Card debt's being charged off, now what?

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question Dear Sally,
I was paying my credit cards on time and always paying at least the minimum amount. Then my husband became disabled, and we had to move. I was unable to pay the minimum amounts, so I contacted the credit card company to make arrangements.

Both credit card companies were OK with the amounts we agreed upon, and I kept paying that much until one of the companies changed its tune. Now it is saying it is going to do a charge-off if I don’t at least bring my account current, prior to the agreement. I am unable to do that. I am still making payments, but I do not know what else to do.

How will a charge-off affect me? Will it ruin my credit? Does it mean I won’t owe the money anymore? – Shelley


Dear Shelley,
It’s important to know what a charge-off does – and what it doesn’t do.

One thing a charge-off does not do is change the fact that you owe the debt. This seems counterintuitive. You’d think if something was “charged off,” it would be gone. However, the charge-off doesn’t change the legal status of the debt. The bank can still try to collect, if it chooses, sell the debt to a collector or send the debt to collections.

A charge-off does change how your balance looks on the company’s books. When you owe the bank money, say $1,000, the bank shows the amount you owe as an asset they own. When they charge it off, they’re making their own bookkeeping more accurate by basically admitting in their books that your balance is worth less than $1,000 because you may not pay back what you owe. It’s important to banks that their own books reflect what their assets are really worth, so accounting for charge-offs is a necessary part of financial accountability.

That’s not to say a charge-off doesn’t affect you. When the bank reports to the credit bureaus that your balance has been charged off, that charged-off debt on your report doesn’t look good. It will generally lower your credit score and remain on your credit reports for seven years. This is a good reason to try to avoid having a charge-off on your report.

Another potential bad consequence is that some lenders that charge off a debt also mistakenly send you and the Internal Revenue Service a Form 1099-C, Cancellation of Debt. The IRS, thinking that the debt has been canceled, not merely charged off, will expect you to pay taxes on the amount of canceled debt.

The fact that the bank wants to charge off your debt when you are current on your payments as per the agreement makes me wonder if it is confused. The first thing I would do is send a copy of your payment agreement to the bank, along with a letter explaining your situation and that you are paying according to the agreement and intend to continue doing so. Banks are big companies, and it’s easy for someone working there to make a mistake. The bank may let you keep making payments without charging off the debt.

If the bank insists on charging off the debt; for example, if the agreement was supposed to be temporary, but now the bank wants you to “catch up,” there may not be much you can do to stop them. However, if you can reasonably afford to continue to pay the debt, you should. Your credit will be much better off if you pay off the debt so it can eventually be marked “paid.”

Consider talking to a credit counselor at a nonprofit agency affiliated with the National Foundation for Credit Counseling or the Financial Counseling Association of America. A credit counselor can look at your total financial picture to help you decide how to move forward. If you have too many debts and expenses and not enough income, they may talk to you about debt negotiation, being “judgment proof” (if your only income is disability benefits) or even bankruptcy.

Don’t think of these options as giving up. You’ve done so well keeping the banks informed, getting a reduced payment arrangement, and then keeping up with the new payments that I hate to tell you to try to not pay the balances. However, depending on your total financial picture, as a result of circumstances beyond your control, you may need to redirect your energies from this credit card debt to making sure you have the resources to take care of yourself and your husband.

See related: 9 debt negotiation tips for introverts, 8 steps to picking a credit counselor

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Updated: 01-21-2018