The simple version

When a credit card goes unpaid long enough, generally about six months, the lender charges it off. The word sounds final, and people often hear it as the debt being written off or forgiven. It is neither.

A charge-off is an accounting action. The lender moves the balance off its books as unlikely to be collected, which is a statement about the lender's expectations rather than about your obligation. The debt still exists, and what usually happens next is that it gets sold.

The numbers

• Federal banking regulators direct that open-end credit such as a credit card be charged off when 180 days past due, and closed-end loans when 120 days past due (Office of the Comptroller of the Currency, on the Uniform Retail Credit Classification and Account Management Policy)
• A charge-off is an accounting classification by the lender. It does not cancel the debt, forgive the balance, or end the obligation to pay
• Buyers paid an average of 4.0 cents per dollar of debt face value, across more than 3,400 portfolios studied (Federal Trade Commission, The Structure and Practices of the Debt Buying Industry, January 2013)
• Older debt sold for less: about 3.1 cents per dollar for debts 3 to 6 years old and 2.2 cents for debts 6 to 15 years old, against 7.9 cents for more recent debt (same study)
• A buyer paying 4 cents on the dollar for a stated $5,000 balance pays roughly $200, and can pursue the full $5,000 (arithmetic)
• Within five days of first contacting a consumer, a collector must send written notice of the amount, the creditor, and a statement that the consumer has thirty days to dispute the debt in writing (15 U.S.C. 1692g)
• The seven-year credit reporting clock for a charged-off account begins 180 days after the delinquency started, not at the charge-off and not at the sale (15 U.S.C. 1681c(c)(1))
• The time limit for suing on a debt varies by state, and the Consumer Financial Protection Bureau states that a partial payment or an acknowledgment may restart that period even after it has expired

What actually happens after a charge-off

The lender has two choices once it charges off a balance. It can keep trying to collect, itself or through an agency working on commission. Or it can sell the account outright to a debt buyer, a company whose business is purchasing charged-off debt in bulk and collecting on it.

The price is the part almost nobody knows. When the Federal Trade Commission studied the industry, it found that buyers paid an average of 4.0 cents per dollar of debt face value. A portfolio carrying a million dollars of balances changes hands for around $40,000.

Age drives the price down further. The same study found debts 3 to 6 years old selling for about 3.1 cents on the dollar and debts 6 to 15 years old for about 2.2 cents. That study was published in January 2013 and remains the most detailed public accounting of these prices, so treat the figures as the documented order of magnitude rather than today's quote.

The buyer then owns the account and can pursue the entire original balance, plus whatever interest and fees the original agreement allows. That gap between what was paid and what can be collected is the business model, and it is legal and disclosed. On a stated $5,000 balance, a buyer paying 4 cents on the dollar spends about $200 to acquire the right to pursue $5,000.

It also explains behavior that otherwise looks strange. A collector willing to settle for a fraction of the balance is not being generous, because a fraction may still be many times what the account cost. And because portfolios get resold, the same debt can pass through several owners, which is why records sometimes arrive incomplete and why the amount claimed can differ from the original statement.

What federal law provides

Collectors have real legal rights, and a debt someone genuinely owes does not stop being owed because it changed hands. Federal law also gives the person on the other end of that call a specific set of protections, and knowing they exist is the difference between a phone call and an ambush.

The first is validation. Within five days of first contacting a consumer, a collector must send written notice stating the amount of the debt, the name of the creditor, and that unless the consumer disputes the debt within thirty days it will be assumed valid. Where the consumer does dispute it in writing within that window, the statute requires the collector to obtain verification of the debt or a copy of a judgment.

The second is the reporting clock, and its start date is the part people get wrong. A charged-off account can appear on a credit report for seven years, and that seven-year period begins 180 days after the delinquency that led to the charge-off started. It does not begin at the charge-off, and it does not restart when the debt is sold, so selling or transferring an account does not buy it more time on a credit report.

The third is the time limit on suing, which is set by state law rather than federal law and varies widely. The Consumer Financial Protection Bureau states that making a partial payment or acknowledging that you owe an old debt may restart that period, even after it has expired. That is a documented fact about how the rule works, and what to do about any particular debt is a question for a lawyer or a nonprofit credit counselor rather than an article.

The Real Cost lens on four cents

The arithmetic of the transaction is worth seeing whole, with every assumption stated.

• On a stated $5,000 charged-off balance, a buyer paying 4 cents per dollar spends roughly $200
• That buyer can pursue the full $5,000, so collecting even a fifth of the balance roughly quintuples what it paid
• Collecting the whole balance returns about 25 times the purchase price, which is why the industry operates at scale
• None of that changes what is owed, and none of it is a reason to ignore a debt. It is the reason the economics of the call are not what they look like from your side of it

The value of knowing the price is context rather than a bargaining chip. The number a collector opens with, the number it will settle for, and the number it paid are three different figures, and only one of them ever appeared on your statement.

What this means

The word charge-off does more damage through misunderstanding than almost any term in consumer finance, because it sounds like an ending. It is a transfer point. What changes is who owns the debt and what it cost them, and what does not change is that the balance is still owed and still reportable.

If a collector contacts you about an old account, the useful thing to know is that federal law defines what they must send you and how the reporting clock runs, and that those rules apply whether or not anyone mentions them. What to do in a specific situation depends on facts this article cannot see, and free help exists: the Consumer Financial Protection Bureau publishes plain-language guidance, and nonprofit credit counseling agencies work with people on exactly this.

What this is NOT

This is not legal advice and it is not a guide to responding to a collector, disputing a debt, negotiating a settlement, or deciding whether to pay. Those decisions depend on individual circumstances, on state law that varies, and on facts specific to each account, and they belong with an attorney or a nonprofit credit counselor rather than a news article. This is not a claim that any debt buyer or collector acts improperly: buying and collecting charged-off debt is a lawful business and collectors have legitimate legal rights. This is not a recommendation of any debt relief, debt settlement, or credit repair company or service. This is not tax advice, and forgiven or settled debt can carry tax consequences this article does not address. The dollar figures are stated illustrations, not any real account, and the price figures come from a study published in 2013. This is not investment or financial advice of any kind.

Sources

• Federal Trade Commission, The Structure and Practices of the Debt Buying Industry (January 2013): https://www.ftc.gov/reports/structure-practices-debt-buying-industry
• 15 U.S.C. 1692g, validation of debts: https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title15-section1692g&num=0&edition=prelim
• 15 U.S.C. 1681c, requirements relating to information contained in consumer reports: https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title15-section1681c&num=0&edition=prelim
• Consumer Financial Protection Bureau, What is a statute of limitations on a debt: https://www.consumerfinance.gov/ask-cfpb/what-is-a-statute-of-limitations-on-a-debt-en-1389/
• Office of the Comptroller of the Currency, Uniform Retail Credit Classification and Account Management Policy: https://www.occ.gov/news-issuances/bulletins/2000/bulletin-2000-20.html