The Differences Between Paying a Collection Account & a Charge-off
The differences between paying a collection account and a charge-off account include the amount of money that is due and the name of the payee. Collection accounts may have additional fees that charge-off accounts do not have, such as legal fees and collection fees. Paying either account may not result in an improved credit rating unless the consumer negotiates the credit listing removal as part of the payment.
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Charge-Off
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Charge-off accounts are credit accounts that an original creditor does not believe will be repaid. The term charge-off, or write-off, is an internal accounting function that moves the receivables on the credit account from the asset section of the company balance sheet. Creditors typically designate an account as a charge-off after payments have been delinquent for at least 180 days. If the credit account agreement specifies that the creditor can assign the account, the creditor may choose to sell or transfer the account to a collection agency.
Collection Account
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A collection account is held by a third-party collection agency for benefit of the original creditor. Collection accounts may also be designated as such if the original creditor turns the account over to its internal collections department. Debt buyers that purchase the charged-off account from the original creditor may also designate the account as a collections account.
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Credit Implications
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According to the Fair Debt Collections and Practices Act, debt collectors and debt buyers may list collection accounts on a consumer credit report. The original creditor also has the right to list the charge-off account, meaning that a consumer may have more than one negative account listing visible on their credit report for a single credit account. The amounts may be different as any of the reporters may add fees and interest to the base amount due. The opening dates may also be different, but they do not affect the seven-year credit-reporting window offered by the Fair Credit Reporting Act. Seven years from the charge-off date, the credit-reporting agency must remove the negative listings as long as the charge-off date was not more than 180 days from the date the account became delinquent.
Legal Implications
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Original creditors with charge-off accounts and collection agencies with collection accounts can choose to sue the consumer in an effort to recoup the outstanding debt. If they win, the court issues a civil money judgment. Judgments earn interest annually, in most states, which can increase the overall amount due. Judgments also give the judgment creditor more avenues in which to pursue collection, such as property liens, garnishments and levies.
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