A charge-off is an internal accounting term and doesn't reduce your credit account to a zero balance. MSN Money reports that it is common for people to assume that they no longer are obligated to pay debts that have been charged off. That simply isn't true, as you remain legally and ethical responsible for the debt. The creditor can continue collection attempts or send your account to a debt collection agency. Eventually the creditor or debt collector could file a lawsuit against you if you continue to refuse to pay.
After six missed payments a creditor will list your account as charged-off -- a move that allows the creditor to receive a tax break worth about 35 percent of your balance, according to MSN Money. From there the creditor may sell your account to a debt collection agency for as little as pennies on the dollar. The debt collector then owns the account and has the legal right to seek the full balance from you. Or the creditor may assign the account to an internal collections team or place it with a debt collection agency on consignment. The debt collection agency is paid a commission if it collects from you.
After the charge-off your credit report is updated to show the account as charged-off, along with the date. This causes your credit score to drop. Also, the debt collection agency inheriting your account is allowed to place its own negative entry on your report, increasing the damage to your credit score. The result is two negative entries -- one labeled a charge-off, and the other a collection account.
The negative entries will remain on your credit for seven years, and generally only the passage of time will help your credit score. Paying the charge-off before it is assigned to a collection agency results in the charge-off being updated to a "paid charge-off" on your report. Or a collection account could be updated to show as a "paid collection account." However, neither update reverses the initial damage done to your credit score. Making steady on-time payments on your other accounts and paying down your overall debt will repair your credit over time.
Some people try to minimize the damage by offering to pay the balance in full in exchange for charge-offs and collection accounts being eliminated from their credit reports. Creditors and debt collectors have the authority to make the changes to your credit report, but they are under no obligation to agree to such an arrangement.