The simple answer is yes. Just because a creditor charges off a debt does not mean you don’t still owe it, even if you’ve received a 1099 for it. You are still liable for the entire debt. And the creditor can legally continue to try to collect on it for 7 years from the date the debt first went delinquent and preceded the charged off status.
“Charge off” is basically nothing more than an accounting function. Any debt you have is considered an asset to that particular creditor. Once a debt goes delinquent for more than 180 days, in most cases, the creditor can no longer hold the debt as an asset because chances are after 180 days payments on that debt will most likely cease. So they charge it off as a bad debt for accounting and tax purposes. It is however still a collectible debt.
Once a bank/lender/credit card company charges off a debt they will either continue to try to collect the debt themselves or turn it over to an outside collection agency to try to collect the debt for them.
A charge off is bad for your credit report on several levels. First it will show up on your credit report with a balance for seven years. If the creditor reports to the bureaus every month, it will continue to hurt your credit scores every month as every time they report, the reporting date moves forward making it look like a new charge off every month. Second, if they sell it to an outside collection agency, the account will then most likely show up twice on your credit report. They could also file a judgment against you for the debt, in which case it would then show up three times on your credit report: Once with the original creditor, once with the new collection agency that bought or has taken over the debt from the original creditor, and once as a public record. This can have a huge negative impact on your credit scores.
So what should you do? The best thing would be to try to settle the debt. And do so before it is sold to an outside collection agency. Once it has gone into a charge off status a lot of creditors will settle for less than what is actually owed. Depending on the debt, many will set up monthly payments plans until the debt is settled in full. Doing as much damage control as you can would be prudent, but it is optional. It would be better to have a charge off show up only once on your credit report rather than two or three times from being sold or having a judgment filed against you.
Even though the charge off will continue to affect your credit score as long as it’s there, once it’s paid and time goes on it will have less and less of an impact. It looks a lot better on a credit report to have a “paid” or “settled” charge off than to carry one with a balance every month.
The best course of action would be to try to avoid the charge off completely. If you find yourself going through financial difficulties, talk to your creditors. See if they can work out a modified payment plan for a period of time so that the debt does not become a charge off in the first place. The creditor wants to get paid so the majority of them will usually agree to do this.
Avoiding late payments and charge off accounts is not always easy. But if you manage things with some fore thought and reach out to your creditors ahead of time there is always the possibility that this can be avoided.