Facts

• After charging off an unsecured debt, your creditor can sell the account to a collection agency for far less than you owe and write off the remainder as a business loss. The creditor benefits from the partial payment and subsequent tax deduction it receives.
  
  Charging off unsecured debts does not render them invalid. You have an obligation to repay your delinquent debts, even after a charge-off.
  
  

Effects

• Collection agencies purchase charged off accounts in bulk. As the legal owner of your debt, the collection agency will pursue you for payment. Debt collection methods vary, but collection agencies can call you both at home and at work, send you letters and even sue you for payment. If the company sues you and wins, it may garnish your bank accounts and wages. Collection agencies also make regular reports to the credit bureaus.
  
  

Time Frame

• A collection agency can pursue you for a charged off debt indefinitely. It must abide by the statute of limitations in your state, however, if it seeks legal redress through a lawsuit. According to MSN Money, most states' statutes of limitations range from four to six years. An expired statute of limitations provides you with an impenetrable legal defense should any collector attempt to sue you for the debt in the future.
  
  

Significance

• Letting your creditor charge off your unsecured debt does considerable damage to your credit history. Not only does the charge-off itself hurt you, the collection agency's report is derogatory and damages your credit rating. The Fair Credit Reporting Act notes that negative credit entries, such as charge-offs and collection accounts, will remain a part of your credit file for seven years.
  
  

Considerations

• Many charged off debts increase over time. If your original contract allowed your creditor to add periodic interest charges to your debt, any collection agency that purchases your account after the charge-off also has the right to add interest charges.
  
  In addition to interest, collection agencies frequently add fees to the accounts they purchase. This provides the company with additional negotiation room when offering consumers debt settlements. While paying off the old debt will not repair any credit damage you incur from the charge-off and collection account, doing so prevents the debt from growing any larger.