Question: What is the correct procedure for reporting a charged-off account that has been subsequently paid by the consumer, and how does this affect compliance with the Fair Credit Reporting Act (FCRA)?
Answer:
A charged-off account represents a debt that the creditor considers unlikely to be collected and has written off as a loss for accounting purposes. However, the consumer remains legally obligated to pay the debt. If the consumer later pays the charged-off amount, either in full or through a negotiated settlement, the account must be updated to reflect this change accurately and in compliance with the Fair Credit Reporting Act (FCRA).
What Is a Paid Charge-Off?
A paid charge-off is a previously charged-off account that the consumer has since resolved. This may include:
- Full repayment of the balance
- Settlement for less than the total owed
- Collection agency payment on behalf of the original creditor
Although the charge-off remains a derogatory mark, updating the status to reflect payment helps consumers demonstrate resolution of debt, which can be a factor in credit evaluations.
Steps for Reporting a Paid Charge-Off
1. Update the Account Status Code
Depending on the resolution, the status code should be changed to one of the following:
- “Account Paid in Full – Was a Charge-Off” (Code 63)
- “Account Paid in Full – Was a Settlement” (Code 61)
- “Account Paid – Was a Charge-Off” with appropriate comment codes
This provides transparency around the payment and the prior charge-off status.
2. Set the Balance and Scheduled Payment to Zero
Once the charge-off is paid or settled, the following must be reported:
- Balance Amount: $0
- Scheduled Monthly Payment Amount: $0
This indicates that there is no remaining financial obligation for the consumer on the account.
3. Maintain Full Payment and Delinquency History
Even after payment, the original delinquency and charge-off history must remain as part of the account record. This includes:
- Date of First Delinquency (DOFD): Required to determine the account’s reporting expiration.
- Charge-Off Date: When the account was officially charged off.
- Payment Profile: Reflecting missed payments and resolution timeline.
Do not delete or reset historical data unless it was reported in error.
FCRA Compliance Standards
The FCRA requires that data furnishers:
- Report accurately and completely, including past due activity and payment resolution.
- Use correct codes and dates to avoid misleading credit scoring models or underwriters.
- Ensure that charge-offs remain on the credit report for seven years from the DOFD, regardless of payment status.
Impact on the Consumer’s Credit Report
- Score Stabilization and Potential Recovery
While the charge-off remains a negative mark, showing that the account has been paid may improve creditworthiness over time. - Lender Perception
Lenders often view paid charge-offs more favorably than unresolved debt, especially when evaluating loan applications or risk profiles. - Expiration Timeline Remains Unchanged
Paying the charge-off does not restart the seven-year removal clock—it still begins from the original delinquency date.
Conclusion
Reporting a paid charge-off correctly is crucial for FCRA compliance and fair credit assessment. By using the appropriate status codes, zeroing out the balance, and retaining the full history of the account, furnishers help consumers demonstrate debt resolution while preserving the accuracy and transparency of the credit reporting system.