Anytime you take out a loan, be it a mortgage, car loan, credit card or other type of loan, your creditor reports your payment history to the three major credit bureaus: Experian, TransUnion and Equifax. While a consistent payment history can help you maintain a good credit score, failure to pay on time damages your score. A company "charges off" your debt if it believes you won't pay them. Even bankruptcy can't remove a charge-off from your credit history.
A company usually charges off a debt within six months after you stop making payments. A charge-off is essentially an accounting measure, allowing the company to take your debt off its books and report the amount of your loan as a loss. However, you still legally owe the amount of your charged-off balance, whether the originally company maintains the right to your debt of if it sold it off to a collection agency.
Companies are restricted in the length of time they can report negative items to the credit bureaus, but the time lines are significant. Creditors can report charge-offs for seven years, even if you later pay off the debt. A Chapter 13 bankruptcy also appears on your credit report for seven years, while a Chapter 7 bankruptcy remains on your report for 10 years.
A bankruptcy discharge eliminates most of your debts but doesn't remove your prior credit history. Any negative payment information that appeared on your report before you filed bankruptcy remains even after you obtain your discharge. While your creditors subject to the discharge must accurately report your balances owed as zero, they're not obligated to remove record of your prior late payments or charge-offs.
The effects of both charge-offs and bankruptcy are severe in terms of your credit report. While filing bankruptcy is the single most negative effect you can have on your credit score, if you already had charged-off accounts on your report before you filed bankruptcy, your score may not dip much further. A low credit score can make it difficult to impossible to receive future credit, including credit cards, car loans and home loans. You may also encounter difficulty in renting an apartment or finding a job, depending on the weight your potential landlord or employer places on your credit history. These effects diminish over time but don't go completely away until your charge-offs and bankruptcy fall off your credit report.
While a bankruptcy doesn't remove a charge-off from your credit report, your bankruptcy discharge can possibly help your credit rating if you have a significant amount of outstanding debt. Although the charge-off still appears in your credit history, the bankruptcy discharge reduces the amount of your outstanding debt to zero. As the amount of debt you owe is a major factor in computing your credit score, reducing that amount to zero can prove to be beneficial in certain cases.