Charge-offs don't make debts disappear

Magnifying glass enlarging the word debt

If you've ignored a debt, you know it doesn't simply go away.

Debt collectors will start calling. And, if you don't try to work it out, you might get sued.

But what happens if your creditors write off the money you owe as bad debt?

So-called charge-offs appear on your credit report for seven years.

It doesn't mean you no longer owe the debt.

It simply means the lender has exhausted collection efforts and considers the debt uncollectable. In most cases, the original lender will sell bad debt to third-party collection companies who pick up where the lender stopped in collection efforts.

Personal finance columnist Liz Weston recently wrote about a charge-off involving a bad auto loan.

While a creditor can take you to court for only so long to attempt to collect what you owe, Weston wrote, "debts only disappear when you pay them or have them legally erased in U.S. Bankruptcy Court."

Charge-offs became a much bigger deal during the recession. The charge-off rate for credit-card debt reached a peak of 11.12% in 2010, according to Moody's Investors Service.

That rate has declined significantly and is expected to fall below 4% in 2012, a 20-year low, Moody's announced last week.

But that doesn't mean we're getting better at paying our debts. It just means the "weakest borrowers," as Moody's put it, have already been written off, even though they still owe the money.

The good news: If you're buried in bills, there is help available.

Start by finding yourself a good credit counselor.