What is a "charge off" and how can it effect your credit?

I am currently in the process of working with a lender on a short sale on my home. I've not been delinquent on payments yet, but will be if something doesn't change. So at the time my credit is in good standing with all debtors. However, the realtor who is working with Indy Mac bank told us that it shouldn't effect us because on our credit report it will state that the debt was charged off. Is this true? Will I have negative consequences? Will they be able to try and collect this unpaid balance or will it be a write-off..