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Question:
APR 17, 2012

Charge Off, Credit Report, Statute of Limitations & Banks

I stopped paying a creditor 9 years ago. My bank just merged with them and collected the amount due. Is that legal?

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Bill's Answer: Bills.com Resident Expert

Before I explore the issues raised in your question, we need to establish a few definitions and concepts.

Charge Off

"Charge off" is an accounting term used by creditors when they move a delinquent account from its accounts receivable books to its bad debt ledger. This usually occurs between 180 and 240 days from the date of your last payment. The fact that an account is charged-off does not mean the debt may not be collected later. The charge-off date also does not correspond to the statute of limitations on collecting a debt, or the date that an entry on a credit record must be removed. All three dates or deadlines are independent of each other and have different meanings.

Because an account is charged off does not mean the creditor lacks a legal right to collect the debt. To the contrary, the creditor may move the account to its own internal collections department, or sell the debt to a third-party collection agency. At some point, and it varies by your state of residence, a debt becomes so old that it cannot be collected. This is where your state's statute of limitations comes in.

Statute of Limitations

All states have a body of statutes in their codes of law called, "Limitations of Actions," commonly referred to as the statutes of limitations. The idea behind these laws is that we as a society have decided that we do not want old debts hanging around forever — we want people and businesses to be able to move on with their lives without worrying about being sued.

The length of time a creditor has to sue you depends on your state of residence and the type of debt. For example, many states allow longer for creditors to file suit to collect on closed-ended consumer loans than on credit card debts. Most states give credit card issuers three to four years to file suit after default, but some states allow as many as 10 years. Check out the Bills.com Collection Laws and Statute of Limitations and How to Tell Which Statute of Limitations Applies to Your Situation pages.

The site I just mentioned has more information about statutes of limitations and a list of limitations by state. If a creditor files a lawsuit after the allowed time, the court will usually throw the case out and not allow the creditor to file suit again (called dismissed with prejudice).

However, you must raise the issue of expired statute of limitations in a written response to the lawsuit, or else the court will not know that the statute of limitations has expired. Although the periods vary from state to state, I believe that there is only one (Ohio) that is longer than 10 years.

Remember: The passing of the SOL does not mean that a creditor cannot sue you. It means if a lawsuit is filed you should have an absolute defense against the lawsuit if you raise the defense. Also, keep in mind that the passage of the SOL does not prevent a creditor from calling you to collect on the debt; it simply provides you an absolute defense in court if the creditor files suit.

Quick Tip Get a no-cost, no obligation analysis of your debt options from a pre-screened debt relief provider.

Credit Report

Federal law (US Code Title 15, §1681c) controls the behavior of credit reporting agencies. This law is known as the Fair Credit Reporting Act (FCRA). Under FCRA §605 (a) and (b), an account in collection will appear on a consumer’s credit report for 7½ years. The clock starts approximately 180 days after the date of first delinquency on the account. To learn when an account will be removed by the credit reporting agencies (TransUnion, Equifax, and Experian and others), add 7½ years to the date of first delinquency. Subsequent activity, such as resolving the debt, is irrelevant to this rule. The seven-year rule does not apply to all debts, however. Here are four exceptions:

  • A tax lien can appear for seven years from the date of payment.
  • A bankruptcy will appear for 10 years from the date of the final order.
  • Federal student loans can be reported for as long as they are delinquent. (Private student loans follow the 7½-year rule.)
  • A civil judgment can appear for seven years, or the length of a judgment’s statute of limitations in the consumer’s state, whichever is longer.

Learn the lifespan of a judgment in your state at the Bills.com Statute of Limitations Laws by State page.

The start of the seven-year begins at the date of first delinquency, or if no payments are made, when the first payment was due. Review your credit report carefully to make certain the dates of first delinquency are reported correctly. Unscrupulous collection agents reset the date of first delinquency to stretch out how long a derogatory account appears on consumer’s credit report. This is illegal under the FCRA.

Just because a debt does not appear on a credit report does not mean the statute of limitations for the debt has passed. The opposite is also true: The passing of a state statute of limitations on a debt does not mean the debt may not appear on a credit report. The federal FCRA and state statutes of limitations are separate and independent of each other.

Whether a debt appears on a credit report does not establish legal liability for the debt. The opposite is also true: You may have legal liability for a debt not reported to the credit reporting agencies. Credit reports are not legal records of every debt a person owes.

If you find any inaccurate information on your credit report, you should dispute the credit report listing with the bureau in question. See the Federal Trade Commission document FTC Facts for Consumers: How to Dispute Credit Report Errors for more information.

Merged Financial Institutions and Debt

I do not know your state of residence, so with a nine-year-old debt it is impossible for me to say with certainty that your debt is older than your state's statute of limitations. Let us create a hypothetical situation here loosely based on your facts. Let us say that you have a debt with a financial institution, you reside in a state where the SOL has expired, and the two financial institutions have not merged. If the creditor sues you, and you raise a statute of limitations defense, the court will dismiss the case with prejudice, meaning they cannot return to court to sue you again for that debt. The debt is not erased. They can continue to pester you about the debt, but they cannot sue you or threaten to sue you.

Now let us use your facts. If I understand your question correctly, your bank merged with your old creditor, your bank discovered an outstanding debt, and plundered your account without notice. As I understand the law of remedies, what your bank did was reprehensible but not illegal because the debt was never forgiven -- the creditor never released you from your obligation.

However, I hasten to say that I do not know what state you are in, and as a consequence have no way of knowing if you are shielded by state laws that protect consumers in this situation. For that reason, I urge you to consult with an attorney in your state who has experience in consumer law to review your facts.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Comments (41)


Julia C.
April 17, 2012
My husband has an old debt that is about four years old. In CA an agency can not collect on a debt after 3 years but the debt will remain on your credit report for seven. National Recovery Agency has been contacting my husband about this old debt but do not appear on any of his credit reports. Since it has been 4 years since the original debt can they touch his credit report in order to collect the debt? Thanks.
Bills.com
April 17, 2012
You wrote, "In CA an agency can not collect on a debt after 3 years..." I assume you are a California resident. If so, your interpretation of California's statute of limitations for consumer debt is incorrect. First, the statute of limitations for debt related to a written contract is four years, and an oral contract is two years from the date of breach in California. Second, an original creditor or collection agent may collect a debt after the statute of limitations expires in California. Please see the Bills.com resource California Statute of Limitations to learn more. For readers in other states, please see the Bills.com resource Statute of Limitations Laws by State to learn your state's statute of limitations.

You mentioned your spouse's credit report. A state's statute of limitations for debt has no relationship to the federal rules for credit reports. See the Bills.com resource Fair Credit Reporting Act to learn more.
Brenda J.
Bullhead City, AZ  |  February 22, 2012
Does anyone know the date that Arizona raised it's statute of limitation on debt collection from 3 to 6 yrs? I know it was proposing to raise it last year but I don't know the exact date that it was raised.
Andrea H.
Key West, FL  |  February 01, 2012
My husband had a auto loan with a credit union on 4/2007 and he stopped making payments on 6/2008. We recently started making payments again, the account says it is charged off but the loan management representative at the credit union is taking our payments and still applying monthly interest of 9.5%. Is it legal to still be applying interest to a charged off loan. I am not really familiar with these kinds of things, please help!
Bills.com
February 01, 2012
A charge off does not mean the debt is forgiven, canceled, or extinguished. Charge-off does not change the legal relationship between the borrower and the lender. Charge off is an accounting term, and has no legal significance for borrowers.

It is perfectly legal for a lender to attempt to collect a charged-off debt, and to charge interest on such a debt.
Mary L.
January 21, 2012
My husband stopped making payments his Home Equity Line of Credit in August 2008. Our home was foreclosed in February 2009 by a different bank. The Home Equity Line of Credit was charged off on October 2011, which is more than 3 years AFTER the last payment. Based upon the date that my husband made his last payment, the delinquent account should be removed from his credit report 7 1/2 years later, which would be January 2016. However, the Credit Reporting Agency has the delinquent account scheduled to be removed on July 2018. Please help.
Bills.com
January 23, 2012
You are correct that the debt should leave his credit report 7½ years after the last payment. You should start disputing the account if it does not drop off at that time. Regardless of what the CRA tells you now, the question is moot until 2016. Try not to worry about this issue now and revisit it in 2016.
Marcin S.
Graham, WA  |  December 23, 2011
Hello, I recently had my credit report ran to refi my current mortgage. The report came back showing an old credit account as a fairly recent charge off (paid.) The report showed the charge off as of 09/08, rather than the actual date, confirmed by the original creditor as 08/07. When I pulled my 3 annual credit reports, both XPN & EFX list the account as "charge of from 08/07 to 09/08" with CO's showing on the timeline through that period. This in essence is making the CO appear more recent that it is. Can I take any action to make this list on the actual date of Charge Off (08/07) rather than making it appear "more recent" as it's doing so now? Thanks for any help. M.S.
Bills.com
December 25, 2011
I recommend that you read the Bills.com article about charge off and credit reports. In general, a credit line will appear for 7.5 years from the date of the delinquency. You may wish to dispute the entries, however, since this is a relatively old tradeline it may not greatly affect your credit score.
Tom W.
Ardsley On Hudson, NY  |  October 17, 2011
Your web site is quite helpful. I have a question regarding SOL and Charge Off that I believe may impact my strategy with a collection agency. I was contacted for collections regarding a credit card debt that was opened in New York around 2002. The account was charged off by the credit card company in 2003 and has since cleared my credit reports as of 2010. Between 2005 and early this year, I made small payments towards the account without a subsequent written agreement to do so, payments were just posted to the account at the website without further communication between the company and myself. However, I have since stopped paying and have now been threatened with a lawsuit. Seeing as how New York Law requires subsequent written agreement to bar accounts from, SOL, which date am i to rely on for the SOL? Would it be the Charge Off date or the last payment made on account? Thanks for any info.
Bills.com
October 17, 2011
Generally speaking, a payment resets the clock on the statute of limitations to zero. However, New York law may have modified this rule. Your safest course of action is to consult with a New York lawyer who has consumer law experience to learn a precise answer to your question.
Will J.
Alameda, CA  |  September 27, 2011
i want to know if the bank has rfused to repo my car and they have not yet took me to court...is it possible for me to obtain the title from them after the SOL is up?
Bills.com
September 27, 2011
I doubt a state's statute of limitations laws for debt apply to the situation you described. Consult with a lawyer in your state who has consumer law experience. He or she will research your state's laws, and learn if any state statutes or case law applies to lienholders who sit on their rights.
Mickey F.
Abingdon, VA  |  June 03, 2011
What do I do now, is there anything they can try to do legally? It looks as if the VA SOL has run out on the account and that's what I told the collection agency on the phone.
Bills.com
June 03, 2011
First, regarding your credit score, the damage is done when a creditor reports the delinquency. Your paying a debt now will have almost no impact on your credit score. The only impact it will have is in your reported debt load, and if the debt is large that may be significant to your debt-to-income ratio.

Second, regarding the statute of limitations, the applicable statute of limitations is tricky. If the contract you signed has a choice of laws clause stating the parties will use State A's laws, then despite your residing in State B, and the creditor being headquartered in State C, both parties agreed to use State A's laws if a dispute ever arose out of the contract. Complicating this is that some state judges will take pains to ignore choice of laws clauses, and not every contract has one. The default is to use the defendant's state laws, and hence, his or her state statute of limitations. If you are ever sued regarding this debt, consult with a lawyer in your state, and be sure to raise a statute of limitations defense if it applies because a court will not raise it for you.

Third, just because the statute of limitations has run does not mean the creditor cannot file a lawsuit against you. However, as mentioned, if you are sued, be sure to raise the statute of limitations affirmative defense in a timely manner.

Fourth, just because the statute of limitations has run does not mean the creditor cannot contact you privately to try to collect the debt (except in Wisconsin).

To resolve this matter, you can negotiate a settlement for the debt. Be sure to ask for a pay for delete.

Click on the hyperlinks mentioned here to learn more about each issue. Ask any follow-up questions you may have on the appropriate pages.
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Mickey F.
Abingdon, VA  |  June 03, 2011
Thanks Bill for the advice, I do however have another question regarding the issue. The charge off has already impacted my credit score and subsequently came off after the seven years, can they add the same thing back on my history again? Eventhough I owed the debt I feel as if I suffered seven years worth of bad credit due to the charge off and have now paid my dues. It was a long hard road to rebuild my credit and for the last almost five years it has been perfect for the most part, I have a 755 credit rating. I view it like someone going to jail for a crime, once they've pulled their time they are free. Am I wrong to view it this way?
Bills.com
June 03, 2011
The date of first delinquency is key, and not the date of last payment. Federal law (US Code Title 15, §1681c) controls the behavior of credit reporting agencies. Under the FCRA, the Fair Credit Reporting Act, §605 (a) and (b), an account in collection will appear on a consumer's credit report for 7½ years. The clock starts approximately 180 days after the date of first delinquency on the account. To learn when an account will be removed by the consumer credit reporting agencies (TransUnion, Equifax, and Experian and others), add 7½ years to the date of first delinquency. Subsequent activity, such as resolving the debt, is irrelevant to the seven-year rule.
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Adam D.
Roanoke City, VA  |  June 06, 2011
I defaulted on a Capital One credit card when I was in college in 2003. I've never paid off this debt, and now I am looking into getting an auto loan. I was going through lending tree and the only financing that they could get me was through Capital One. If I take the loan, could they repossess my vehicle because of the default on credit cards even though I am paying the auto loan? What damage could they do with having a lien on my vehicle? I live in VA. Thank You!
Bills.com
June 06, 2011
Your debt has likely passed the statute of limitations for debt, IF you have not made a payment on the debt for a number of years.

I don't believe that Capital One would have authority to repossess your car, based on what you described.

Still, as you are concerned about the issue and I can't give you 100% assurance that Capital One could not cause you problems, I suggest that you look for other financing. Look elsewhere than Lending Tree; if Capital One is willing to finance an auto loan, then some other lender will be, too. Try looking at car financing at a local credit union.
Mickey F.
Abingdon, VA  |  June 03, 2011
I live in Virgina and had a charge off more than nine years ago when I was young and starting out and the plant I worked in shut down unexpectedly. The loan was through a credit union that came to my workplace and enrolled everyone. The payment came straight out of my paycheck, so when the plant closed I assumed the debt was insured or something because I never recieved anything from the credit union until they had made their decision to charge it off. In the past few months a collections agency has contacted me wnating to make a settlement. I told them no and agreed to nothing, in 2002 I tried to make an arrangement with the credit union to pay the debt and they said it was already charged off and even if i paid the note it would not come off my credit history, so I said if it's going to hurt me then I just will not pay it.
Angie .
November 11, 2010
Hi Bill - I just found this string while searching for some information, and I hope you can help. My husband bought a stereo system from a company 19 years ago. The company went out of business shortly after he purchased the item, but he was fairly certain it was paid off. For the lsat 5 years or so, we have been getting phone calls from Merchants Credit Group wanting to collect for this no-longer-in-business company. We live in Missouri, and from what information I can gather, the SOL is way past, and was so when they first began calling. Can you advise as to what the best course would be for when we are contaced again? Thank you in advance.
Bills.com
November 12, 2010
Validate the debt. If the collection agent cannot validate the debt then it may not report the debt to the credit reporting agencies, which it cannot do because the debt is more than 7½ years ago, and it may not attempt further collection efforts. I would be very surprised that after 19 years the collection agent has sufficient documentation to validate the debt.
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