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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?

Can a financial institution collect on a charge-off account from nine years ago because they have merged with your present financial institution without giving you notification they will take your money?

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Bill's Answer
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Updated: Sep 23, 2014

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Highlights

  • Learn when an account moves into 'charge-off' status.
  • Examine when the statute of limitations can make a debt expire.
  • Dispute any inaccurate information on your credit report.

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

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Fair Credit Reporting Act

Federal law (US Code Title 15, §1681c) controls the behavior of credit reporting agencies (CRAs). The specific law is called 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 up to 7½ years. To determine when an account will be removed by the CRAs (TransUnion, Equifax, and Experian and others), add 7 years to the date of first delinquency. The date of first delinquency is shown in credit reports. Subsequent activity, such as resolving the debt or one debt collector selling the debt to another collector, is irrelevant to the 7-year rule.

Some debts have a reporting period longer than 7 years, including:

  • Tax liens: 10 years if unpaid, or 7 years from the payment date
  • Bankruptcy: 10 years from the date of filing (15 U.S.C. §1681c)
  • Perkins student loans: Until paid in full (20 U.S.C. §1087cc(c)(3))
  • Direct and FFEL loans: 7 years from default or rehabilitation date (20 U.S.C. §1080a(f)(1) and 20 U.S.C. §1087e(a)(1))
  • Judgments: 7 years or the debtor’s state statute of limitations on judgments, whichever is longer

The FCRA 7-year rule is separate from state statutes of limitations for debt issues. Learn the lifespan of a judgment in your state at the Bills.com Statute of Limitations Laws by State page.

The start of the 7-year period 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.

Quick Tip

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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.

Your Facts

Now let us look at 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

67 Comments

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  • VM
    Mar, 2014
    verinia
    Regarding HELOC - did not pay more than a year. Currently receives letter with the order of paying from 3 different Collection Agencies. Can I ask them to provide; 1.Letter from original creditor who is legally authorized to collect debt. 2.Copy of direct contract between this collection agency and original creditor 3.Copy of cancelled check from collection agency to the original creditor. 4. Is the debt assigned or sold to this collection agency. Can I send also letter to the Original Creditor with same question? Can I ask if the original creditor took tax credit or compensation for this debt?
    0 Votes

    • BA
      Mar, 2014
      Bill
      Your first step is to request a debt validation from each collection agent that tries to collect the debt. Follow the hyperlink just mentioned for detailed instructions on how to request a debt validation properly. That page also describes correct validation, and what you can do if the debt is not validated according the FDCPA.

      The information you mentioned in your comment may or may not be relevant should you decide to file a lawsuit against the collection agent or original creditor. Consult with a lawyer if you believe you have a cause of action against the collection agent or original creditor.
      0 Votes

  • KD
    Mar, 2014
    Kay
    The questions I have are in regard to my auto loan back in 2009. We had the loan with Chase Auto Finance. The account was current when we were involved in an accident. The other party being determined to be at fault, and the vehicle was totaled. They put out a repossession order and repossessed the vehicle from the towing yard it was being held at prior to the next payment being due. Long story short it was hell trying to get the claims adjusters access to the vehicle and we ended up just using the photos I shot at the scene which showcased the damage. We owed $6,400 on the loan and the responsible party's insurance was set to pay $8,600 (determined value of the vehicle) plus the storage and towing costs on top of that. We looked forward to receiving the leftover funds in order to purchase a new vehicle. However Chase kept the entire $8,600 + and still called it a charge-off and sent me a bill for $117. I don't know if there's anything I can do at this point but they strong armed us and I want them to answer for it. Please let me know if there's any recommendation or information you can provide. Or if the statute of limitations has passed.
    0 Votes

    • BA
      Mar, 2014
      Bill
      Consult with a lawyer in your state to learn if your state's statute of limitations would prevent you from filing an action against Chase.
      0 Votes

  • CC
    Mar, 2014
    Christine
    My ex-husband purchased a car in 2002 (I was co-signer). In 2003, he totaled it. The insurance company only paid half of what was owed, and we were stuck with the rest. We separated and divorced soon after that, and the debt was charged off. The debt was then purchased by a collection agency in August 2008, and they sent me something in writing saying that I owe this delinquent amount. How does the statute of limitations work in this situation? I know it's 6 years where I live, but what date do I go by? The original debt date, or when the collection agency purchased the debt in August 2008? I'm terrified to respond to them in any way for fear of triggering collection or lawsuit. My ex husband went bankrupt with his new wife a few years ago and included this debt in his bankruptcy which is now discharged, so essentially I think I'm stuck. What date do I go by? How do I respond?
    0 Votes

    • BA
      Mar, 2014
      Bill
      Talk to a lawyer in your state of residence who has consumer law experience. It's unclear to me exactly when the statute of limitations clock would start in a situation like yours, and may be a matter for debate between you and the creditor(s).
      0 Votes

  • ER
    Nov, 2013
    EM
    I live in California, in 2008, my checking account with a bank incurred a few overdraft & return fees that I discussed with a bank officer that those should be taken off because they are not authorized and they were "refunded" and the bank sent me a statement outlining the refunds and charged off $79.97. I did not pay the charge off amount as I was unemployed at that time and did not have the money to do so. I recently pulled my credit report, now that i am ready to fix my credit because i got a job. The bank that closed the account was acquired by another bank in 2009. The new bank is reporting this account in my credit file with a balance of $500 as an OPEN UNSECURED LOAN. What can i do?
    0 Votes

    • BA
      Nov, 2013
      Bill
      The debt appears to be older than California's statute of limitations for contracts. Therefore, if the successor in interest (the new bank) files a lawsuit against you, consult with a California lawyer about filing a motion to dismiss based on the statute of limitations defense. You must take this action: Do not expect the court or someone else to raise this defense for you.

      Regarding the wrong amount appearing as a debt on your credit report, file a dispute with each credit reporting agency reporting the error. There are three consumer credit reporting agencies, so you may need to file three disputes if all three credit bureaus publish this error.
      0 Votes

  • AH
    Oct, 2013
    Anita
    I have an account that charged off in 2012. I disputed the information being reported because I actually due to my spouse losing his job stopped paying on the account in 2011 and so the actual charge off should have occurred in 2011. According to Experian the creditor verified the accuracy of the information they had originally provided on October 2, 2013. Therefore, the reporting on my account stayed the same. Then on October 20th suddenly the same creditor reports a charge off to Experian for exactly $1 more than the balance that has been reported for over one year. My score suddenly dropped 60 points. Is it legal for a creditor to charge off an account more than once?
    0 Votes

    • BA
      Oct, 2013
      Bill
      Under the Fair Credit Reporting Act, the FCRA's 7-year clock for how long a derogatory can appear on a consumer's credit report is the date of first delinquency. All other dates, such as the date the account was written-off/charged off, or when the collection account was sold by the original creditor, or when one collection agent sells the account to another are irrelevant to the 7-year clock.

      It is common for unscrupulous collection agents to monkey with the date of first delinquency. It is unclear from your message if that's the case here. It is unclear because credit reports may display other dates, such as the date of charge off. However, these other dates have no bearing on the date you need to make sure is accurate, namely the date of first delinquency.

      The credit score models lenders use — FICO and VantageScore — are proprietary and therefore we do not know if FICO or VantageScore pay any attention to charge-off date.

      You mentioned your credit score dropped 60 points when either a second derogatory appeared on your credit report, or the amount changed. If a second (bogus) derogatory appeared, then it's understandable your score would drop. If the only change was the dollar amount, then it's possible the debt amount bumped you up from one "bucket" amount to another, or the score drop was a coincidence.

      Charge-off/write-off is an accounting term and this action is not defined by federal or state law. The closest thing to a rule we can find is an FDIC policy. The FDIC's "Uniform Retail Credit Classification and Account Management Policy" sets a recommended number of days a bank should wait before writing-off/charging-off bad credit card accounts. This varies from 90 to 180 days, depending on various factors.

      Charge-off/write-off is the point where the lender must no longer consider the account current, and should consider it a bad debt. A creditor reporting to the consumer credit reporting agencies it is writing-off an account more than once is nonsensical, but not contrary to any law we know of.

      As mentioned at the beginning of my reply, is the date of first delinquency on this derogatory account correct? Focus on that date, and dispute the account if it is inaccurate.
      1 Votes