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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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

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

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

Struggling with debt questions? Let the Bills.com Debt Coach review your debts and give you your options to resolving these debts.

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

51 Comments

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  • GD
    Dec, 2012
    Grant
    I had a car repossessed back in May of 2006. I struggled to make payments during the term of the lease and the account went from delinquent to paid up multiple times before finally lapsing and leading to the repossession. What date would be used to determine when this will fall off my credit report? You mentioned that "the start of the 7-year period begins at the date of first delinquency". Would that mean the first time I missed a payment (in early 2005 and thus past 7 years), or since the account was late then paid up multiple times the last time it first went delinquent leading to the repossession (in February of 2006 meaning I'm stuck with this on my report until next year)? Thanks in advance for your help!
    0 Votes

    • BA
      Dec, 2012
      Bill
      FTC staff attorneys used to publish questions and answers about the Fair Credit Reporting Act. Clarke W. Brinckerhoff's letter to Jeff Kosmerl has a fact pattern similar to yours.

      Staff Attorney Brinckerhoff states then when an account has multiple delinquencies, the date of first delinquency begins on the date when the account becomes continuously delinquent. Subsequent remediation, and then delinquencies are not significant under the FCRA's Sections 605(c)(1) and 623(a)(5).
      0 Votes

  • ER
    Oct, 2012
    eileen
    I went to my child's doctor appointment and was called back before being seen and before my child's chart was put in the doctor's bin. I was called to the check-out area where I'm presented with a simple sheet of paper stating my balance and date of service leading back to 2001. I need to, A: Make full payment; or B: Use their phone to call and set up a payment arrangement. If I choose neither then I will not be seen and/or my child will be discharged as a patient. My question is, can I be forced to pay a bill with no exact explanation other then your insurance didn't pay? For a bill over 11 years old?
    0 Votes

    • BA
      Oct, 2012
      Bill
      Yes, a service provider or merchant can condition their doing business with you on your paying an old debt.

      Was it rude for the medical office to call you out they way they did? I think so. Should the office alerted you to the existing balance when you made the appointment? In a perfect world, yes. But there is no requirement a medical provider or anyone else forgive and forget an old debt, unless a bankruptcy is involved.

      My advice? Negotiate a settlement to this medical debt.
      0 Votes

  • ZC
    Sep, 2012
    Zachariah
    I have a motorcycle that was charged off about 8 years ago. can i get the lien holder taken off of the title? the debt has been sold about 6 times now and the original lien holder has no paperwork about the vehicle or the amount owed anymore. they creditors that buy the old debt dont contact me either. can i take the lien holder off my title and can i get the debt taken off of my credit report also? by the way I live in texas.
    0 Votes

    • BA
      Sep, 2012
      Bill
      Two issues in play here:
      • See the Bills.com resource Bonded Title to see if this procedure applies in your situation.
      • Under the FCRA, the derogatory on your credit report should no longer be reported 7½ years after the date of first delinquency. If, as you mentioned, the date of first delinquency was 8 years ago, this bad mark should no longer appear on your credit report.

      My advice? File a dispute with the credit reporting agencies that publish the derogatory information in question.

      0 Votes

  • KP
    Aug, 2012
    Kevin
    I have a debt that was a line of credit that I have not paid in nearly 180 days. They have told me that if I make one monthly payment that it won't charge off. My question is : If I make that one payment does the clock start again for them to have to wait another 180 days before they can charge off the debt? I am in North Carolina.
    0 Votes

    • BA
      Aug, 2012
      Bill
      Charge-off has no legal significance. Charge-off is not the same as cancelling or forgiving a debt. There are no hard-and-fast charge-off rules because it is an accounting action, and subject to each organization's policies.

      Charge-off appearing on a credit report will have a negative impact on a person's credit score. On to your question.

      If the creditor tells you its policy is to not charge-off a debt if you make a payment on day 179, then you have to take them at their word. However, if the creditor thinks you are just going to string them along for another 179 days before you make your next payment, it may decide to accept your payment, then charge-off your account anyway.
      0 Votes

  • JO
    Jun, 2012
    Jenna
    I wrote a couple checks from a closed account bank to my current bank account for cash. They closed my bank account, charged it off and filed charges on me. Now it shows up on my credit and I have to pay the money back or face criminal charges. Can they do that?
    0 Votes

    • BA
      Jun, 2012
      Bill
      You indicated you reside in Texas. If so, read Texas Penal Code 32.41 Issuance of a Bad Check to learn Texas' "hot check" law. If you knew at the time you wrote the check your account did not contain sufficient funds, you could be prosecuted for a Class C misdemeanor.

      Note to readers residing in other states: Other states have different laws regarding writing a check on an account with insufficient funds. Your state may not criminalize writing a bad check under any circumstance, or it may under particular circumstances.
      0 Votes