Charge-Off

If an account is charged off do you still have to pay that debt?

Must you pay a debt a creditor places on charge off status?

Read full question
Bill's Answer
4.0
/5.0
(6 Votes)
Bills.com Team
Pro

By

Highlights


  • An account charge-off does not remove your obligation to pay the debt.
  • Know your rights under the Fair Debt Collections Practices Act.
  • Never ignore a summons you receive.

Let us define charge-off and other terms before we get to the central issue in your question.

Charge-Off

A charge-off does not mean a debt is forgiven. When a debtor stops paying on a debt, a creditor will attempt to contact the debtor on the telephone and via the mail. When the number of days since the most recent payment reaches 120-180 days, the account is no longer considered current and the creditor is required by generally accepted accounting principles to "write-off" the debt. Writing-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease.

The write-off date has almost nothing to do with the statute of limitations for debts. To learn more about statutes of limitations, read Which Statute of Limitations Applies to You.

National banks and federal savings associations must follow federal rules and guidelines for charge-offs. Both types of financial institutions must charge-off delinquent installment accounts at 120 days or five missed payments, and credit cards at “180 days past due after seven zero billings” (Allowance for Loan and Lease Losses (PDF), Comptroller of the Currency Administrator of National Banks).

At the write-off point, the creditor will transfer the debt to a late-accounts department, or has the option to sell the debt to a collection agent. The collection agent will buy the debt at a discount. However, the collection agent has the right to collect the entire balance due plus interest.

A charge-off / write-off does not change the legal status of the debt, or change the legal relationship between the creditor and the borrower. However, because the creditor classifies a charged-off debt differently from a current debt, the borrower can often negotiate a settlement for less than the present balance of the debt to after charge off. This would not have been possible when the the creditor considered the debt current.

Charge-Off & Debt Collection

A collection agent may use aggressive tactics to when contacting the debtor. The collection agent may threaten to call the debtor’s employer, file charges with the local sheriff, or say they will park a truck in front of the debtor’s house with a sign that reads "Bad Debt" on it. All of these tactics and many others are illegal under the Fair Debt Collection Practices Act (FDCPA). Start here to learn the rights consumers have in collections under the FDCPA.

A creditor — a debt collector that owns a debt account is a creditor — has several legal means of collecting a debt. But before the creditor can start, the creditor must go to court to receive a judgment. A court (or in some states, a law firm for the plaintiff) is required to notify the debtor of the time and place of the hearing. This notice is called a "summons to appear" or a "summons and complaint." In some jurisdictions, a process server will present the summons personally. In others the sheriff’s deputy will pay a visit with the summons, and in others the notice will appear in the mail. Each jurisdiction has different civil procedure rules regarding proper service of notice. (See Served Summons and Complaint to learn more about this process.)

If you ever receive a summons you should do as it instructs! This is not just a social invitation that you can ignore. In the hearing, the judge will decide if the creditor should be allowed to collect the debt. If the debtor fails to appear, the judge has no choice but to decide on behalf of the creditor.

Therefore, if you receive a summons, the first thing you should do is contact the law firm representing the creditor. Open a negotiation to see if they are willing to settle the debt. If not, it would be wise to respond as indicated in the summons. If there is a hearing, attend it and present your side of the story to the judge. Use facts, tell the truth, dress appropriately, and show the court respect. The court may or may not decide in your favor, but at least you exercised your right to be heard.

The court may decide to grant a judgment to the creditor. A judgment is a declaration by a court that the creditor has the legal right to demand a wage garnishment, a levy on the debtor’s bank accounts, and a lien on the debtor’s property. Which of these tools the creditor will use depends on the circumstances. We discuss each of these remedies below.

Looking for a home loan? Try one of Bills.com’s pre-screened mortgage and refinance partners to find a lender who will give you a great deal in your area.

Wage Garnishment

The most common method used by judgment creditors to enforce judgments is wage garnishment, in which a judgment creditor would contact the debtor’s employer and require the employer to deduct a certain portion of the debtor’s wages each pay period and send the money to the creditor. However, several states, including Texas, Pennsylvania, North Carolina, and South Carolina, do not allow wage garnishment for the enforcement of most judgments. In several other states, such as New Hampshire, wage garnishment is not the "preferred" method of judgment enforcement because, while possible, it is a tedious and time consuming process for creditors. In most states, creditors are allowed to garnish between 10% and 25% of your wages, with the percentage allowed being determined by each state. See Advice on Judgment Garnishment to learn more about wage garnishment.

Levy Bank Accounts

A levy means that the creditor has the right to take whatever money in a debtor’s account and apply the funds to the balance of the judgment. Again, the procedure for levying bank accounts, as well as what amount, if any, a debtor can claim as exempt from the levy, is governed by state law. Many states exempt certain amounts and certain types of funds from bank levies, so a debtor should review his or her state's laws to find if a bank account can be levied. See the Bills.com resource State Consumer Protection Laws and Exemptions for an overview of each state’s rules.

Lien

A lien is an encumbrance — a claim — on a property. For example, if the debtor owns a home, a creditor with a judgment has the right to place a lien on the home, meaning that if the debtor sells or refinance the home, the debtor will be required to pay the judgment out of the proceeds of the sale or refinance. If the amount of the judgment is more than the amount of equity in your home, then the lien may prevent the debtor from selling or refinancing until the debtor can pay off the judgment. Again, every state has its own rules about property liens, so debtors with a judgment against them who own property should review their state’s laws to learn creditor can and cannot do to enforce its judgment. See the Bills.com resource State Consumer Protection Laws and Exemptions for an overview of each state’s rules.

Debt Resolution

If you have a judgment against you, consult with an attorney licensed in your jurisdiction to learn how the judgment will affect you, based on your individual financial circumstances and your local rules.

It is not too late to contact the creditor or the law firm that either represented the creditor or bought the debt, and present them a settlement offer. Even with a judgment in place, the law firm must spend money to try to collect the debt. Getting a wage garnishment, levy, or lien takes time, and time to a law firm is money. The law firm may settle for a lump-sum payment. See "Debt Negotiation and Settlement Advice" before opening negotiations with a creditor. See "What Are My Debt Consolidation Options?" to learn more about your rights and options for resolving the debt.

Important! Get all settlement offers in writing before sending a check to the law firm or collection agent.

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

Best,

Bill

Bills.com

28 Comments

Recent Best
1500 characters remaining
  • DQ
    Aug, 2012
    David
    All of my credit card debt has long since been "charged off" (two to three years ago) and now I have some debt buyers and collections folks who have posted them to my credit report. Can I go back to the original credit card holders and settle with them? Will paying the debt buyers off help my credit more than making them prove they own the debt? I'm at the statute of limitations on most of the accounts - haven't been sued, will it benefit my score to pay them even though technically I don't have to? I see lots of advice for people who are just getting into trouble - I've long been in trouble with the credit cards. When the wife and I lost our jobs we paid secured debt only...
    0 Votes

    • BA
      Aug, 2012
      Bill
      Charge-off is an accounting term, and does not change the legal relationship between the lender and borrower. Some lenders will move a charged-off account to an internal collections team. Others will hire a collection agent to pursue the borrower on the lender's behalf. Still others will sell a charged-off account to a collection agent.

      Here, we do not know if your collection accounts were sold to collection agents, or if collection agents are working for the original creditors. If the collection accounts were sold, then the original creditors have no rights to accept your payments, or negotiate settlements. If the collection agents are contractors, then it would not hurt to try contacting the original creditors to negotiate a settlement of the debt.
      1 Votes

  • MS
    Jul, 2012
    maria
    I have a couple of charge-off on my credit report. I want to start cleaning up my credit if i pay the collections agency will it fix my credit?
    0 Votes

    • BA
      Jul, 2012
      Bill
      Depends on the circumstances. If the delinquencies are few in number and six or seven years old, then you will see little to no change in your credit score. If the items are new, then you may see a slight change because of the status change.

      Missing payments or chronic late payments have a large negative impact. Paying a delinquent debt does not undo the damage caused by the delinquency.
      0 Votes

  • KP
    Apr, 2012
    kristin
    I purchased an appliance and the store made billing errors (I have written proof of the errors) which they refused to fix and insisted I pay interest on the errors they made. I, in turn, refused to pay the errors they made so they put me in collections. All of this happened in 2007. Since then the store has charged off the debt and I paid income taxes on the charge-off. Now the collection company sent me a summons WITHOUT date or time to appear and they expect me to pay them. I wrote a letter denying all their allegations and they responded with another summons again WITHOUT a date and time to appear but they included copies of the old bills minus the bills where they made the mistakes. What should I do?
    0 Votes

    • BA
      Apr, 2012
      Bill
      Are the documents you received actual summons to appear in court, or gussied-up collection letters that have no force of law? Take the letters you received to a lawyer who has experience in civil litigation or consumer law. He or she will tell you in a few seconds if the documents are actual summonses to appear. Explain your situation to the lawyer, and point out the mistakes. A court appearance may be just what you need to make this debt go away
      0 Votes

  • TL
    Mar, 2012
    Ty
    I have a collector that's writing off monthly payments and sending me 1099s. Shouldn't I only have to pay interest on the principle portion of each payment? The taxes I have to pay seem to be more than the principle contained within these loan payments.
    0 Votes

    • BA
      Mar, 2012
      Bill
      Four questions for you:
      1. Do I understand you correctly when you say a collection agent is sending you monthly 1099 statements?
      2. What is the balance due?
      3. What is the monthly amount due, according to the collection agent?
      4. Are you receiving 1099-A or 1099-C statements?

      The first question is key because only certain entities can issue 1099-As and 1099-Cs. Please name names in your reply.

      0 Votes

  • CV
    Mar, 2012
    CATHERINE
    I have a charge off on my crecit report and it shows charge-off for 10 consecutive months on one debt is this normal or should it show for one month and then stop?
    0 Votes

    • BA
      Mar, 2012
      Bill
      A debt can be charged off once. Dispute the last nine charge offs.
      0 Votes