Ask Bill your personal finance question

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?

Read full question
Bill's Answer
4.7
/5.0
(13 Votes)
Bills.com | Find Learn Save
IN THIS ARTICLE:
  • 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

4.7
/5.0
(13 Votes)
73 Comments
Recent Oldest
1500 characters remaining
  • K
    Kay,
    Jun, 2020

    I have found only one reference so far to when, or even if a charge off is required after a specific amount of time. I just recently figured out that a four year old payday loan being reported, of course on the one credit report that does not display on credit karma, is still showing an installment loan as paid late for the same due date every month. I am currently showing the same “12/05/2015” unpaid late payment monthly equaling 48 late payments for the same final installment payment! Is it true that a lender must charge off after X amount of days? They were the last of all of my credit crud to clean up, feeling defeated. As paying them won’t erase 48 late payments, for one (and the final) missed installment.

    • 35x35
      Daniel,
      Jul, 2020

      Kay, here are a couple of resources for you. The first is a page at the FDIC website that has the requirements institutions face for charging off debt. 

      Here is one of our articles about charge-offs that has good info for you.

      I understand that it has been 48 months as you described it since the account went delinquent, but I believe the report is not showing 48 months of late payments. I am happy to speak with you about this and figure out if an error exists and if disputing the info on the report is a good step. You may email me at dcohen@bills.com.

       

       

  • ,
    Aug, 2019

    I had an account in Illinois and a loan with the same credit union. I had someone write me a bad check and I was unable to collect on it. It caused my account to go negative and the bank charged off the checking account. I have paid the loan off in full and did so based off the official pay off letter they sent me. They are now stating via bank messenger the pay off is a different amount then the one originally sent to me and that it includes the amount for the charged off checking account. They are refusing to release the title until the checking account fees are paid. Do you know if it is legal for a bank to charge a different amount than what the official pay off letter states and if they are allowed to hold the title from the loan until the fees are paid on the checking account? (account was charged off in April and I paid the loan off in full 1 week ago).

    • 35x35
      Daniel,
      Aug, 2019

      I will comment on your very reasonable question, but only with the preface that I don't give legal advice and nothing I say is to be considered such.

      I think the language of the demand letter is crucial. If you are told in writing that you need to pay $X by a certain date and that will close the matter, then asking for more money seems improper, as does the act of not relasing title. 

      However, it could be the case that there is language in the loan agreement that ties any accounts you hold with them together. It could be a right of offset issue. See https://www.bills.com/debt/right-of-offset and look for any language in the loan agreement about this.

      Another suggestion is to speak with an attorney that handles violations of the FDCPA (Fair Debt Collection Practices Act). This kind of lawyer doesn't charge you a fee but will take the case if he or she is confident of winning the case, which will result in getting money from the creditor that is acting improperly. Do a search online for FDCPA attorney and the name of the city in which you live. Please report back on how things go for you!

  • TP
    Tewanda,
    Oct, 2016
    In 2009 I financed a medical procedure and after the 1st treatment they stopped because I had MS, locking me into a contract because I had the 1st treatment. Because they would not continue treatment because of my medical condition, I stopped paying in 2011. The bank then charge off the debt and sent it to collections in 2011. After going back and forth between the bank, collections, and American laser, I finally received a refund. American laser refunded the money back to the bank. The bank then pulled the account from collections. I was told from the bank customer service that I was owed money since the money was refunded was more than what owe. I never received any money so I guess that was incorrect. A a year later I noticed that the bank left the charge off on my credit. 2 still has a balance and 1 says I legally settled for less than what was owed, but has a balance of 0. The bank keeps updating the charge off monthly. They refuse to delete it and keep telling me that only the credit Bureau can remove it. I also noticed that they put that I made my last payment on the day that amer. Laser refunded the money in 2012. They then later wrote it off again as a charge off in 2012. I asked the bank about it and they told me when the money was refunded it was toward the balance of the debt and it settled the account. Now this seems like complete by to me and I need help.
    • 35x35
      Betsalel,
      Apr, 2017

      If you want to delete an inaccurate item on your credit report, then check out Bills.com article about credit repair and disputing a credit item.  It sounds like you owed the bank money, which was at some time delinquent. However, it isn't clear if you paid off the account in full, or if the account was settled for less than you owed. I suggest that you speak to the bank and get all of the relevant records regarding the loan and the amount of money that was taken to pay off the loan.

  • VM
    verinia,
    Deer Park, IL,
    Mar, 2014
    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?
    • BA
      Bill,
      Mar, 2014
      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.
  • KD
    Kay,
    Merced, CA,
    Mar, 2014
    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.
    • BA
      Bill,
      Mar, 2014
      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.
loading...