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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?

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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.

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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

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  • 35x35
    Aug, 2019

    I had a charge off as January 2017 in the state of Texas because my ex let it go during our divorce and didn't put it in his name. Wanting to know how long, how many years I am looking at having this on my credit being already 2 years.

    0 Votes

    • 35x35
      Aug, 2019
      Daniel

      It is not Texas law that applies, but federal law, the Fair Credit Reporting Act. Your derogatory account will remain on your credit report for 7 years. 

      You can focus on improving your credit by having accounts open that report timely payments each month while keeping the credit utilization low.

      Separate from credit, some plan should be in place to deal with the creditor. You can decide to try and avoid them and hope the statute of limitations on debt in Texas passes or you can try to work something out with the creditor. The creditor views you as fully responsible and could sue you. Even if  your divorce decree says your ex has full responsibility for the debt, the creditor can come after you. If that happens you can take action against your ex for damage you suffer, but it doesn't protect you from collection efforts by the creditor.

      0 Votes

  • DE
    Aug, 2019
    David

    I had a charge-off from 5yr ago that still reports the amount of time charge-off last month on my credit report. I called to pay it off and they told me it is doubled in price because of interest. They have not send me one statement telling me that I have been charging interest or reporting extra amount to credit report? What can I do about this?

    0 Votes

    • 35x35
      Aug, 2019
      Daniel

      I can't give legal advice, as only an attorney can properly do so. Here are a couple of thoughts, with the understanding that I am not giving you legal advice.

      In what state do you live? When did you make your last payment on the debt? These two questions are in relation to the Statute of Limitations on Debt. It is worth exploring whether you could use the SOL to avoid paying, if you were sued by a creditor. If you make a payment of even a penny, you can restart the clock. In some states, even a verbal commitment to pay can restart the clock, so be careful what you say to anyone collecting on the debt. It is even possible to pay on a debt that has passed the SOL and bring a dead debt back to life.

      A separate issue is what interest can continue to accrue. This is a complicated question, as it can depend on a number of factors, including the ruling of the Circuit Court of the District in which your case is adjudicated, the lack of statements sent to you, whether what is reported to the credit bureaus is binding on what the debt collector can charge you. 

      My understanding regarding the credit reporting issue is that what is reported to the credit bureau is not what determines the amount you can be charged. 

      Here are two interesting articles that talk about how complex it is to collect interest properly:

      1. https://www.insidearm.com/news/00044201-collecting-interest-charged-debt-requires/
      2. https://www.americanbar.org/groups/business_law/publications/blt/2014/04/04a_marin/

      The first one is authored by a Debt Collection Industry professional, the second by the ABA.

      The ABA article says, "A debt collector may not collect any interest or fee not authorized by the agreement or by law. The interest rate or fees charged on your debt may be raised if your original loan or credit agreement permits it. Some state laws and some contracts allow interest to be charged and costs to be added. If you still have the contract, it may say what interest rate can be charged or how much it can increase. State law may also limit the amount of interest charged. "

      The CFPB weighs in here

      Here is what I would do

      1. Nail down the SOL issue. Could the SOL have passed? Did you say anything when you "called to pay it off" that harmed yourself by resetting the clock?.
      2. If the SOL can't be used, then it is importan to figure out what interewt can be charged, if any. Look for the original agreement with the creditor to review the specific language in the agreement
      3. IContact an attorney that handles casesr regardign the FDCPA (Fair Debt Collection Practices Act). Search online for "FDCPA attorney" + the name of the city in which you live. Ask them if the collector is doing something wrong. It should be a free consultation. 

      Please report back on how things go for you!

      0 Votes

  • NS
    Apr, 2019
    Natalya

    I have a creditor who charged off the account after being late with payment (with the new shorter payment terms the creditor established) for 10 calendar days (they charged off and received the payment). Are there regulations that would allow me to dispute the treatment of an account as charge off? I have never been late with payments with this creditor before and they continue financing the current obligation. My credit score has been severely damaged because of this and I am at impasse. Tried to negotiate to remove, disputed with credit agencies to no avail. Thank you.

    0 Votes

    • 35x35
      Apr, 2019
      Daniel

      I am not clear if I understand what you mean by changing the payment dates to 10 days. If you were making payments that never went 30 days late, then you should not have been reported to the credit bureau as delinquent. You can file a dispute with any bureau that shows this account with 30-days late. It could be the case that the creditor will supply information that satisfies the credit bureaus.

      Another option is to speak with an attorney who handles cases involving violations of the Fair Credit Reporting Act (FCRA).  These types of attorneys don't charge you a fee, but will take the case if they feel they can win and get money from the creditor who violated the FCRA. Do a search online for "FCRA attorney" and the name of the city in which you live. Please report back on how things go for you!

      0 Votes

  • RB
    Feb, 2019
    Robbort

    I had some accounts go into charge-off, after missing work due to extended illness. I let some accounts go delinquent and focused on making my mortgage payment. My credit took a major hit. I could use some money (who couldn't) to catch up, but couldn't use the equity in my home at a reasonable rate due to the accounts I let go delinquent, including two that went to charge-off.

    ALMOST fell for a scam about loans with no credit requirements at 3%. Wanted the loan so much that I almost paid a fee to have my application processed. Remembered something I read at Bills.com about not paying a fee in advance for a loan. So glad I didn't. Would have been scammed by southeastfinancialconsultant@ and I am not putting their full email in. Run away from these vermin.

    0 Votes

    • 35x35
      Feb, 2019
      Daniel

      Thanks for sharing. Whether it was our site or somewhere else you read it, it is good advice to NOT pay a a fee in advance for a personal loan. Glad the scammers didn't get you!

      0 Votes

  • CJ
    Dec, 2013
    CR
    Phoenix, AZ
    I have a Chapter 7 bankruptcy, tax lien, and 2 charged-off school loans from the same major bank. At some point, they had sold the debts to a collection agency, who sold it to someone else, and so forth. Not one could validate the debt so they received no payment. Even now, I'm not sure I owe them. Either way, I recently found out that within the last few months, my personal information could have been compromised and available for sale due to lax school record security. Suspiciously, a month or so ago, I started receiving calls from a collections agency for the debts. I asked the agency to prove the validity of the debt and have heard nothing from them. At the time of the first collector call, I called the original lender to get any information I could on my account. They couldn't even provide me my account numbers. I verified their involvement with this new agency and was told that they work for the lender. The lender says repeatedly that they no longer have any account information for me due to the sale of the debt, yet they just sent me settlement letters. I have yet to contact them back because I don't trust this process. Can they try to collect it directly once it's been sold and proven invalid for each agency? Are they liable for lying to me about my account? PS, I believe I am near my statute of limitations within a year or two. Does this play a role? Should I be worried?
    0 Votes

    • BA
      Dec, 2013
      Bill
      Once an original creditor sells a collection account, it is gone — the original creditor has no right to collect the debt. A collection account is like a car, iPod, or book. Once it's sold it's sold. However, like a car, iPod, or book, the original creditor can buy your collection account from the collection agent who has the current rights to the account. Some credit card companies have a reputation for buying collection accounts they sold previously.

      Before you make any settlement with either a collection agent or the original creditor, validate the debt. You mentioned you have been doing so, and I suggest you continue to push-back against collection agents that try to collect a debt the original creditor has all but told you it has virtually no record of.

      Regarding the original creditor or collection agents telling you untruths, review the Fair Debt Collection Practices Act to see if the lies create a private cause of action under the FDCPA.

      The nearing statute of limitations is significant. Under the FDCPA, a collection agent cannot pursue an unpermitted legal action against you. This means once the statute of limitations clock runs out, a collection agent violates the FDCPA if it files a lawsuit against you. I hasten to add some collection agents are either unaware of this FDCPA prohibition, or hope the person they sue doesn't know the law, and they sue anyway. Read the Bills.com Statute of Limitations article to learn more.

      Should you be worried? Up to the moment the statute of limitations clock runs out, you can be the target of a lawsuit. Once the clock runs out, you can still be sued, but will have your state's statute of limitations and the FDCPA on your side.
      1 Votes

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