If you fall on hard times or face unexpected expenses and fail to pay off your debts, your lender may eventually write off the debt. This is also referred to as a charge-off, and a lender will commonly do this after your debt has gone six months or more without a payment. However, this internal accounting maneuver does not relieve you of the responsibility to repay the debt.
Charge-off Defined
After several months without payment, a company may consider your account uncollectible. When an account is charged off, the company claims the account as a bad debt expense on its financial statements. At this point, the original creditor may sell your account to a collection agency.
Legal Action
The original creditor or the collection agency may file a lawsuit against you and seek judgment for the amount that you owe whether or not the debt has been written off. Writing off a debt is an accounting phenomenon; the debt and obligation to pay survives. The debt is collectible until the statute of limitation expires.
Statute of Limitations
The statute of limitations for your state governs how long a debt is considered legally collectible. Statutes of limitations vary among states, but they generally expire between four and five years from the date of your last payment.
A creditor can technically sue you after the statute of limitations has expired, but the Fair Debt Collection Practices Act (FDCPA) offers protection to the debtor. The FDCPA prohibits a creditor from pursuing legal action if the collector knew or should have known that the statute of limitations had expired.
Responding to a Lawsuit
If your creditor sues, you must respond to the lawsuit if you are sued after the statute of limitations has expired. In your response to the court, clearly state and provide documented evidence that the statute of limitations has expired. This is sufficient to have the case dismissed. If you fail to respond, however, the creditor may obtain a default judgment against you, and that can be extremely difficult to overturn.
Suing under FDCPA
If the creditor violates the FDCPA, you may be able to file a lawsuit against the creditor. The FDCPA provides that up to $1,000 in compensatory damages, any actual damages, and legal and litigation expenses can be awarded to the debtor if the creditor has violated the law.
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