A home equity line of credit, or "HELOC," provides homeowners with the ability to use their home's equity as security for credit purchases. Like purchases made on a credit card, a HELOC carries an interest rate and, if not paid in a timely manner, the lender has the option to charge-off the debt.
Facts
When a lender charges off a HELOC, it removes the account from its business accounting ledger and often sells it to a debt collection agency. The fact that the company charged off the unpaid HELOC appears on the debtor's credit report and, according to the Fair Credit Reporting Act, can remain there for seven years. After the charge-off and sale of the debt, the original lender will claim any lost revenue as a business tax deduction.
Effects
Collection agencies often start out using standard debt-collection methods, such as collection calls, and steadily progress to more aggressive tactics, such as lawsuits, if the debt remains unpaid. If a collection agency wins a lawsuit against the debtor, it becomes a judgment creditor and, in many states, has the right to recover the debt through an involuntary bank account or wage garnishment.
Considerations
When a lender charges off a HELOC, it relinquishes its right to seize the debtor's property as collateral for the debt. This makes the account an unsecured, rather than secured, debt and leaves it subject to the debtor's state's statute of limitations for debt collection. The statute of limitations varies in every state, but once it passes, neither the original creditor nor a debt collector can legally sue the debtor for the defaulted HELOC.
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