If you fall behind on your credit card payments, your debt may eventually reach the "charge-off" stage. Although the name may sound as if your debt no longer exists, why it really means is that your creditor has elected to remove the debt from its books as a collectable liability. You are still legally responsible for the debt, whether the original creditor or a subsequent collection agency comes calling.
The Charge-Off Process
Once a creditor is convinced that you cannot or will not pay a credit card debt, it may charge your debt off. In accounting terms, this generally means that the creditor will move your account into the bad debt section in its accounting ledger from the accounts receivable area. Typically, creditors will charge off your debt after a period of six months of nonpayment, although some move more slowly. At this point, your original creditor may hand off the debt to a collection agency.
How Collection Agencies Get Involved
Collection agencies generally end up with your debt in one of two ways. Sometimes, your original creditor will have its own in-house collection division. This wing of the company will simply pick up your charged-off account and begin pursuing you in its own way. The other way collection agencies get involved is through purchase on the open market. Many collection agencies buy old debt for pennies on the dollar. If they can convince you to pay even a little bit of your outstanding debt, they stand to turn a profit. Since these collection agencies had to pay money to own the rights to your debt, they can often be very aggressive when contacting you for repayment.
Legal Action
If phone calls and letters are not enough to convince you to pay, a collection agency will sometimes take the additional step of filing a lawsuit against you. Since the collection agency has the legal right to collect on your debt, it also has the right to sue you for breach of contract, nonpayment of debt and possibly other claims. If the agency can prove that your debt is valid, meaning you did incur it and you are responsible for it, you will most likely lose your court case. At that point, the court will issue a judgment against you, forcing you to repay your debt. In most states, the collection agency can have the court garnish your wages in an attempt to collect on the debt.
Bankruptcy
Although it can carry some serious financial ramifications, filing bankruptcy is one way that you can fight back against the collection agency. Filing bankruptcy will immediately put an end to the collection agency's efforts to contact you, and if you have already lost a judgment, the automatic stay of bankruptcy will prevent the garnishment from continuing. If you successfully get a bankruptcy discharge, your credit card debt and judgment will disappear, and the collection agency no longer has the right to collect on that debt.
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