Can Someone Collect on a Debt That Has Been Charged Off?

When you secure a debt with property, such as a car, a creditor has the option to repossess the property if the borrower fails to make regular loan payments. Creditors that hold unsecured debts, such as hospitals and some credit card companies, do not have this option. Thus, if they do not receive payment, most unsecured creditors will eventually charge off unpaid debts.

Misconceptions

Many consumers incorrectly believe that once a creditor charges off a debt, the debt ceases to exist and they no longer owe it. Creditors, however, only charge off debts to remove the accounts from their ledgers. They then sell charged-off debts to third-party recovery firms, such as collection agencies. In this way, the original creditor recovers a portion of the amount owed. A debt does not disappear after a charge-off.

Significance

The collection industry makes a profit by purchasing and collecting charged-off debts that original creditors were unable to recover. Collection agencies achieve this by calling debtors repeatedly, sending collection letters and offering debt settlements. Even if a consumer settles a charged-off debt with a collection agency rather than paying it in full, the company still realizes a profit since debt buyers often pay very little for the accounts they purchase.

Considerations

Any company that collects charged-off debt must abide by federal collection laws and the debtor's state laws regarding adding fees to the debt. If the individual's original contract made a provision for additional interest charges or collection fees, the collection agency may add in these charges. Some states, such as California, allow collection agencies to charge 10 percent interest even if the original contract made no provision for additional charges.

Warning

Because charged-off debts remain valid, collection agencies have the right to file lawsuits against consumers who do not respond to collection letters and telephone calls from debt collectors. In many states, a successful collection lawsuit gives a collection agency the right to place a lien against the debtor's home or other personal property. This secures a previously unsecured debt, giving the company the right to seize any assets it holds a lien against in lieu of payment.

Time Frame

Each state places limits on the length of time a collection agency has to sue for a charged-off debt. The expiration of this limit, however, does not mean the debt becomes uncollectible. Collection firms can pass debts from company to company for years. It isn't uncommon for consumers to receive telephone calls or letters from collection agencies requesting payment on charged-off debts that are 10 years old or older.