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Collection agencies and charge-offs


Dear Dr. Don,
Just out of college I was living on my own, and due to many factors, I got into big credit card debt. I received advice at the time that I should choose two or three credit cards that I could continue to make payments on and keep them in good standing, while the cards I could not afford to make payments on would be "charged off", and that is what I did.

Those cards that were "charged off" would be left on my credit report for seven years, and then I could rebuild my credit. I am coming up on the seven-year mark, and I just received a letter from a lawyer, on behalf of a collection agency, telling me they would sue me if I didn't make arrangements to pay off the debt, .

At this point, after that many years, can they do that? If so, what do you recommend that I do? -- Steve Seven

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Dear Steve,
A charge-off is when a creditor writes off a loan as nonperforming or uncollectable. It's an accounting practice of the company and doesn't mean that you no longer owe the debt. Companies often sell their nonperforming loans to collection agencies for pennies on the dollar, and the collection agency then seeks repayment.

Paying off these charged-off debts won't clear up your credit. They will be reported as a paid collection or a paid charge-off on your credit report and, depending on what state you live in, if you make a partial payment you could be postponing the statute of limitations' taking effect on your collection account or charge-off.

So hold off negotiating with the lawyer or the collection agency while you take the steps necessary to understand your situation better. The first step is to get a copy of your credit report so you'll know the exact age of the delinquencies. You can order a report from Equifax.

The creditor or its successor can pursue the debt up to the point where the statute of limitations in your state becomes effective.

So, the creditor or its successor can sue and win a judgment against you for the full amount of the debt as long as the statute of limitations hasn't run out on the contractual agreement for the debt. If the statue of limitations has run out but you're still being sued, you have a defense to win the case. But you'll have to present the statute of limitations defense to the court to win.

So, you need to find out the statute of limitations on the charged-off debts before you decide what you want to do.

The statute of limitations for the debt depends on what type of debt it is, and what state you live in. Credit cards are generally considered open accounts, while auto loans and other installment agreements are considered written contracts. The statute of limitations varies for open accounts and written agreements.

In most states the statute of limitations for open accounts is from three to six years, so it's possible that your charge-offs are already outside the statute of limitations. Otherwise, it's likely that the charge-off is coming up against its statute of limitations, and the collection agency, through it's lawyer, is trying to get you to pay something rather than have to sue for a judgment against you or to have the statue of limitations run out.

Creditinfocenter.com can help you find out the statue of limitations for your state.

Regardless of when a collection agency receives or purchases a debt for collection, it cannot legally report the debt longer than seven years from the date that the account first became delinquent and stayed delinquent. By your accounting, the seven years are almost up. These items should drop off your credit report as required by the Fair Credit Reporting Act.

Information about a lawsuit or an unpaid judgment against you, however, can be reported for seven years or until the statute of limitations runs out, whichever is longer. So, if the collection agency sues and wins a judgment against you, that information can be placed on your credit report.

The Fair Debt Collections Practices Act spells out what steps a creditor or collection agency can take in pursuing repayment, steps you can take to stop a collector from contacting you, and how you can file a complaint against a collector for noncompliance with this act.

If you've reviewed your situation and can't figure a way to protect your credit history from a judgment, consider hiring a debt negotiator to deal with the collection agency to resolve the issue.

-- Posted: Jan. 18, 2002




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