Debt Charge Offs And Subsequent Collection Process

By: Lance T. Denha, Esq.

As many may or may not be aware, debts owed to creditors travel down many paths of classification according to creditors. Examples of such classifications include any of the following: continuous late and delinquent status, judgment status, or charged off status. The purpose of this article is to discuss charge off status and how the cycle may continue towards collections after the charged-off classification.

A charged-off account is an outstanding balance that the lender/creditor considers a business loss. How long it takes before the creditor/lender declares the account a loss varies from creditor to creditor, but this typically happens after several months of attempting to collect the money. Once an account has been charged off, the lender may sell it to a collection agency, either immediately or at a later date. At the time the account is charged off, the creditor usually stops the clock on interest charges, but the collection agency may add fees of its own. On your credit report, this kind of debt is designated as R9 for “revolving credit charge-off” or I9 for “installment credit charge-off.”                                                                            

If an account is charged-off and sold to a collection agency, how can both accounts be used against you? When an account is charged off, or written off as a loss, it remains on your credit report for seven years from the original delinquency date leading up to the charge off. Often, the original creditor will transfer or sell the account to a collection agency. In that case, the original account will be updated to show transferred/closed, and will no longer show a balance owed because the debt is now owed to the collection agency. However, the credit report will still show the history of the account, including the amount that was written off. Since the collection agency is now involved and owed money on the otherwise charged-off account, it will still report the current balance owed. The balance may be higher on the collection account due to interest and fees added by the collection agency. Ouch!

So the question now becomes, as a debtor, what are your rights? First, if any of your accounts were charged off more than seven years ago, the damaging information on that account should be removed and erased from the credit bureau file, and a collection agency is not permitted by law to reenter that information. Do not make the mistake of making a new payment as that would essentially create new activity in the account and start the seven year cycle over again.

Another question typically posed is how long can they collect?  In Michigan, the statute of limitations on debt varies by the type of debt. But for consumer debt, the statute of limitations is six years. This applies to all four types of contracts.

• Oral contracts (verbal agreements)
• Written contracts (signed documents)
• Promissory notes
• Open Ended Accounts (i.e credit cards)

There are a lot of misunderstandings about the statute of limitation. Keep in mind that the statute does not mean that someone has to stop trying to collect from you. It only means that they cannot do it through the court. Once the statute of limitations passes, debt collectors and creditors can continue any of the following:

• Call you
• Send you correspondence
• Give information to credit reporting agencies

They are not allowed to harass you, but they are allowed to attempt to collect. They just cannot seek a judgment.

If you or anyone you know is being harassed or notice some issues with a credit report, one should immediately contact a consumer credit attorney to help you get to the bottom of what is going on. If the collector is up to no good, or in violation of the Fair Debt Collection Practices Act, then one can possibly contest the action and turn the table on these creditors through legal action.