“Charged Off” Debts

Oct 18, 2013 by

YDebt burdenou were laid off and couldn’t make payments on a credit card account for six months. The card issuer gave up trying to collect from you and “charged off” the debt. “Phew!”, you think, “now I don’t have to worry about that anymore!” What’s wrong with this picture?

How To Make Debts Go Away

If you owe money, there are only two ways to make that debt go away: pay it off, or get a discharge through bankruptcy. With respect to paying it off, your options are:

For help, check out “Be Debt Free!” and “Settle Your Debt in 12 Easy Steps“, parts of the Money Counselor Simple Guides to Debt, Credit, and Wealth Series.

What’s “Charged Off” Mean?

If the original creditor charges off your debt, that merely means it’s given up trying to collect and has taken an accounting charge that converts your debt (less its market value—more below) from an asset to an expense in its books. Your legal obligation to pay the debt is unchanged by this internal accounting entry.

Your Charged Off Debt Has Likely Been Sold

More than likely the original creditor sold your debt to a debt collection agency, probably for pennies on the dollar, when it charged off the debt. When the debt is sold, your legal obligation to pay also passed from the original creditor to the collection agency. If you didn’t like the credit card issuer’s collections people, you ain’t seen nothin’ yet, bub.

As the name implies, debt collection agencies specialize in getting debtors to cough up money. Their chief means of leverage is becoming a gigantic and they hope intolerable nuisance in your life. Brace yourself. And expect fees, more interest, and other charges—some legitimate, some not—to be tacked onto the debt by the collector.

Debt Collectors Can Sue

As the legal owner of your debt, the collector has the legal right to sue you, up until the statute of limitations runs out. (Actually many agencies sue after the statute of limitations has run out; they’re hoping you’re too ignorant and lazy to realize you can’t successfully be sued and, fearful of going to court, will pay up.) Even after the statute of limitations deadline, you still legally owe the debt. All that’s changed is the creditor cannot use the courts to compel you to pay up.

If a collector sues you and the debt is legitimate, the court may authorize extraordinary collection actions like garnishing your wages, seizing money in your bank account, and placing a lien on your property. Now you may be forced into bankruptcy to halt these sorts of aggressive actions.

What Should You Do?

If you have some ability to pay, your best course is to work with the collection agency on a payment plan or settlement. (The Money Counselor Guides linked above will help you.) If you have no ability to pay, you’ve got no choice but to hunker down and hope you’re not sued. If you are sued and truly cannot pay, you could be forced into bankruptcy to stop intolerable collection actions like garnishment.

What’s Your Experience?

Have you experienced an unpaid debt being charged off by the original creditor and sold to a collection agency? How did things work out, or have they?

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