Managing Your Credit: Charge Offs and Collections

Many people think that when they see a notation on their credit report that one of their debts is “charged off” that “charged off” means that the debt is forgiven or that for some unknown reason, they no longer have to repay that debt. A charge-off is simply a collection account that is six months overdue. By that time, the creditor has a right to recover by filing a lawsuit or selling the account to a third-party collection agent. However, sometimes the agent is neither the owner of the debt, nor did they purchase the debt from the original creditor. Instead, the agent is only collecting on behalf of the original creditor.

All creditors, collectors, or agents are subject to the Fair Debt Collections Practices Act (FDCPA). However, the act doesn’t prevent them from being unreasonable when discussing paying off the debt with you. They can be rude, crude, and indifferent in trying to coerce payment. I believe they are trained not to listen to “bleeding hearts” and demand payment. Unfortunately, intimidation gets results, and your only alternative is bankruptcy.

However, it is important not to be overwhelmed by the debt collectors’ tactics and rush to pay a bill, especially one that you don’t recognize. In fact, you may be able to remove some negative items from your credit report by disputing old debts that are no longer due and watch your credit score rise as a result!

Don’t Fall for the Bill Collector’s Scam

Reporting invalid “out of statute” debt as currently collectible obligations is an old bill collector’s scam. If you fall into this trap, you could be tricked into paying money you don’t owe.
A debt is considered “out of statute”—past the statute of limitations—if the last payment on the debt was made six or more years ago. Did you know that consumer debt that has been in default for more than six years is not collectible using any sort of lawsuit or legal process, and therefore should not be reported on your credit report? However, there is an important exception to that rule when debt is owed as a result of a lawsuit judgment issued sometime within those six years. I’ll explain how this exception applies later in this article.

Many Americans have several “out of statute” debts—debts that should not be listed as currently due on their Experian, Transunion, or Equifax credit report. These debts are too old to be carried on the credit report. In these cases, you should write to the collection bureau that lists the debt and dispute the entry so that the debt no longer appears on your credit report from that credit reporting bureau.

Q: How do bill collectors get away with this?

A: Once a debt has been in default—unpaid—for six years, the statute of limitations to collect the debt has expired. The creditor cannot file a suit to collect the debt if the debt is in default for six years or longer. The debt is too old to collect through a lawsuit. However, to trick you into thinking that the creditor has additional time to collect upon the debt, the creditor will make up a phony date called the “charged off date”, and put that phony “charged off date” on your credit report as the date of default. In fact, “charge off date” is a term of no legal significance.

Q: Why is my credit score important?

A: The benefits of improving your credit score are undeniable; improved employment prospects, cheaper car insurance, and low-interest rates for future car loans and mortgages are among the perks of a better credit score. A FICO credit score of 700 or higher is ideal for the best of benefits—850 is considered “perfect” credit.

During the present financial crisis brought on by COVID-19, careful credit management is even more important. We have heard of cases where bad credit made it nearly impossible to rent an apartment or obtain a mortgage, leaving individuals and families literally out in the cold.

Q: My credit is rocky. Will disputing “out of statute” debts help?

A: If your credit report contains many enforceable unpaid debts, then disputing a few here and there might not be that helpful–—a bankruptcy filing could be the right call. We can help you determine your best course of action, contact us at sterbick.com to make an appointment for a free, confidential, personal consultation right away.
If your credit is reasonably clean, you should make a habit of obtaining a free copy of your free credit report each year and checking it for errors. Even after a bankruptcy filing, you should get in the habit of doing an annual review of your credit report. The federal government provides a site where you can obtain your free annual credit report at annualcreditreport.com.

Q: Can you give me an example of a phony “charge off date” for an “out of statute” debt?

A: Let’s assume that you received medical or dental services on July 1, 2012 (8 years ago) that were billed to you on August 1, 2012. Let’s assume that you made one or two small payments and never paid again after September 1, 2012 (7 years 9 months ago). Finally, let’s assume that as of today, August 5, 2020, the remaining unpaid medical/dental bill balance appears on your credit report as “charged off” in early April 2017—only 40 months ago. What should you do?

In this example, you should make a written dispute to each credit bureau that lists this debt as still due based on your current credit report that you obtained for free at annualcreditreport.com so that the debt can be removed from your credit report for each credit reporting bureau that lists the debt as due. The date of default for the debt was really September 1, 2012, the last date you made a payment that did not pay the debt in full. The last date that the creditor could file suit to collect the debt was six years later, on September 1, 2018. You have been “free” of the debt since September 2018.

Q: How long can I be pursued for a valid debt?

A: If a debt is valid—the debt is still due and payable within six years of the date of default—the creditor can file a lawsuit and obtain a judgment provided that the lawsuit is filed with the court before the six-year period expires. Once a judgment is obtained in the creditor’s lawsuit to collect the debt, the creditor has ten years after the date of the judgment to pursue and garnish you based upon the lawsuit judgment.

There is even worse news. After the first 10-year period draws to a close, the creditor can ask the judge to extend the judgment for an additional 10 years (for a total of 20 years!). That’s right; the creditor can have up to 20 years to garnish and collect from you.

Recently, a prospective customer who was considering filing bankruptcy told us about a call she had with her bank branch manager. After telling the branch manager that she was considering filing bankruptcy, the manager told her that the bank could defer the upcoming bills on her credit cards and lines of credit. She should even max out her line of credit to help with her short-term cash problems. We informed her that the manager gave her very bad advice. In fact, deferring those payments doesn’t reschedule them at the end of the loan; instead, they would be due in total at the end of the deferment period, including payments on her now maxed-out line of credit.

The Sterbick team does our best to give each client the best, unbiased advice we can provide in every case. We do not automatically recommend bankruptcy; we tailor our advice to each person’s circumstances. We would never advise a client to take actions that would worsen their circumstances and increase their debts as this bank manager did. We advised our client to immediately return the line of credit to the bank and to continue to work with our team on her next steps towards rebuilding a sound financial future.

Bankruptcy should be your last option when all other alternatives have been examined and rejected. If bankruptcy is not a good fit for you–if it is not in your best interest–then we will not recommend it in your case. On the other hand, financial stress is not a healthy state, and it does not cost you anything to check out your options. Please contact my office to make an appointment for a free, confidential, personal consultation to review your circumstances together.