Has Your Debt Been Written Off or Charged Off?
August 2nd, 2010 at 09:14am Under Consumer Debt+ Harassing Phone Calls
One of the most difficult concepts for most borrowers to grasp when you fall behind on your credit card payments or your mortgage (or both) is the idea of charge-offs.
When a lender (regardless of the type of debt) decides that you are no longer likely to pay your debt, they will “write off” or “charge off” your account. This will happen anywhere from a few months to a year or more after you fall behind. When this happens, they take your account off their books and no longer expect you to pay. Usually, they will take a tax write-off for your bad debt, and in some cases they will collect on an insurance policy that they hold which pays them in the event you cannot.
So… this is the end of your debt, right? Well… for the specific creditor, yes. They no longer expect you to pay. However, frequently this is not the end of your debt for you as the borrower. In fact, this is where things can get nasty. In most cases, creditors will sell your account to a collection agency. More on this in a moment.
As long as you are working with your creditor (talking to them and making attempts at paying them), they will most likely not write off your account. If the payments you’re making aren’t large enough or frequent enough, you’ll be talking to an in-house collector. These creditors would rather see you strung along as a borrower of theirs than charge off your account and sell it to a third-party collection agency.
Remember: the whole goal of these lenders is to loan you money. As long as they can keep you classified as a borrower, they want to do so…
This means that they’ll typically work with you by lowering your interest rate, making accommodations so that you can move payments to the end of your note, or make lower payments for a while. It all depends on the type of debt. But they have all sorts of unadvertised in-house programs that they can put you in which are designed to keep you on board as a borrower. With the exception of mortgage lenders (which are in a class of their own and have their own practices and policies), the lender would most likely love to do whatever it takes to string you along and keep you making endless payments on a balance that never decreases (even better: one that grows because you’re not even fully paying the interest).
But at some point… if you quit paying for a long enough period of time or stop responding to their harassing phone calls, the lender will charge off your debt.
How a Charge-Off Affects You
What happens next raises some interesting legal questions. Can you legitimately be expected by anyone to pay a debt that the original lender says you no longer owe? If the lender has taken a tax benefit or collected on an insurance policy, should you be harassed by anyone to make payment?
For collateralized or secured debt, typically the collateral will be seized. If you have a car note, for example, the lender will attempt to repossess your vehicle. This will happen without any warning. A tow truck will pull up to your home or work and take off with your car. Laws vary from state to state, but you may not legally be able to stop this person from taking your car. Some people try all sorts of crazy tactics — parking a car in an unusual or hard-to-reach location, or hiding it entirely, or even skipping town with it. But chances are… if the lender wants to repossess your car, they’ll get it.
If you have a mortgage, then seizing your collateral amounts to foreclosure. The only good thing about foreclosure right now (as I’ve talked about previously here) is that your state’s court system is likely to be really clogged up right now and it will take some time before they can actually complete the process. In short: you have options.
But if the debt we’re talking about here is unsecured, the situation is different. Some examples of unsecured debt include:
- credit cards
- “signature” loans
- a second mortgage or home equity line of credit — if you’re underwater on your first mortgage (meaning that you owe more than the property is worth)
- anything else for which you didn’t pledge collateral
With unsecured debt, when the lender charges off or writes off your account, you have a situation that actually is to your advantage.
Most people don’t realize that they have options now. They just assume that dealing with collection agencies is a new fact of life. They never think to challenge the legal grounds that a third-party collector may be using as a basis for harassing you.
The fact is that significant legal questions remain as to whether or not certain types of unsecured debt can be sold.
For example, credit card debt is not the same as a loan. With a loan, there is a clear contract that includes an exact amount to be borrowed (usually on a one-time basis) along with the exact repayment terms. A credit card, however, is a series of continuing offers to contract. This type of contract is not transferable due to the nature of the series of continuing offers.
If you allow yourself to be bullied by a collector who has bought up bad debt from a credit card company, however, you will find yourself inadvertently agreeing to allow them to collect. And your agreement is what they need! If, however, you challenge the legitimacy of the debt, they frequently have no legal footing! If the debt wasn’t transferable, then you must specifically agree to the notion that you owe the debt buyer any money in order for them to have a valid right to collect!
Unfortunately, most people agree to the debts by not requesting verification within 30 days of being notified in writing. This is a major mistake.
We’ll talk more about this in the future. Feel free to comment here if you have questions about this topic or if there are specific areas of this that you’d like to see us discuss.
The bottom line is: always dispute the debt, its legitimacy, and the amounts. Do it in writing. And do it within 30 days of receiving notice from a collector.
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