Charge-Offs, the myth: Noncollectable
So often, clients are surprised when they receive a summons and complaint in the mail for a credit card debt that has been charged-off. They call and want to know how and why they are being sued. Sometimes they mistakenly believe the summons and complaint are a letter. Don’t make that mistake.
Here are some of the questions I often hear and, hopefully, some helpful answers.
How come I am being sued for a debt that has been charged-off. I thought once they charged it off I didn’t owe the money anymore. Also, why is the charged-off debt still on my credit report? And, does a charge off hurt my credit score?
A charged-off debt is an accounting practice by the creditor and does not affect your obligation to pay. The creditor has determined they can no longer keep the debt as an asset in their accounts receivable and has charged-off the debt. This does not affect your obligation to pay the debt. Often the debts are sold to third parties who will attempt to collect the debt. First via collection companies and then, ultimately, they may file a law suit to collect the money owed.
The reason the charge-off is still on your credit report is because the change in status is not a reflection of any activity you have taken, but reflects the activity of the creditor. I have no idea how the rumor started that debts, once charged-off, became noncollectable and were simply removed from your credit report, when the opposite is true.
Further, because a charged-off debt indicates poor credit behavior (i.e. long term nonpayment of a financial obligation). It can have a damaging impact on your credit score. It indicates to creditors an unwillingness to make payment arrangements with past due accounts. So, for example, if a person is looking for an apartment and property manager requests a credit report, the report will indicate any charge-offs and the potential tenant’s payment history for other lines of credit. If the performance is poor, the application will most likely be rejected.
This has a negative impact on your credit score, which can affect the interest rates you qualify for when borrowing money and insurance rates.
I appreciate you taking the time to come to my website. I hope the information has been helpful. If you are facing a difficult financial situation and need legal assistance, please give my office a call.