Consumer Law

Can A Debt Collector Call Me About A "Charged Off" Account?

By M. Stan Herring

A question we often are asked is whether it is legal or proper for a debt buyer or collection agency to try to collect (call, write, sue, etc) on a credit card account that has been "charged off". The short answer is "Yes" with some exceptions....

An account that has been charged off simply means that from an accounting perspective the account has been removed from Accounts Receivable which is an asset. Here's the deal - if a business is owed money for goods or services sold or provided then this is categorized as an Account Receivable. It is money that, for example, a consumer owes to Bank of America.

But let's say its been 10 years since the consumer paid anything to Bank of America. It would be deceptive for Bank of America to still claim this account as an asset - as an Account Receivable. Really Bank of America has no expectation of ever receiving this money. So to prevent fraud against investors who are looking at the balance sheet of a company (where Account Receivable is listed) the accounting rules require that if payment has not been made in six months (some exceptions but not important for our purposes) then the account must be "written off" or "charged off" and removed from account receivable. The company normally receives a tax write off (deduction against revenues) because this was an asset that was lost or destroyed just the same as if a building for a business that was an asset burned down.

OK - what does this mean for collection and credit reporting?

For credit reporting it means the furnisher (the bank or whoever wrote the account off) must report to Equifax, Experian, TransUnion, and the other credit reporting agencies that the account has actually been charged off.

For collection purposes, the company can still try and collect from the consumer. The charge off is simply an accounting function and does not affect the validity of the debt.

As a practical matter, most companies send charged off accounts to collection agencies or sell the accounts to debt buyers. Now at this point the violations of the Fair Debt Collection Practices Act and (to a lesser extent) the Fair Credit Reporting Act usually begin very quickly.

OK - what about the exceptions on collecting a charged off account? First, if the account is beyond the statute of limitations then the debt buyer cannot threaten to sue and cannot actually sue as this violates the Fair Debt Collection Practices Act. Second, if the account is too old (basically 7 years after charge off) then the debt buyer or collection agency cannot threaten to put this on your credit report. There are some other exceptions but these are the main two exceptions that affect Alabama consumers.

If you have questions about a charged off account or if you are dealing with a debt collector (collection agency or debt buyer) please feel free to contact us now so we can help answer any questions you have.

Full post as published by Alabama Consumer Blog on December 23, 2008 (boomark / email).