Sounds like Jennifer is in a tough spot. To make the best of the
situation she's going to need to learn a little about what a 'charge-off' really
is, how collections work and whether the lender can charge interest on the debt.
When Jennifer borrowed money from a company she created an
expectation of future income when the debt was repaid. That's an asset of the
When a company 'charges-off' a loan, they're saying that they
don't believe that they'll ever be able to collect the debt. So they 'write-off'
the asset. It's an accounting entry that reduces their profits and taxes.
They'll also report the charge-off to the credit rating
agencies. That makes it more difficult for Jennifer to borrow money later. An
overdue debt can be shown on your credit report for 7 years after the account
But, that's just the accounting aspects. What happens to the
debt in the 'real' world?
Just because a debt has been charged-off does not mean that
Jennifer still doesn't owe the money (plus interest and penalties). What she
owes depends on the original loan agreement, state law concerning the Statute of
Limitations (SoL) and the federal law governing collections.
The original terms from the loan still apply. All that fine
print that no one reads becomes important now. Generally it gives the lender
quite a bit of latitude to charge interest and penalties.
Next Jennifer needs to find out the statute of limitations (SoL)
on her debt. In most cases it's between 3 and 6 years. State law and the type of
debt will determine the SoL. The SoL says that after a certain period of time
that the debtor is no longer legally required to pay a debt.
There are actions that Jennifer could take that would restart
the clock on the SoL. Making a payment, signing an agreement to pay or even
admitting that the debt is valid could be enough to stop or reset the SoL clock
She'll need to do a little research to learn the SoL in her
state. Her phone book should have a number for the state's information operator.
They should be able to point her to the state agency that can explain the law.
Two notes about SoL. Even though the SoL says that a debt
doesn't have to be repaid it's not illegal to attempt to collect it. And, if the
lender gets a judgement against the borrower there's no SoL on the judgement.
Jennifer also needs to know a little bit about collection
agencies. Some work for a percentage of any money that they're able to collect.
Others buy a group of bad loans for pennies on the dollar. Then they keep
everything collected. Since they own the loan, they're also allowed to re-sell
it to another collection agency. That could explain why Jennifer has heard from
more than one agency. They're also sometimes affiliated with law firms so that
they sound more important.
Whoever owns the loan, original lender or collection agency, is
allowed to keep charging interest and penalties per the original loan agreement
and applicable laws.
Anyone trying to collect the loan is supposed to obey the
federal Fair Debt Collection Practices Act. But, as you'd expect, some will bend
or even break the collection rules.
It's no surprise that they tapped into Jennifer's bank account.
She might have given permission without realizing it. They will also try to
garnish her wages or put a lien against any property that she owns. There are,
however, laws that keep them from just taking anything they find.
If Jennifer does agree to settle the debt by paying a portion of
it, she needs to get a release from the agency saying that the balance of the
debt is forgiven. She should look for the words "payment in full".
Once a debt as been reported as written-off, paying it will not
wipe away the bad comment in her credit report. It will look better, but only
slightly. It's possible that the original lender may agree to remove the item if
a partial payment is made. But, only the original lender may do that. Not an
outside collection agency.
Hopefully Jennifer will be able to close this unfortunate
episode and never have to revisit the issue again.
Gary Foreman is a former financial
planner who currently edits The Dollar Stretcher newsletters and website <www.TheDollarStretcher.com>
You'll find hundreds of articles to help stretch your day and your dollar!