Learn What Happens When Your Debt Goes Unpaid
Have you fallen far behind on bills? Are you being contacted by collection agencies? Learn how your credit is impacted when you stop making.
Credit Account "Charge Off"
When you fall far behind on a credit account, the lender will "charge it off." This means it must be treated as bad debt for accounting purposes, and you are still responsible for payment of the bad debt. Usually, the debt will be turned over to a collection agency, which may charge additional fees and interest.
Credit Report Impact
Regarding your credit report, collection or charge-off accounts can be reported for up to seven years and 180 days from the date you miss your first payment leading up to the account being charged off or sent to collections. Here is an example:
- January 1, 2010: You miss a payment and the account becomes delinquent.
- June 1, 2010: The account is charged off by the lender.
- December 1, 2010: The account is acquired by a collection agency.
- June 29, 2017: The collections account and charge-off must be removed from your credit reports.
Under federal law, the Fair Credit Reporting Act, the collection agency is required to inform the credit reporting bureaus of the original date you, the debtor, fell behind. The credit reporting bureaus must disclose the date of the account delinquency; in this example the delinquency date is January 1, 2010.
If the debt is too old to be reported you can dispute the account with the credit reporting bureaus. You should monitor your credit report to make sure it is removed and does not reappear. You can also file a complaint with the Federal Trade Commission http://www.ftc.gov/bcp/index.shtml that enforces the federal credit laws.
Collection Agency Lawsuit
An account that goes to collections is a negative item whether it is paid or unpaid. The same is true if you settle the debt for less than the full balance. However, if you do not pay a collection account, you run the risk of being sued. If you lose the lawsuit, a judgment will appear on your credit report, which will hurt your credit for another seven years.
That brings up one more issue to consider: whether the collection agency can still successfully sue you to collect your debt. Every state has what's called "statutes of limitations" for debts. The statute of limitations that applies to your debt could last for two years – or twenty years – depending on your type of debt and the state law.
For example, let's say the statute of limitations in your state is four years. The collection agency can attempt to collect payment for debt after four years. However, if the collection agency takes you to court, and you can prove that the debt falls outside the statute of limitations, it is unlikely the collection agency will win the case against you.
Legal Help
To make sure you understand your rights when it comes to collection accounts, you can contact a local consumer law attorney or use the Union Plus Legal Services for help.