Q: Should I settle in full on an account that has already been closed or charged off? Or should I demand a paid in full receipt once we have a negotiated amount?
A: Without knowing the specific type of debt involved, what state you’re in, and how old the debt is, it’s hard for me to give you definitive advice. However, if I were in your shoes I probably would not agree to pay a charged off debt at all – unless I desperately wanted to clean up my credit, and there was an upfront, written agreement to have all negative information about the charged off account removed from my credit reports.
And, yes, getting a receipt would absolutely have to be included in any deal, regardless of whether my payment was a partial one or one that paid the balance in full.
Here are some insights to take into consideration when it comes to paying charged off debts.
A debt that has been charged off has been “written off” by the original creditor as “uncollectable.” So when a company charges off a debt, the business gets a tax break for this loss.
After a charge off, most companies will not try to pursue further collection from a consumer. But some do. Also, some companies may sell old debts to collection agents.
Unfortunately, there are no universal practices and it is not cut-and-dried about whether a consumer is still liable/legally on the hook to pay a debt that has been charged off.
I actually did quite a bit of research into this topic recently because a few of my coaching clients were facing dilemmas about what to do about very, very old charged off debts. As mentioned the age of your debts nor do I know the state where you reside. Nonetheless, I will tell you, in summary, what I told them.
In a nutshell, there is a lot of contrarian advice out there. Some experts state emphatically that you still owe an old debt, even if it’s been charged off. The charge-off, they note, is mainly for the creditor’s benefit. But it does not remove your legal liability. Therefore, they suggest you pay the debt.
Other experts (myself included) note that there is a statute of limitations in every state that governs old debts. And so it’s not always so clear-cut about whether a consumer still legally owes an old debt. It really depends on how old the debt is, the type of debt was involved, and even where you live or where the creditor is based.
In the State of New York, for example, the statute of limitations on credit card debt is generally 6 years. However, there are two big exceptions to this:
- The statute of limitations on a department store card is 4 years.
- The statute of limitations on other national credit cards (like those issued by Chase, Bank of America, or Discover) is 3 years. Read here to learn what the New York-based consumer advocacy group called NEDAP/New Economy Project has to say about this topic.
(Also, for more background info, here’s another article I wrote about the statute of limitations, with an explanation on how to use it to eliminate old debts).
But if you’re worried about what a debt collector can do to you, here are some insights that may help. I’m not a lawyer, so I asked attorney Jacqueline McMickens of Brooklyn, New York, for her views on this matter. She stated that many people are paying old debts that they are no longer legally responsible for paying, including ancient, charged off debts.
Lawyers from NOLO also state that creditors can’t sue you once the statute of limitations has passed.
Here is an article from NOLO on when collectors can NOT sue you over old debts.
Pay attention to the section of this article that contains the sub-heading: “Using the Statute of Limitations.” It highlights how, even after you are not legally responsible for a debt, some collectors will still try to squeeze money out of you — so-called “voluntary” payments. In other words, they can still ask. They just can’t sue, or even threaten to sue.
And this is the key point.
From a legal perspective, once the statute of limitations expires, there is nothing that a creditor/collection agent can lawfully do to make you pay them any money.
Can they still report you to the credit bureaus? Yes; negative information about your payment history can stay on your credit reports for 7 years from the date of last activity. For charged-off debts, those also remain on your credit reports for seven years from the charge-off, even if the debt is later transferred to a collection agency, according to this explanation from Experian.
But remember: even if you pay in full or settle the debt, the only thing that will change is your payment status: the negative information on the charge-off will remain for seven years, according to TransUnion. Also, any recent payments you made don’t “re-start” the seven year clock for credit reporting purposes. You’ve already been dinged there. After seven years, that charge-off goes away. See this article, which quotes experts from Experian and the FTC.
Can they try to sue you in court? Yes. Anyone can sue over anything. So sure, a creditor can try to sue over an old debt, but if the debt is too old, a judge would throw out the case. You have an “absolute defense” in matters where the statute of limitations has expired. Furthermore, from a practical standpoint, if a creditor does sue even after they know the statute of limitations has expired, they would be violating the Fair Debt Collection Practices Act (FDCPA) and subject to penalties – which is why a lawsuit would be less likely to occur.
Can they break the law and try to harass you with annoying phone calls? Yes; unfortunately, abusive debt collectors do exist. So repeated or annoying phone calls are a possibility. The only way to make them stop is to assert your rights under the FDCPA and not tolerate such behavior. If a debt collector keeps contacting you, you simply need to write a Cease and Desist Letter and tell them to stop.
One final tip: here’s another really good article I read called 8 Things Debt Collectors Won’t Tell You. There’s lots of good stuff in here about dealing with debt collectors.