Beware phantom debt pains from charge-offs

A sad female clown.

Are old charge-offs still giving you the blues? (Photo Credit: CC BY/Caitlin Doe/Flickr)

Maintaining good credit can be challenging, particularly after a life-altering event like job loss. Understand that if a creditor throws in the towel and charges off one of your debts, that doesn’t mean that you’re in the clear. It’s quite possible that you will still be liable for that bad debt – even after it disappears from your credit report.

Charge-offs: The light side

Imagine this scenario involving a charge-off on your credit report. While the credit item may say it’s going to drop off your credit report at a certain time, that debt may still have legs because the rules for collecting a debt and the rules for reporting a debt aren’t the same, reports Bankrate. The Fair Debt Collection Practices Act (FDCPA) provides the guidelines for debt collection, while the Fair Credit Reporting Act (FCRA) holds jurisdiction over how a charge-off is reported.

On the plus side, the FCRA mandates that a charge-off must be removed from your credit report after 7 years. That includes whatever debt collection agency owned the debt. Check your credit report about a month after the charge-off is supposed to occur. If the bad debt is still there, dispute it with the three credit reporting agencies: Equifax, Experian and TransUnion.

Student loans, tax liens and Chapter 7 bankruptcies cannot be charged off.

Charge-offs: The dark side

Thanks to the FCRA, bad debt will disappear from your credit report. Unfortunately, the FDCPA makes it possible for debt collectors to pursue your debt almost in perpetuity. As there is a lucrative secondary market that purchases bad debt, there is still cause for concern on the part of the consumer who needs debt repair. Each collection agency will likely try to collect at least once before selling your charge-off.

Can a consumer escape from that bad credit card debt amassed during a span of unemployment? Because there is typically a statute of limitations, the answer is yes. The amount of time in which a debt is subject to collection via the court system varies by state, although it is usually 4 to 6 years for credit cards and 6 to 10 years for installment loans, payday loans or auto loans. Contact your state’s attorney general for more specific information.

Know your debt collection rights

If a charged off debt is past your state’s statute of limitations for collection, it cannot be legally pursued and you can ask not to be contacted against regarding that debt. If a debt collector continues to chase, you may have the option to levy a counter-suit.

Legal action will require time, money and the advice of a lawyer, however. The best way to get out from under a debt collector that is pursuing your debt in a legal fashion is to either pay what you owe in full or come to a settlement.

Equifax dispute form
Experian dispute form
TransUnion dispute form

How to deal with collections

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