The term “charge off” means that the original creditor has given up on being repaid according to the loan’s original terms.
Many people confuse the terms “charge off” and “forgiven.” You do not usually owe the balance if your unpaid debt has been forgiven. However, a charge-off means that one creditor has written the debt off and either sold it or gave it to another debt collection agency to collect on.
If your debt has been charged off, you do owe the balance. Here’s what to know about the legal ramifications of having a charged-off debt.
Can You Be Sued for Charged-Off Bad Debts?
Yes, you can be sued for a debt that has been charged off. This could be for credit card debt or another type of debt.
Nonpayment can result in legal action from debt collectors and debt collection agencies. You may be sued, resulting in consequences such as a frozen bank account or wage garnishment. The court may issue a default judgment against you if you don’t respond to a lawsuit. Not to mention, nonpayment looks bad on your credit report and can hurt your credit score.
Debt owed through charge-offs is subject to the applicable state laws for statute of limitations. So be sure to check if the debt isn’t “time-barred.” If it’s old debt that’s time-barred, a debt collector or agency can still attempt to collect the debt, but they cannot sue you. Be aware of your rights through the Fair Debt Collection Practices Act (FDCPA), and check out resources available from the Consumer Financial Protection Bureau that may help you with debt collection.
Consequences of Charge-Offs
Having a charge-off noted on your credit report has several negative consequences, including:
- Credit Score Impact: A charge-off can significantly lower your credit score, making it harder to obtain new credit or loans. It stays on your credit report for seven years from the date of the first missed payment.
- Collections Activity: The creditor may sell the charged-off debt to a collection agency, which will then pursue you for payment. Collection agencies can be very persistent and aggressive in their efforts to collect the debt. You may receive frequent calls and letters demanding payment.
- Legal Action: The creditor or collection agency may file a lawsuit against you to recover the debt. If they win, they can garnish your wages or place a lien on your property.
- Difficulty Obtaining Credit: If you are able to get credit, it will likely be at a higher interest rate due to the increased risk you represent. However, many lenders may deny you credit outright due to the charge-off on your record.
Can a Creditor Garnish Wages Following a Charge-Off?
Yes, a creditor can garnish your wages following a charge-off, but there are several steps and legal processes they must follow first. Here is how it typically works:
1. Charge-Off Declaration
The creditor writes off the debt as a loss and reports it as a charge-off to credit bureaus. This usually happens after six months of non-payment.
2. Collection Efforts
The creditor may transfer or sell the charged-off debt to a third-party collection agency, which will then try to collect the debt from you.
3. Legal Action
If collection efforts fail, the creditor or collection agency may file a lawsuit against you in an attempt to recover the debt. If the court rules in favor of the creditor, a judgment is issued against you for the amount owed, plus any additional legal fees and interest. Failing to file an answer to the lawsuit by the deadline or missing the court date will result in a default judgment against you.
4. Wage Garnishment
Once a judgment is obtained, the creditor can request a court order for wage garnishment. The court order is sent to your employer, instructing them to withhold a portion of your wages and send it directly to the creditor until the debt is paid off.
Note that certain types of debts, including child support, alimony, federal student loans, and unpaid taxes have different rules and may not require a court judgment before garnishment.
Legal Protections and Limits
The Consumer Credit Protection Act limits the amount that can be garnished from your wages to the lesser of 25% of your disposable earnings or the amount by which your weekly earnings exceed 30 times the federal minimum wage. Some states have stricter limits on wage garnishment or provide additional protections for debtors.
Dealing with a Charged-Off Account
Before it gets to the point of wage garnishment, try to negotiate a repayment plan or settlement with the creditor. You may also consider working with a credit counseling agency to manage your debt and potentially avoid legal action. Or you may want to contact a lawyer to understand your rights and options.
If you are unsure whether your debt has been forgiven or charged off, contact a law firm that can assist you in locating this information. Depending on the financial institution, lender, or credit card company, you may qualify for a debt relief option. Asking thorough questions will help you make financial decisions with confidence. Options might include debt settlement and setting up a payment plan with monthly payments. Making small, regular payments on your outstanding debt could help you get through financial hardship and avoid debt-collection lawsuits.
