BACK

Expert Q&A

Yes, debt collectors have the right to collect, and sue

Summary

Some people mistakenly believe that when a debt is charged off, the obligation to pay disappears. Not so. Debt collectors have the legal right to pursue, and sue, you

The editorial content below is based solely on the objective assessment of our writers and is not driven by advertising dollars. However, we may receive compensation when you click on links to products from our partners. Learn more about our advertising policy.

The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired. Please see the bank’s website for the most current version of card offers; and please review our list of best credit cards, or use our CardMatch™ tool to find cards matched to your needs.

Question for the CreditCards.com expert

Dear Let’s Talk Credit,
If your original creditor has charged off your debt and sold it to a collection agency, do you have to pay them? And can they file a judgment against you?
Randy

Answer for the CreditCards.com expert

Dear Randy,
Many people mistakenly believe that when a debt is charged off by a creditor, the debt is no longer owed. In fact, charging off a debt is a simple accounting measure that moves a debt from an asset to a liability. Charging off the debt does not change the original agreement between you and the creditor; the debt is still owed. Typically, a creditor will charge off a debt after 180 days with no payment.

When a collection agency purchases the charged-off debt, that debt, including fees and interest, is transferred to the collector. The collector has the right to pursue you for that debt, under the rules imposed by the Fair Debt Collection Practices Act. This federal law requires, among other things, that a collector provide to you, in writing, the amount owed, the name of the original creditor and a statement explaining your right to dispute the debt. In addition, if you request validation of the debt, the collector must provide proof that the debt is owed by you. It sounds as if you know the debt in question is yours.

The federal consumer watchdog agency, the Consumer Financial Protection Bureau, has published debt collection sample letters that may help you craft a letter on your own behalf.

To answer the second part of your question, yes, a collector can sue you to collect what is owed. Should things progress to that point, a judge could issue a judgment to the collector for the amount due and even garnish your wages.

My recommendation is to work with the collector to pay what you owe before legal action is taken. If you have the funds, you could offer to settle the debt for less than the total amount due in one lump sum payment. Should you decide to settle the debt, have the collector send you the settlement agreement in writing prior to making the payment. Keep copies of the settlement agreement and proof of your payment.

Finally, if you do settle the debt, if the negotiations reduce your debt by $600 or more, you will be issued a 1099-C tax form. The form will document the amount of money that was forgiven in the settlement, and you will owe income taxes on that amount. For example, if you settle a $5,000 debt for $2,000, you will owe taxes on the forgiven debt amount of $3,000.

Should you not have the money or decide you don’t want to settle the account, you may also have the option to work out a monthly repayment plan with the collector. Do not agree to a monthly amount unless you know that you can afford to make the payments. Again, get the payment agreement in writing from the collector and keep good records.

Let’s keep talking!

See related:Credit card debt negotiation in 3 (not) easy steps

 

 

What’s up next?

In Expert Q&A

Wage garnishment laws differ by state

If you’re served with a summons for unpaid debt, where you live will determine whether a creditor can recoup funds through wage garnishment

Published: September 27, 2013

See more stories
Credit Card Rate Report Updated: May 23rd, 2019
Business
15.61%
Airline
17.50%
Cash Back
17.60%
Reward
17.62%
Student
17.79%

Questions or comments?

Contact us

Editorial corrections policies

Learn more

Join the Discussion

We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company’s business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.