Answer

Hi again. Thank you for clarifying your question.

Question: “Do these companies who are not the original creditor have the right to collect after the original creditors have charged them off?”

Answer: I’m sorry to say that the answer is yes. Many consumers mistakenly believe that when a debt is “charged off” they no longer owe it. That is, unfortunately, not the case. A “charged off” debt is a debt that has been reclassified from an asset to a liability. For example, if you took out a car loan and signed a note that includes interest, the note is considered an income generating asset for the lender. When the lender balances its accounting books, the note is included as an asset. However, if you don’t pay the note, then the lender may eventually change its status to a liability for purposes of its accounting books. It may then deduct the unpaid debt from its taxes because its considered a total loss.

But, the charged off status has nothing to do with your liability for the debt. Regardless of how the lender classifies the debt, or whether it deducts the debt from its taxes, your obligation remains. When the lender updates your credit report to include the fact that it charged off the debt, it’s really just saying to other lenders “this borrower is so delinquent, we could no longer count the debt as an asset … we were forced to count the debt as a liability and a total loss.” As you can imagine, that’s actually worse for your credit report than an ordinary delinquent debt because prior to a debt being charged off, the creditor still counts the debt as an asset, and hasn’t concluded that it’s a total loss.

So, the bottom line is that a charge off is simply an accounting term, and it merely indicates that the debt is so delinquent, the lender had to actually count the debt as a total loss. It has nothing to do with your liability for the debt … you still owe it.

Now, having said that, often by the time a debt is sold to several different collection agencies, several years may have passed. If that’s the case, then you may have a statute of limitations defense. In Maryland, the statute of limitations for contractual obligations, loans, etc., is 3 years. The statute of limitations begins to run when you first default on your obligations. So, let’s stay with the car note example, and let’s say your monthly payments are due on the first of each month. If your last payment was May 1, 2006, then that means you first defaulted when you failed to pay on June 1, 2006. The statute of limitations began to run on June 2, 2006, and it ran out last week on June 2, 2009. In that situation, you would have a defense if you were sued for the debt.

You should note three things about the statute of limitations, however:

(1) Any payment you make after the first default restarts the statute of limitations clock, so going back to my car note example, if for some reason you made one payment in August 2007, and never again, the statute of limitations would begin to run from August 2007, and would not expire until August 2010;

(2) The expiration of the statute of limitations is merely a defense to a lawsuit … it does not prevent a lawsuit, nor does it prevent other collection activity.

(3) In order to successfully use the statute of limitations, you generally need to affirmatively assert it as your defense immediately upon being sued. Since you’re not at that point yet, that’s a conversation for a different day.

Last, if you want to stop all communications with the collection agencies, you can write them a “cease and desist” letter, which basically demands that they stop contacting you. Under Section 805(c) of the Fair Debt Collections Practices Act, the collection agency must not contact you again, except to inform you of its compliance and to sue you. Generally speaking, once a collection agency gets such a letter, it immediately puts your account on the fast track to being the subject of a lawsuit. That doesn’t sound good, does it? Why would you want to be on the fast track to being sued? You would want it if you have a statute of limitations defense. In other words, if you have a statute of limitations defense, then you’ll want to send the cease and desist letter because it will stop the phone calls and letters, and more than likely the collection agency won’t bother suing because it will have to assume you’ll properly assert the statute of limitations as your defense. But even if it takes the chance that you don’t know about the statute of limitations, you’ll win if you properly use it in court.

I hope all of that helps!

Have I satisfactorily addressed your concerns? If not, then please feel free to ask for clarification.

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DISCLAIMER: Please understand that the complexities of most legal problems cannot be adequately addressed in this setting, and that I am only licensed to practice law in the State of Maryland. Accordingly, by continuing in this discussion and/or by “accepting” my answer you acknowledge that (1) we have not formed an attorney-client relationship, (2) my answer is general information only and is not legal advice, and (3) you should not rely on my answer in undertaking any course of action without first consulting with an attorney in person who can review all relevant facts.

Expert:	TJG, Esq.
Pos. Feedback:	99.6 %
Accepts:
Answered:	6/9/2009

Attorney-At-Law

Licensed in Maryland