If you aren't paying your bills no matter how much your creditors ask you to, then you may watch your credit score plummet. This is because somewhere in the area of 6 to 9 months after you stop paying on your account, your creditor will list the amount owed as a charge-off. This is an accounting term that means your credit no longer expects to get paid and has moved the account to bad debt. Before you start thinking you're off the hook, having an account charged off will show on your credit report making it impossible for you to get a good rate if you can even get a loan or credit card. It also means that your account can be sold to a collection agency and they will try to get you to pay.
Your Credit Report
The account that was charged off shows on your credit report for seven years. It will act as a red flag for anyone who views your report including banks, landlords and potential employers. Once the charge-off stops showing on your credit report even the collection agencies have to stop trying to get you to pay your account.
Paying the Charge Off
If you don't want to live without credit for seven years, then you should consider paying off the account. Call whoever owns the account and negotiate an agreement. If you can't pay all of the account off, see if they will accept so much on the dollar. You should also make sure that the creditor agrees to update the credit agencies so that the charge-off amount is marked "paid in full" or "paid as agreed." This won't totally repair that damage a charge off does to your credit report, but it can get you moving in the right direction.
Collection Agencies
Once the creditor charges off your account, they can sell it to a collection agency and at least get a little of what is owed them back. While your creditor may have stopped calling you, the collection agency is just getting started. According to Suze Orman, the statute of limitations for debt collection varies state to state but is generally, four to five years from the date of the last payment. Once this time period is up, the collection agency can no longer contact you about it.
Other Assets
There is a chance that having debt charged off could put other assets at risk to be garnished. IRAs, bank accounts or SEPs could be used to pay off your debt whether you want it to or not. This all depends on what the laws of your state are. Federal law protects employer-associated retirement plans, but other assets could be at risk. Your state attorney general's office can tell you if there is state law that protects your assets from being garnished to pay off bad debt.
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