Charged-off Credit Card Accounts Can Come Back to Haunt You

Dear Suze,

I've had a really hard time with my money. I owe a considerable sum to credit card companies, and I haven't made any payments in about five years. My credit report says my accounts are "charged off," and everyone has stopped calling me. But will they make me pay up someday? How long will all this stay on my credit report?

I do have some money in an IRA. Another question: If I claim bankruptcy, will the credit card companies take the money in my IRA? The truth is, I still have no money to pay the bills, but I don't want to live with this forever.

-Worried

Dear Worried,

The fact that your creditors have stopped calling doesn't mean you're out of the woods-not yet. Here is the problem. Credit card companies are selling their old, "charged-off" accounts to collection agencies for pennies on the dollar. The collection agencies then resume collection efforts, figuring that some consumers will pay up and that they, the agencies, will make a profit. All of this is perfectly legal.

Just so you know: A charged-off account is an outstanding balance that the lender considers a business loss. How long it takes before the lender declares the account a loss varies from creditor to creditor, but this typically happens after several months of attempting to collect the money. Once an account has been charged off, the lender may sell it to a collection agency-and this can happen right away or much later on. At the time the account is charged off, the creditor usually stops the clock on interest charges, but the collection agency may add fees of its own. On your credit report, this kind of debt is designated as R9 for "revolving credit charge-off" or I9 for "installment credit charge-off."

Here are your rights:

• To clear your credit report:
  If any of your accounts were charged off more than seven years ago, the damaging information on that account should have been erased from your credit bureau file, and a collection agency cannot reenter the information. This process take place under a federal law, called the Fair Credit Reporting Act (FCRA), that regulates the actions of all creditors and credit reporting agencies. The law is designed to protect consumers, creditors, and credit reporting agencies. The FCRA enforces the seven-year limit; specifically, it says that information in a consumer's file concerning accounts that have been charged off or placed for collection must be completely erased after seven years from the date of last activity; last activity generally means the date the creditor charged off the account. On the copy of your report look at the date of last activity. Has it been seven years from that date? If so, write to the credit bureau and tell it to remove the account from your file. Each one of your accounts is probably different. For many of them, that seven-year limit may not be far away. Making a new payment now would merely create new activity in your account and start the seven-year cycle over. Be very careful about doing this.
• To deal with bill collectors:
  When it comes to collection efforts, each state has its own statute of limitations governing how long a debt is considered legally collectible. In general, the limit is about four to five years from date of your last payment. If a creditor waits beyond the time limit set by the statute of limitations to sue you, the case can be thrown out of court. To find out about the statute of limitations in your state, contact the Office of the State Attorney General. If you know that your debt has expired under this statute of limitations and a collection agency happens to call you, do this: Explain to the agency that you will pay only if you are taken to court and a judgment is obtained against you; otherwise, you have no intention to pay what you believe to be a legally uncollectible debt. The key here is to put your argument in writing, adding a clear demand that the agency stop contacting you. The Federal Fair Debt Collection Practices Act, another federal law, declares that if the state-regulated limitation period is up, the agency may not contact you again once it receives your letter-except to say there will be no further contact. If the state statute of limitations hasn't yet run out, paying something on your charged-off accounts will not help clear up your credit report and may start the collection agencies' clock ticking anew, so once again, think hard before you do this. Only time will repair your credit report-specifically, the seven years it takes until the credit bureau must, by law, remove the debt notation.
• To find out whether or not your IRA is in jeopardy from a creditor or a collection agency:
  As far as I know, the ability of creditors to come after your retirement accounts largely depends on your state. All states have their quirks when it comes to placing limits on debt collectors and/or collection during bankruptcy. In recent years a number of state courts have given IRAs and SEPs protection against garnishment, but many have not; so once again, you must call the Office of your State Attorney General and ask what the law is in your state. The only federal protection there is comes into play only if your retirement savings are part of an employer-related plan. Years ago, the U.S. Supreme Court decided that a federal pension law called ERISA shields retirement-plan benefits from creditors in bankruptcy, no matter where the bankruptcy takes place. But some local federal courts have interpreted this to mean that in order for pension benefits to be federally protected, three requirements must be satisfied:
  1. the retirement plan must be subject to ERISA;
  2. it must be tax-qualified under certain IRS rules; and
  3. it must contain a written "anti-alienation" provision. Most employer-sponsored plans meet these requirements, but plans covering only the owner-meaning you, my friend-are not considered ERISA plans. So, if you ever enter bankruptcy, the benefits of your IRA, Keogh, or SEP IRA may fall outside the protection of this Supreme Court ruling.
• If you feel you want to pay the balances due:
  So at last we come to the heart of the question: What, exactly, do you want to do about your debt, my friend? Even if the card companies and collection agencies never again call you, will you feel better about yourself if you pay or don't pay the outstanding sum? As you ponder this, remember: You must not do anything that renders you powerless. An essential law of money-that power attracts money and that being powerless repels it-is the crucial point for you. If you'd feel less powerful by letting the time go by and seeing if you can get away with not paying, then you should call a lawyer and find out what she can do to help you settle the outstanding balance. if you feel just fine about letting this debt expire unpaid and believe that you can make it through to the five- to seven-year state and federal endgame that's almost here, then consider placing all of your money in a safety deposit box and sitting it out. Either way, check your state laws to know what you're up against.