Charge-offs Are Creating New Financial Nightmare for Consumers

Writing off bad debt is not a new practice in the credit card industry. Called a “charge-off,” the practice is commonly used to clear a credit card issuer’s books of uncollectable debt before the end of the fiscal year. Before the recession, charge-offs were seldom necessary and their use infrequent. However, the litany of financial and social ills that have plagued America since the early days of the recession left consumer finances decimated. Consumers whose personal finances were strained to the breaking point lacked the resources to meet the minimal monthly payments on their hefty credit card debt. The result has been a dramatic increase in the number of charge-offs.

Typically, banks, credit card companies and other lenders sell lists of uncollected debts to third-party debt buyers. In the business to make money, these debt buyers don’t waste time investigating the current status of the debts they are trying to collect. They simply file suit against delinquent debtors based on often-outdated file information. Many states have debt laws that favor the lender, permitting debt buyers to attach wages or place property liens without informing the debtor. Obviously, this can create a nightmare for debt-ridden consumers.

A recent lawsuit could set some ground rules that might afford consumers some protection against debt buyers. In what some credit card industry watchers are calling a landmark case, a New York man closed a credit card account on which he still owed a significant balance. He returned his card to the issuer, requesting instructions on how to pay off the debt; but the card company never responded.

Six years later, a debt buyer took the man to court to collect the balance due on the still unclosed account. The card holder argued that the debt buyer had waited too long to file suit, missing the three-year window during which debts can be collected. The trial court sided with the debt buyer, as did an intermediate appeals court. However, this year, the New York State Court of Appeals overruled the earlier judgment, agreeing with the borrower that the debt buyer negated his claim by waiting more than 3 years to start collection proceedings.

Credit card watchers are waiting to see if this case might spark a national statute of limitations on debt collection.