Dear Let's Talk Credit,
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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?
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