I am often asked the same questions by folks who have fallen behind on paying a debt such as a credit card. The questions sometimes center around articles that people have read on the internet, as if a loophole has been found preventing the creditor from collecting on the debt that is owed. I will address a few of these questions and misconceptions about debt collection in this post.
- What is the “Statute of Limitations” in Texas?
A statute of limitations is the amount of time a company (or person) has to file a lawsuit about a certain situation. In Texas, for debts like credit cards, the statute of limitations is 4 years from the date of default. The actual law can be viewed here. The date of default is defined by the terms and conditions of the credit card. For most credit cards, the date of default is usually 30 or 60 days from the date that the last payment was made.
There is sometimes a misconception that a creditor is somehow restrained or prohibited from filing a lawsuit after the 4-year statute of limitations has run. That is not always the case. Once the statute of limitations has run, if a lawsuit is filed, that defense must be properly presented in court. Sometimes, due to an error or poor record keeping, a creditor files a lawsuit for a debt after the statute of limitations has expired. These lawsuits should not be ignored as the defendant (person being sued) MUST raise the statute of limitations defense (it is not automatic).
Although a creditor cannot lawfully threaten to file a lawsuit on a debt when the statute of limitations has run, creditors are not prohibited from continuing to send letters or make telephone calls attempting to collect on the debt.
- What Does it Mean When a Debt is “Charged Off?”
From the point of view of the debtor (the person who owes the money), a charge off means nothing. This means the creditor has moved the debt from one side of their accounting books to the other. It is a tax benefit to the creditor. This does not, however, mean that the debt has been forgiven. Often times people think that if a debt has been charged off then the debt is no longer owed. This is unfortunately not the case.
- Why Does the Information on a Credit Report Not Always Match the Information Provided by a Creditor or Debt Collector?
Information on a credit report is not conclusive. The fact that a debt is not listed on a credit report does not mean that a debt does not exist or has been forgiven. Creditors are not required to report anything to the credit bureaus (but what they report must be truthful).
The dollar amount listed in a collection letter or lawsuit may not match the balance listed on the credit report. This could be because of accrued interest or late fees since the last time the creditor reported to the credit bureaus. The difference could also be due to how the creditor is breaking down the different parts of the debt (for example- principal, fees and interest).
A letter may be received from a collection agency for a particular debt that does not match the creditor listed on the credit report. The debt could have recently been sold from one creditor to another, and the new creditor has not sent an update to the credit bureaus. Or the company could be a collection agency hired by the creditor listed on the credit report.
While information on a credit report can be evidence to help prove or disprove a debt, credit reports are not conclusive and should not be relied upon as such.
- Will a Creditor Sue for a “Small” Debt in Houston?
I frequently have people tell me they think a creditor will not sue them because the dollar amount is ‘small.’ I hear people say this about all types and sizes of creditors. Other times consumers ask me why a creditor is suing them for such a ‘small’ amount. ‘Small’ is a relative term, however. I see creditors filing lawsuits in Houston daily when less than $1,000 is owed, including credit cards, debt collectors, payday loans, homeowner’s associations, furniture stores and more.
Unfortunately, it is a numbers game. For example, if a nationwide bank has 100,000 customers that stop paying on their credit cards (with an average balance of $750.00) that’s $750,000 not being paid back to the bank. The bank may make a business decision to pursue none, some, or all of these folks to try to recoup some of the money they lent.
As another example, consider a home owner’s association (“HOA”). Let’s say the HOA is for 300 homes with annual dues of $600 per home. If 25 people do not pay, that is $15,000 not being paid to the HOA that the HOA relies upon to run each year. That’s almost 10% of their budget for the year. They may choose to attempt to collect the money owed to them because it is collectively a larger sum, even though it may seem like a small amount to the debtor.
The bottom line is that the dollar amount owed is generally not a good predictor as to whether a creditor will sue on an unpaid debt or not. The size of the debt, generally speaking, has no bearing on a lawsuit for an unpaid debt – in other words telling the judge you are outraged or that it is a waste of time that you are being sued for $X will not impact your case.
The information contained in this blog is for general information and educational purposes and is not legal advice. Reading these posts does not create an attorney/client relationship.