The mysterious notation on your credit report that says your home equity line of credit has been charged off is leaving you stumped. While you’d like to think it is a promising sign that the lender has given up its collection efforts against you, it also sounds awfully final -- and in a bad way. It is a bit of both, because while your lender has given up on its efforts, it’s released the big dogs in its place.
What is a Charge-Off?
Lenders are in the business of getting rich off of the interest they earns on their loans, not from the collection of bad debts. When you fall behind on your payments, the lender sells your debt to a business that specializes in hounding you until you come up with the money: the dreaded collection agency.
Since the collection agency won’t work for free, the lender often sells your debt for pennies on the dollar. The lender then writes off the difference and notes your HELOC as being “charged off” on your credit report.
Do I Have to Pay a Charge-Off?
Yes. The fact that the lender sold the HELOC does not affect your obligation to pay the full amount, even though the collection agency likely paid less for it. The only difference is that you now owe the debt to the collection agency rather than to the original lender -- although the collection agency may be willing to accept less from you for the debt than the lender was willing to accept from you.
Collection Efforts Before Judgment
Unless the collection agency files a lawsuit against you in court and receives a judgment for the amount owed, the only action it can take is to send you demanding letters and contact you by phone. In most states, that can go on for up to four years.
This is because a HELOC is like any other contract. The failure to pay according to the contract terms is considered a default or breach of contract, and the creditor only has so many years to file a lawsuit and obtain a judgment against you. This is according to the law known as the “statute of limitations.” If the owner of the debt fails to obtain a timely judgment against you, it loses any recourse and cannot collect money from you unless you voluntarily agree to pay.
Collection Efforts After Judgment
If the collection agency successfully sues you and obtains a judgment, the tactics available to it change drastically. They include the ability to garnish your wages and drain the funds out of your bank account. So the fact that your HELOC is charged off has little effect other than putting you on notice that the professional collectors will soon be knocking at your door.
An attorney for more than 20 years, Cara O'Neill currently practices in the areas of civil litigation, family law and bankruptcy. She also served as an Administrative Law Judge and taught undergraduate and graduate courses in the areas of employment law, business law and criminal law for a well-known university. Attending the University of the Pacific, McGeorge School of Law, she graduated a National member of the Order of the Barristers - an honor society recognizing excellence in courtroom advocacy. She is currently licensed in the state of California.