I was always under the impression that banks are required to charge off debt at 180 days. Just about every issuer does this and account balances dont seem to increase much more from that point with the exception of Capital One, I have found that Capital One balances increase almost 50% within a year of default. I am curious how Capital One is legally able to not charge off bad debt and continue to charge excessive fees, penalties and interest?
Can you shed any light on this Steve?
The charge-off function confuses many people. They believe that a charge-off alters the underlying terms of the debt. It does not. The best way to think of a charge-off is as an accounting requirement. After 180 days delinquent the bank can no longer report that account as a good performing account on their books. This reporting function is actually an outgrowth of the S&L crisis of the 1980s when S&Ls held horrible debt on their books and masked the true condition of the institution.
As a matter of practice credit card companies in the past would bundle all their charged off debt in big lots and sell it soon after charge-off. Some money for that junk was better than trying to collect it and get little. However there is no requirement I am aware of that requires Capital one or any bank to have to sell the debt. And if the bank held onto the debt, the multiplier of fees, penalties and maximum interest can make the balance rocket.
I just so happen to have a Capital one application in my hand so let’s use that as an example. And let’s also assume that once the card went delinquent that the bank ratcheted the limit down to the balance, which generates over limit fees.
So if the balance began at $1,000 at the end of 12 months with fees and interest the balance would be just about $2,200. If the initial balance was $4,000, at the end of 12 months it would be about $6,200.
If the bank has already taken the reporting hit and is willing to hold-on to the debt and feels that approach will be more profitable for them, as far as I am aware, they certainly can.
The charge-off conundrum is very similar to the statute of limitations brain twister. Many people think that debt past the statute of limitations can’t be collected. In fact it can be attempted. The statute of limitations only limits the creditors options to sue you, not their ability to collect.
Please post your responses and follow-up messages to me on this in the comments section below.