When a debt is charged-off, collectors may not charge interest or other fees not explicitly stated in the original agreement or authorized by law. As per federal regulations, a creditor may charge-off an installment loan after 120 days of delinquency Revolving credit card accounts are charged-off after 180 days. Once a debt is charged-off it is no longer an asset in the creditor’s financial books and becomes an expense or loss to the creditor. Uncollected interest inflates the lender’s losses, so creditors usually stop charging interest once a debt is charged-off. Debt collectors and buyers, however, have the same rights as the assignor to pursue a debt, and they often pursue the collection of additional fees and interest.
Does the Fair Debt Collection Practices Act (FDCPA) allow debt collectors to impose interest on charged-off debts?
Though many debt collectors attempt to charge post charge-off interest and fees, whether they can legally impose this interest depends on the original loan contract as well as federal and state laws. Some courts have ruled that when an original lender charges off a debt and waives its right to collect statutory interest before the debt is sold, the debt buyer has no right to collect this interest and attempting to do so would violate the FDCPA. A number of other courts that have held that debt collectors can charge statutory interest on a debt.
What does the Consumer Financial Protection Bureau Say?
According to the Consumer Financial Protection Bureau (CFPB), the interest or charges imposed on a charged-off debt can be increased if the loan or credit agreement allows it and the charges are permitted under state law. The contract may stipulate the interest rate to be imposed or by how much it can it be increased. State law can also impose a ceiling on the amount of interest chargeable.
Disclosure of Interest Accrual
Interpretation of the debt collector’s role as per the FDCPA concerning furnishing the debtor with information regarding accrual of post charge-off interest is another pertinent issue. Debt collectors are required to disclose the accrual of interest to the debtor. There is no manner prescribed in which a debt collector should disclose the accrual of interest causing this to be left to the interpretation of courts.