After you default on a loan, collectors often try to puff up the
debt, heaping interest and fees atop the balance you already owe.
How bad can it get?
Plenty bad -- one collector tried to charge Montana resident Tim
McCollough $5,500 in interest on top of his unpaid $3,800 balance
on a Chase card.
Consumer advocates say you should turn a skeptical eye on these
claims. It might be legal for a debt buyer to charge interest
on money it never loaned to you, but the amounts they can tack on
are limited and courts are increasingly forcing them to justify
their claims. McCollough, a retired school custodian, wound up
winning a six-figure judgment against collection law firm
Johnson, Rodenburg & Lauinger LLC for abusive practices. The
decision was affirmed in 2011.
"If a debt buyer purchases (your debt), the right to collect
interest is not automatic," said Peter Barry, a consumer lawyer in
Interest claims are part of a larger controversy surrounding
sold-off debts, which include about $50 billion in unpaid credit
card debts sold each year. In a landmark report in January,
the Federal Trade Commission concluded that
debts are frequently sold with just scanty
about their origins. The lack of information makes it hard to tell
if the amounts are correct, or even whether the right person
is being targeted. But since debtors fail to show up in court
for most of these cases, weak claims -- including interest
charges that are made up out of thin air -- can slip through
The claims can be inflated or downright baseless, as Catherine
Petrilli of Lansing, Mich., discovered. Chase Bank wrote off her
account after she defaulted and stopped charging interest in 2008,
leaving an unpaid balance of $1,058. Two years later, debt buyer
Asset Acceptance claimed she owed that balance plus an extra $400
-- an increase of nearly 40 percent -- based on retroactive
interest charges. But there was a big problem with their math:
Asset Acceptance started charging Petrilli interest two years
before it owned her debt.
"It's certainly interesting when somebody is putting in an
affidavit claiming an amount is owed, but they made up the
amount," said Daniel Edelman, a consumer lawyer in Chicago who
In a stern ruling in August, a federal court in Michigan found
that Asset Acceptance violated collection law by making "false
statements regarding the total amount of the debt." The company is
seeking permission to appeal the class-action suit, but consumer
advocates say the ruling struck a blow at claims for interest.
Charge-offs change debt's legal status
After you default, there are important changes in the legal status
of your debt. Rules that protect banks' soundness require them to
write off, or
the amount after it has been delinquent for six months. The
charge-off removes your unpaid balance from the bank's assets
and puts it into the "losses" column.
Almost all card issuers stop charging interest when they charge
off a debt. That's because continuing to charge interest would mean
having to send monthly statements to cardholders, under the U.S.
Truth in Lending Act
. Besides, the uncollected interest inflates the lender's
"They don't want to put it on their books, when there's only a
slim chance they'll recover it," said Ronald Canter, a Maryland
lawyer who represents banks and debt collectors.
Writing off the debt does not mean it goes away. To the
contrary -- the lender may hire collectors to hound you or it may
sell the debt on the debt market. Once the debt is sold, its
legal status changes yet again. Debt buyers, not subject to Truth
in Lending, claim the right to charge interest on the unpaid amount
without sending you monthly statements. That is the basis for
demands that include years of built-up interest that the bank never
"Debt buyers purchase these debts with all the rights, title and
interest of the assignor to the indebtedness and therefore have the
same rights as the assignor to pursue the debt," the debt buyers
industry group DBA International stated in a paper filed with
Principal and interest
Claims from collectors often refer to the charge-off amount as the
"principal amount," to distinguish it from interest added
later by the buyer of the debt. Consumer advocates say that the
term is confusing, because the so-called "principal" includes
interest that was charged by the original lender. Debts in
collection are usually loaded with such interest. For example, a
$1,500 delinquent credit card balance would grow to $1,845 by the
time it is charged off, at 26 percent interest and late fees of $25
"From the moment you default, every month they're charging fees,
they're going to continue adding on interest," said Peter Holland,
a University of Maryland law professor who runs the school's legal
In 2005, the 7th U.S. Circuit Court of Appeals affirmed a debt
buyer's right to continue charging interest rates north of 18
percent to Illinois residents Enrique Olvera and Jeffrey Dawson,
based on rates charged by their original lender. The ruling is
often cited as a pillar of the longstanding principle that the
owner of a debt "stands in the shoes" of the original
More recent cases, such as Petrilli's successful defense, show
that such claims are far from a slam-dunk, however. Some states are
skeptical of debt buyers' ability to charge interest rates above
the state statutory limit, a right reserved for national banks.
Then there is the question of the correct interest rate. A debt
buyer may charge the periodic rate indicated on the last account
statement -- but is this rate justified by the card agreement?
Fair Debt Collection Practices Act
says collectors can add fees or interest only if the amount is
"expressly authorized by the agreement creating the debt or
permitted by law." That requires having a copy of the original card
agreement to prove the interest is permitted, consumer advocates
In Maryland, debt buyers "would just continue to charge that
interest (but) they didn't have a copy of the actual agreement,"
said Holland, author of a paper entitled, "Defending Junk
Debt-Buyer Lawsuits." "If they continue to charge interest (based
on the card agreement), you're going to want to see that
Christine Green, staff attorney at the Georgia Legal Services
Program, said that the variable rates charged on most credit cards
make it harder for debt buyers to claim they are charging rates
permitted by contract. For variable rate cards, the interest rate
is stated as a formula linked to the prime rate. The actual rate
that you qualify for may be left out of the agreement entirely, and
sent to you individually by mail. "All they (debt buyers) have are
computer printouts; they don't have the mailings that were sent to
the debtor," Green said.
She often sees debt buyers backing away from claims for post
charge-off interest. Having bought the debt for a small fraction of
the charge-off amount, they focus on collecting that. Interest on
top of the charge-off amount "is going to be tough to prove," Green
said. "They don't want to mess with that."
State laws comes into play
Debt buyers may claim interest other than through their rights
under a card agreement. Many states specify the interest rates that
creditors, including debt buyers, can charge on a debt that lacks a
rate set by contract. A simple IOU that carries no interest may be
subject to the interest rate under state law for a debt of a known
amount. Georgia, for example, allows "pre-judgment interest" of 7
Consumer lawyers say they see debt buyers more often pursuing
these usually lower rates, but that these claims are open to
challenge as well. Green said that the debt buyer should be able to
show that the contract amount -- which trumps other rates -- was
not less than the statutory limit. In one case, a debt buyer
claimed the statutory 7 percent interest rate, but the original
credit agreement carried a rate of 5.9 percent, she said.
In Maryland, the state constitution sets a rate of 6 percent for
pre-judgment interest, Holland said. New court rules in Maryland
allow debt buyers to claim the statutory rate without filing the
original credit card contract. "If you're seeking the state limit
for pre-judgment interest and you're not asking for attorney fees,
that was the compromise," Holland said.
Attorney fees are another source of inflation for old debts, but
these are added by courts when one side has won. Most card
agreements allow "reasonable" attorney fees, giving judges wide
latitude and making it difficult to predict the resulting costs
As the controversy around debt collection continues, several
states have written new laws or court rules designed to protect
consumers from unfair default judgments in debt collection cases.
Maryland, California and Minnesota have passed laws requiring debt
buyers to have documentation for claims, and other states are
looking at similar measures.
In Texas, a merger of small claims courts led to combined rules
effective August 31. For claims under $10,000, creditors can charge
interest up to an 18 percent usury limit without submitting
original contract documents. Bronson Tucker, general counsel of the
Texas Justice Court Training Center at Texas State University, said
that the rules require the debt buyer to submit sworn statements
about the validity of the claims, putting company officers in hot
water if the claim turns out to be invalid.
What to do
How should you deal with demands for post charge-off interest?
Whether you are negotiating with a collector or mulling your
response to a lawsuit, it is important to remember that a debt
buyer's claims for interest could be inflated -- or downright
baseless, consumer advocates say.
Claims for interest bolted onto an old balance can make the
original debt unrecognizable. You might ignore demands for an
amount you don't recognize, coming from a company you never did
business with. But the worst reaction to these claims is to ignore
them, consumer advocates say. Once a default judgment is
entered against you, it can be used to seize your assets or garnish
your wages many years later.
How should you deal with claims for post charge-off
Step one is to determine the amount of your debt at charge off.
This may be called the "principal amount" by a debt collector. This
should be the balance showing on the last statement from the
lender. The same amount should also be shown on your credit report
as the balance due for the delinquent account.
If the debt buyer is claiming an amount greater than the
charge-off amount, determine how much more, and look at the basis
for the claim. If the interest charges start from the date of the
charge-off, instead of the date that the debt buyer bought the
debt, you may, like Petrilli, have a case against the debt buyer
for unfair debt collection.
If you are negotiating with a collector to settle the debt,
experts say to start with the charge-off amount as the basis for
discussions. Claims for greater amounts will have to be proved in
court by the debt buyer if they don't settle with you. If the
collector does not have a copy of your credit card agreement, plus
the sale contract showing that the right to collect the debt, with
interest, claims for post charge-off interest will face tough
sledding in court.
If you have already been sued and post charge-off interest is
part of the claim, the stakes are higher. Many lawsuits are
high-volume, low-documentation claims that do not hold up when
challenged. However, some debt buyers can obtain account documents
to support their claims, while some courts, as in Texas, will
accept sworn statements in lieu of original documents. You
can search for consumer lawyers in your area using the website of
of Consumer Attorneys.
Some firms offer sliding fees and, if they find errors by the
collector, will be able to get the other side to pay the fees.
"There are times when people represent themselves successfully,
said Kris Skaar, a consumer lawyer in Georgia, "but the vast
majority of the time people come out better economically (with
representation), even if they have to pay the attorney
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