Handle Old Debts Carefully
Scenario: Like millions of Americans, you went through a rough patch after the financial meltdown and got behind on your bills. You stopped making payments on a $3,000 credit card bill. The card issuer long ago charged off your debt and sold it to a collection agency. You get occasional letters and calls from the debt collector, which you’ve so far ignored.
Should the Debt Still Be on Your Credit Report?
The answer is yes. Credit reports can legally include debts in collections for seven years after the most recent payment.
Note in particular the part in italics above. Make even a modest payment on the debt, and you may re-set the clock, allowing the debt to be reported for another seven years.
Dishonest “credit repair” agencies claim they can—for a big, non-refundable fee—erase unfavorable information on credit reports before the seven-year deadline. It’s a scam—don’t believe it. By claiming the debt is not legitimate, an agency may be able to force temporarily a debt’s removal from a credit report, but the debt will reappear once the debt’s owner proves legitimacy.
Do You Still Owe the Debt?
Again the answer is yes. Three ways exist to fully and permanently erase a debt:
- Pay off the debt
- Settle with the creditor or debt collector (“Settle” means come to a negotiated agreement to end your liability after paying an amount less than the total due. See DIY Debt Settlement for more info.)
- Have the debt discharged through bankruptcy
Passage of time alone never means you cease to owe a debt.
Is the Unpaid Debt Dragging Down Your Credit Score?
Answer: Probably at least a little. As credit history information ages, its impact on your credit score decreases. The most recent information carries the most weight in credit scoring algorithms.
Say you never pay the debt. Will it always have some impact on your credit score? No. Your credit score reflects only the information included on your credit report. After seven years of no payments, the debt should drop off your credit report (you can force that to happen if necessary). Thereafter the unpaid debt cannot be reflected in your credit score, and any party who reviews your credit report in the future will not learn of the unpaid debt.
Can You Be Sued for Collection of the Debt?
The answer depends on where you live. Owners of debt have the legal right to sue for collection until expiration of the statute of limitations. If you’re successfully sued, your wages could be garnished, funds could be extracted from your bank account, and liens could be placed on your property.
State law governs the statute of limitations for debt collection lawsuits. At one end of the spectrum, Kansas and Alabama allow creditors only three years to sue for collection of most debts. At the other end, Wyoming allows ten years. Most states’ statutes of limitations for debt collection lawsuits are in the 5-7 year range. And even within a state, the statue of limitations can vary for different sorts of debt.
If you want to know for sure whether a particular debt has passed the statute of limitations, best to phone your state’s Attorney General’s office and ask, or meet with a consumer law attorney. Still, securing an ironclad answer can be tricky. Even agreeing to make payments on the debt—whether in a phone conversation or in writing—could have restarted the statute of limitations clock at zero, even if the statue had already expired. If you’re not careful, you could unintentionally restore a debt collector’s expired right to sue you!
Should You Pay the Debt?
If you have the means and the debt is legitimate, of course!
Would You Pay a Five-Year Old Debt If You Could?
Let’s say you had a 5-year old debt and the statute of limitations in your state is six years. You’ve got the means now to repay the debt. Would you? Or would you try to ride out the next year until the statute expires, then tell the debt collector to buzz off?