What Would You Do? #6
Here’s a note that came in recently from a reader:
I lost my job in January 2006. I did my best, but couldn’t help running up a $4,200 tab on a credit card just for necessities. After two years of unemployment, I at last got hired, but at much lower pay than before. After slashing my cost of living, I’m mostly back on my feet financially, and I’m not past due on anything except this one debt. I’ve even been able to rebuild a small ($1,000) emergency fund.
I stopped making payments on the credit card bill in 2007, nearly seven years ago. The debt is in the hands of a collection agency now. I’ve become expert at dodging the collector’s phone calls after telling him once I do not have the money to pay, period. I guess he doesn’t believe it.
Last month I got an unexpected inheritance of $25,000 when my uncle passed away. So I’ve got the means now to repay the old debt. But as I understand it, this debt will come off my credit report after seven years, and that’s coming up in just a few months. Also, I’m pretty sure the statute of limitations for collecting the debt will also soon expire.
Should I pay off this debt?
How to Interpret the Reader’s Questions
I haven’t yet written back to this individual, but I think there are at least two ways to interpret his question, “should I pay off this debt?”, and I’m not sure which he’s asking.
- Ethically, now that he’s got the cash to repay the debt, should he?
- Will he benefit financially in any way or potentially avoid something bad from happening by repaying the debt now?
Question #2’s a bit easier for me to talk about in a straightforward way.
First, the reader’s correct that information of this type survives on a credit report for seven years. When it drops off, his credit score will no longer be affected by this debt because a credit score reflects only a snapshot of what’s on your credit report at a point in time.
BUT: Many people don’t understand when the seven-year clock starts, and they may not realize how easy it is to re-set the clock to zero. For example, making a payment may re-set the seven-year life of all or part of a debt on a credit report. And the seven-year clock begins when the debt is first officially labeled as “late” (the “original delinquency date” it’s called), not, for example, when a payment is first skipped.
If the debt does not disappear from his credit report when the reader thinks it should, he can file a request with the reporting bureau to remove the debt on the ground that the seven-year clock has expired. He may then discover that the collection agency that owns the debt thinks otherwise. Resolving the issue will take time and trouble and possibly an attorney.
With respect to the statute of limitations, here’s the reader’s point: after the statute of limitations expires for a debt, the creditor can no longer use the courts to sue him and get authorization to garnish his wages, put liens on his property, or seize funds in his bank account. He could then demand that the collection agency cease contact—a creditor’s right—without fear of igniting a lawsuit.
Statutes of limitations vary by state and for different sorts of debt. At the least, I’d want someone at the state Attorney General’s office to tell me unequivocally the applicable statute of limitations for the specific debt in question.
But that doesn’t settle the matter. Again, the reader may have unintentionally re-started the statute of limitations clock at some point in the past. Collection agencies excel at inducing debtors to take some action or make some commitment that (they could later argue) extends their right to sue.
And the reader should understand that just because a debt slips off a credit report and the statute of limitations expires does NOT mean he no longer owes the debt. He does! The only ways to stop owing are to pay off the debt, in full or through a settlement, or have the debt discharged through bankruptcy.
What About the Ethical Question?
Here’s where you come in. For the sake of this question, let’s assume the reader is correct: the debt’s about to drop off his credit report, and the statute of limitations is about to expire.
Now that he has the means, should he pay off the debt?