
If you stop making payments on your debts, creditors usually have a set amount of time to pursue repayment. After that time, they can no longer legally pursue the debt. But that doesnโt mean you can just forget about the debt. Learn more about how debt collection and statutes of limitations work.
In This Piece
- How Does Debt Collection Work?
- What Are the Four Types of Debt?
- Can a Debt Collector Collect After 10 Years?
- What โRestartsโ the Clock on Old Debt?
- How Long Can a Debt Collector Pursue an Old Debt?
- What Is a Time-Barred Debt?
- What Effect Does Bankruptcy Have on Old Debt?
- What to Do If You Are Contacted About an Old Debt
- Do Time-Barred Debts Show Up on Your Credit Report?
- Debt Collections and Credit Reports
How Does Debt Collection Work?
If a creditor doesnโt believe it can recover a debt, it may sell that debt to a collection agency. These agencies specialize in debt recovery and have the resources, staff, and time to pursue old debts more aggressively than some original creditors.
A collection agency can also list an old debt as a new line on your credit report with a continuation of the original debt date.
When you default on debt, the creditor may close your account and report it as a closed account with negative payment information. When the account is sold to a collection agency, the collection agency owns the account and can list it as a collections account on your credit report.
As long as the collection agency can document the debt, it has a legal right to pursue it. That includes attempting to sue you for the debt and following up with methods such as wage garnishment if it receives a judgment for the debt.
What Are the Four Types of Debt?
Debt generally falls into a few main types. Each type works fairly similarly when it comes to debt collection.
If you miss payments on a debt, it can become delinquent and go to collections no matter how the original account was set up. Here are the main four types of debt:
- Secured. Secured debt means you put something up as collateral to borrow against. That makes debt collection simple: the collateral can be repossessed.
- Unsecured. Unsecured debt doesnโt involve collateral, so collection can get a bit messy. This can include lawsuits and wage garnishment.
- Revolving. Revolving credit involves an open line of credit you can continue to draw on as you pay it off. Credit cards are a common form of revolving credit. This type of debt is usually unsecured, but secured options are available for people with poor or no credit.
- Installment. Installment debt is a one-time loan paid back via a series of payments. Examples include auto loans, student loans, and mortgages. Installment debt can also be secured or unsecured.
Can a Debt Collector Collect After 10 Years?
In most cases, the statute of limitations for a debt will have passed after 10 years. This means a debt collector may still attempt to pursue it (and you technically do still owe it), but they canโt typically take legal action against you. If you notify them that the debt is past the statute of limitations and request they not contact you again, they likely wonโt.
It also depends on when you made the last payment. The statute of limitations for most debts starts when you go into default. If a debt is 10 years old but you were making payments until three years ago, the debt is likely still within the statute of limitations and can be pursued by a debt collector.
However, itโs important to note that every case is unique and the statute of limitations on various forms of debt is different in each state. Understanding what the rules in your state are and how they might apply to your specific debt situation is important. Contact a lawyer for your unique situation if you have questions.
What โRestartsโ the Clock on Old Debt?
Many people make the mistake of believing the statute of limitations on debt starts when they open an account. In reality, the countdown starts when you miss a payment or make your last payment.
For example, imagine you have a credit card you opened in 2010. You used the account and paid as agreed for five years. In 2015, something happened that changed your income and ability to make payments, and you stopped paying on the credit card debt. Depending on which state youโre in, the statute of limitations could be from three to 10 years. If the state has a six-year statute of limitations, that debt would have been collectible using the legal system until 2021โsix years after the last activity on the account. Note that some debts have an even longer statute of limitations in some states, such as promissory notes, revolving credit, or legal oral contracts.
You can also inadvertently reset the clock on a statute of limitations by making an agreement to pay or paying a partial amount on a debt. In most cases, the clock resets starting at that date. Itโs important to factor this point into any negotiations or repayment plans. If the statute of limitations is almost up, it may not be in your best interest to make any payments. However, if thereโs still a lot of time left for creditors or collectors to sue, it may be wise to start making payments.
Having said that, an unpaid debt will stay on your credit report for about seven years, even if the time clock has run out.
How Long Can a Debt Collector Pursue an Old Debt?
In some states, a collection agency cannot try to collect at all once a debt is past the statute of limitations. In other states, they cannot sue you, but they may still try to collect the debt, which can include calls and written requests.
Some debt buyersโcompanies that buy and try to collect very old debtsโstill go after borrowers and might even take them to court. If they do this knowing that the debt is past the statute of limitations, they may have violated the Fair Debt Collections Practices Act. But they also know that most borrowers who are sued for old debts wonโt show up in court, and the judge will issue a default judgment.
If your debt is past the statute of limitations at this point, you can re-open the default judgment and ask the judge to vacate it because it is time-barred. The process is relatively straightforward, but you may want to consult with an attorney to ensure itโs done correctly.
Always respond to legal summons. Judgments may give collectors additional collection powers, such as access to the money a debtor has in their bank account or the ability to garnish wages to collect the judgment. To prevent this, all a borrower has to do is appear in court at the appointed time and explain that they have a time-barred debt. If that is correct, the lawsuit will be dismissed.
Itโs important to note that the statute of limitations is not the same as how long the debt appears on your credit report. The timeline for debt to stay on your credit report is often seven years, but again, this depends on your activity with the debt. If the debt was sold by the original lender at six years, and you made a payment with the new debt buyer, it could restart the clock.
What Is a Time-Barred Debt?
Time-barred debt refers to debt thatโs beyond the statute of limitations. It simply means that the debt is not legally enforceable. It doesnโt mean you donโt owe the debt if it was legitimate to begin with. It means the creditor or collector canโt use the legal system to force you to make good on the debt.
According to the Federal Trade Commission, whether or not collectors can continue to contact you about a time-barred debt is up to various state laws. Some states do make this illegal. And in any state, a debt collector canโt sue you, threaten to sue you, or harass you over time-barred debt.
If youโre being contacted by a creditor about a time-barred debt, you can ask them to stop. The FTC recommends sending this request in writing by mail.
When Does the Clock Start on the Statute of Limitations for Debt?
Many people make the mistake of believing that the statute of limitations on debt starts when they open an account. In reality, the countdown starts when you miss a payment or make your last payment.
For example, imagine you have a credit card you opened in 2000. You used the account and paid as agreed for five years. In 2005, something happened that changed your income and ability to make payments. You stopped paying on the credit card debt in July 2005.
Depending on which state youโre in, the statute of limitations could be from three to 10 years. Letโs say the state in question had a six-year statute of limitations. The debt would be collectible using the legal system until August 2011.
You can also inadvertently reset the clock on a statute of limitations by making an agreement to pay or paying a partial amount on a debt. In most cases, that resets the clock starting at that date.
What Debt Isnโt Subject to the Statute of Limitations?
Time-barred debt refers to debt thatโs beyond the statute of limitations. It doesnโt mean you donโt owe the debt if it was legitimate to begin with, but the creditor or collector canโt use the legal system to force you to make good on the debt.
What Effect Does Bankruptcy Have on Old Debt?
Bankruptcy means creditors canโt legally pursue debt collection of any credit debt in the bankruptcy. The debt also canโt be sent to a collection agency, and almost all collection activity, including legal action or wage garnishment, is prohibited. If youโre contacted about paying a debt after filing for bankruptcy, itโs a good idea to turn the matter over to your attorney to handle. Some debts canโt be discharged, such as student loans, taxes, and child support, even when you declare bankruptcy.
Negative payment history and bankruptcy can cause major damage to your credit score. So even if youโre off the hook for a debt, you still have to consider your credit and how you can start to build it back up.
What to Do If You Are Contacted About an Old Debt
If youโre contacted about an old debt, it doesnโt mean you should automatically pay it. Remember, agreeing to terms and providing a payment can restart the clock on an old debt, and itโs important to be aware of your rights as a consumer. Instead, take the steps below to see if you need to pay the debt and what your options are.
1. Ask the creditor to send you written notice of the debt.
This is required under the federal Fair Debt Collections Practices Act even if you donโt ask, but asking is a good first step. Scammers will say they arenโt allowed to send a notice or will try to email instead, which helps you weed out illegitimate callers. By keeping the initial phone conversation to a minimum, you may avoid saying or doing something that could hurt you later on with legitimate collectors.
2. Validate the debt.
Once you receive written notice of the debt, you have 30 days to request validation of the debt. Mail your request to the creditor or collections agency via a certified letter and ask them to validate the debt. You donโt have to give a reason for your request. You can simply say, โI dispute this debt. Please validate it.โ
Tip: If the debt isnโt yours, you may want to reach out to a credit repair organization to help you work to challenge the debt and request it be removed from your credit report.
3. Confirm that the debt is within the statute of limitations.
While youโre waiting for the response from the bill collector, contact a consumer law attorney or your state attorney generalโs office to confirm the statute of limitations for the debt. Consumer law attorneys who regularly represent consumers in cases against debt collectors often provide a free consultation.
4. Decide on an action.
Once you receive validation of the debt and confirm whether itโs inside or outside the statute of limitations, you typically have three main options.
- Pay it. If you know you owe the debt and you can pay it, you can do so. Make sure you keep written records of the amount due and your payment. Sometimes these old debts get sold to more than one collection agency, and if you get another call about this debt, you want to have proof youโve paid it.
- Settle it. If you know you owe the debt and want to try to make good on it, but you canโt pay the full amountโor if the debt has been inflated by feesโ you may want to negotiate to settle it for less than the full amount due. This is tricky, though, because once you start negotiating, you could reset the statute of limitations and end up being sued for the entire debt. That could lead to wage garnishments or other issues. If you want to go this route, your best bet is to talk with an attorney first.
- Send the collector a letter telling them to leave you alone. You have the right to ask a debt collector to stop contacting you. Once you do that, they are only allowed to contact you to tell you if they are taking legal action against you. If you know the debt is outside the statute of limitations, state that in your letter and tell them not to contact you again.
Do Time-Barred Debts Show Up on Your Credit Report?
Time-barred debts can show up on a credit report. Negative items such as missed payments and collections accounts stay on your credit report around seven years. Many state statutes of limitations on debt are less than seven years.
Can a Collection Agency Report an Old Debt as New?
A collection agency can list an old debt as a new trade line on your credit report. It works like this:
- You have a loan, credit card, or other debt. Itโs listed as a tradeline by your creditor on your credit report.
- You default on that debt. The creditor closes your account. Itโs now listed on your credit report as a closed account with negative payment information.
- The original creditor eventually sells the account to a collections agency.
- The collections agency now owns the account and can list it as a collections accountโa separate tradelineโon your credit report.
Debt Collections and Credit Reports
One of the best ways to protect yourself against old debts cropping up and creating problems is to keep an eye on your credit report. Sign up for ExtraCreditยฎ for a proactive look at your credit reports and scores so you can take care of issues before they become legal problems.
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