The Statute of Limitations and 4 Options for Old Debt
Money Girl explains what the statute of limitations is on debt, and details 4 options to help handle your old, unpaid debts.
If you’ve ever owed a debt that you couldn’t pay, you know what a terrible situation it is. But what you may not know is that the statute of limitations on debt gives you certain protections from getting into legal trouble.
In this episode, I’ll explain what the statute of limitations on debt is, and why you should understand it before paying any amount of old debt. I’ll also review 4 options for how to handle unpaid debt.
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What Is the Statute of Limitations on Debt?
The statute of limitations is a legal term that refers to the time period when some legal action may be taken. In other words, it’s a strict deadline for filing a lawsuit.
When it comes to your personal finances, there’s a statute of limitations for how long a debt collector or creditor can bring legal action against you to recover certain types of unpaid debts. It varies depending on the state where you live, what’s specified in your credit contract, and the type of debt you have.
For example, the statute of limitations for credit card debt may be as long as 10 years in a few states, but most are in the range of 3 to 6 years. And some types of debts, such as federal student loans and income taxes, don’t have a statue of limitations because you’re never off the hook for them.
After the statute of limitations on a debt expires, it’s considered a time-barred debt. However, in most states, a debt collector can still attempt to collect a time-barred debt from you for as long as they want. They can call you and send you letters – within legal limits of course.
What you need to know is that even if the statute of limitations has expired on an old debt, a court may still rule against you if you don’t appear and use the statute of limitations as your defense.
So you should never ignore a lawsuit for an unpaid debt. It’s still your responsibility to prove that the statute of limitations has expired. and that there’s been no activity on an old account.
See also: The Law About Debt Collections Harrassment
What Is Reviving or Re-Aging an Old Debt?
What’s really tricky about the statute of limitations on debt is that there are different rules for when it starts and stops.
For instance, in some states it begins when you first become delinquent. In others, the clock restarts at day one any time you take an action on the account. This might include simply acknowledging that an old debt is yours, promising a payment, entering into a payment agreement, or making a payment.
Reviving or re-aging an old debt means that you’ve restarted the statute of limitations, and that the collector can now sue you for the full amount. That could put you in a worse position than if you hadn’t taken any action to begin with.
That’s why it’s so important to know the law in your state or to consult with an attorney before speaking to a debt collector about an old debt or making a partial payment.
How Long Old Debt Stays on Your Credit Report
Even if you pay off a delinquent debt or the statute of limitations expires, most debt will not be removed from your credit report until 7 years after the date it first became past due.
When it comes to unpaid debt, be sure you don’t confuse the statute of limitations with the length of time that it stays on your credit reports. These are 2 completely different time limits, and are often misunderstood.
The credit reporting time limit is the maximum amount of time the credit bureaus can include negative information – such as late payments and accounts in collection – on your credit report. It’s generally 7 years, except for certain types of bankruptcies, which can remain there for up to 10 years.
So even if you pay off a delinquent debt or the statute of limitations expires, most debt will not be removed from your credit report until 7 years after the date it first became past due.
See also: Best Tips to Improve Your Credit Score
4 Options to Consider for Old Debt
If you have an old, time-barred debt, you may wonder if you should pay it. I recommend weighing your options carefully, and even speaking with an attorney before choosing one of the following 4 options:
Option #1: Pay Off the Debt in Full
Even if the statute of limitations has expired on an old debt, you may still decide to pay it. Many people believe that they have a moral obligation to pay their debts, even after struggling through a financial hardship.
I can’t make that decision for you, because everyone’s life and financial situation is different. You’re the only one who really knows if you truly can or can’t afford to pay a debt.
When it comes to your credit reports, as I previous mentioned, paying off an old debt doesn’t make its history disappear. An account less than 7 years old will remain on your report, even if it’s paid in full. However, the current status changes from “unpaid” to “paid,” which can help improve your credit.
Option #2: Settle the Debt for Less
If you want to pay a debt but don’t want to pay the full amount, many collectors are willing to settle for less. For instance, if you owe $10,000, you might offer to pay $6,000 in one lump sum, or $8,000 over time in a series of payments.
The creditor is likely to negotiate as high a settlement as possible, so always start with a low initial offer. Then make sure you get the agreed-upon terms in writing before you make any payment.
A settlement agreement should state that your partial payment settles the entire debt in full and releases you from any further obligation. If you don’t get this in writing first, your payment could be considered a partial payment, reviving the statute of limitations in some states.
When you settle a debt, the account will show as “settled” on your credit report for the remainder of its 7-year history. This indicates that the debt was not paid in full, as originally agreed, and will have a negative effect on your credit scores.
So remember that settling a debt is better for your credit than leaving it unpaid, but it’s not as good as paying it off in full.
See also: Settle Debt or Pay in Full–What’s Better for Your Credit?
Option #3: Make a Debt Partial Payment
If your financial situation has changed for the better, you may decide to begin making payments on an old debt.
Again, remember that in some states, paying any amount of a time-barred debt restarts a brand new statute of limitations period. That means you give up your legal protection, because the collector would be able to sue you in order to recover the full amount of debt.
Your credit report will always indicate that a debt became delinquent or went into collections, even if you begin making payments. However, once you pay it off and the account status shows “paid” your credit has a chance to improve.
Option #4: Pay Nothing on the Debt
If you don’t pay a debt, you still owe it even after the statute of limitations expires or it falls off your credit reports. That means a collector can continue to contact you indefinitely to try to collect it, even if they can’t sue you.
Having an unpaid debt on your credit report is obviously very bad for your credit. It can make it difficult or more expensive to get new credit, insurance, certain utilities, or to rent an apartment.
See also: 5 Ways to Get a Loan With Bad Credit
So what I want you to take away from this episode is that you need to consider both the statute of limitations and your credit when deciding how to handle debt. Also, understand how easy it could be to inadvertently revive an old debt and give a creditor much more time to file a lawsuit against you.
For these reasons, I encourage to you get legal help so you can consider all your options for unpaid debt and make the best decision for your financial future.
More Resources:
Chart: Statutes of Limitations in All 50 States
Complete List of Statute of Limitations by State
Federal Trade Commission – Fair Debt Collection
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
