You got behind on some bills and now you’re being hounded by debt collectors. They call you at all hours of the day, they threaten to take your house or garnish your wages, and it’s really starting to get under your skin.
When will this nightmare ever end? What can you do about it? Is there any way to put an end to these calls and letters once and for all?
This chapter will help you understand your rights when dealing with old debts and zombie debts (debts that have passed the statute of limitations). You’ll how to fight back against unfair collection practices and get peace of mind knowing that your credit score will not suffer as a result.
5.1. Understanding the Statute of Limitations
In this section, you’ll learn the best way to deal with any old debt that you may have that’s hurting your credit and your wellbeing and happiness.
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In this chapter, we’ll review what the Statute of Limitations for Debt is and why it should play a role in how you handle an old debt.
The Statute of Limitations is a legal term that refers to the period when some legal action may be taken. In other words, it’s a strict deadline for filing a lawsuit.
There is 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 owe.
For example, the Statute of Limitation for credit card debt may be as long as 10 years in a few states, but most are in the range of 3-6 years. And some types of debts, such as Federal Student Loans and income taxes, don’t have a Statute of Limitations because you’re never off the hook for them.
After the Statute of Limitations on debt expires, it’s considered a time-barred debt. However, in most cases, a debt collector can still attempt to collect a time-barred debt from you for as long as they want.
They can call you, send you letters, within legal limits, of course.
You need to know 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.
What’s 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 action in 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. Now the collector can 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 consult with an attorney before speaking to a debt collector about an old debt or making a partial payment.
When it comes to an unpaid debt, be sure you don’t confuse the Statute of Limitations with the length of time it stays on your credit reports. These are two completely different time limits and are often confused and misunderstood.
As we covered in previous chapters, the credit reporting time limit for an account with any negative information is generally 7 years except for certain types of bankruptcies, which can remain for 10 years on your credit reports.
So even if you pay 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 that it first became past due.
In the next chapter, we’ll cover different options you have to manage an old debt.
5.2. Settle Old Debt or Pay It in Full?
In this chapter, you’ll learn different options for managing an old-time barred debt. So, you can weigh the options carefully and know if it’s better to settle for less than you owe or to pay it in full.
If you have several old debts or have a large past balance, I’d recommend speaking with an attorney who understands the law within the state you live in before choosing one of the following four options.
Option #1- pay off the debt in full– Even if the Statute of Limitations has expired on an old debt, you might still decide to pay it. Many people believe that they have a moral obligation to pay their debts even after struggling with financial hardship.
I can’t make that decision for you because everyone’s life and financial situation are different. You’re the only one who truly knows if you can or can’t afford to pay a debt.
As we’ve covered, paying off an old debt doesn’t make its history disappear when it comes to your credit reports. An account less that 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 $10000, you might offer to pay $6000 in one lump sum or $8000 overtime in a series of payments.
The creditor is likely to negotiate a settlement as high as possible, so always start with a low offer, then make sure you get the agreed-upon terms in writing before making any payment.
A settlement agreement should state that your partial settlement settles the entire debt fully 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 hurt your credit scores. So, remember that settling a debt is certainly better for your credit than leaving it unpaid, but it is not as good as paying it off in full.
Option #3- Make a partial debt payment
If your financial situation has changed for the better, you may decide to begin making payments on an old debt.
As we’ve covered, it’s critical to remember that paying any amount of a time-barred debt restarts a brand new Statute of Limitations period in some states.
That means you give up your legal protection because the creditor would be able to sue you to recover the full amount of debt. Your credit report will always indicate that the debt was 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 your debt, you still owe it, even after the Statute of Limitations expires, or it falls off your credit reports. That means a creditor 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 very bad for your credit, so I want you to take away from this chapter because you need to consider both the Statute of Limitations and your credit when deciding how to handle an old debt.
Also, understand how easy it could be to revive an old debt inadvertently and give a creditor much more time to file a lawsuit against you.
For these reasons, I encourage you to get legal help so you can consider all your options for unpaid debt and make the best decision for your financial future.
You can find the Statute of Limitations for your state by visiting your state’s Attorney General’s website.
Next we’ll discuss the law about Debt Collections harassment, so you know your rights when it comes to old debts
5.3. 5 Debt Collections Rights
In this chapter, you’ll learn the best ways to deal with a debt collector, no matter if they contact you due to a mistake or if you have a financial hardship.
Knowing your rights is the best way to prevent debt collection harassment. Many people do not realize that there are Federal and State laws that debt collectors such as collection agencies and attorneys must follow.
The main Federal law for personal debt is called the Fair Debt Collections Practices Act.
It prohibits debt collectors from harassing you even if you owe money.
Illegal harassment includes the following:
- Threatening harm or violence
- Calling you repeatedly
- Using obscene or profane language
- Misrepresenting personal or company identity
- Saying or doing anything deceptive or misleading
- Threatening to contact your employer about a debt
- Debt collectors also can’t contact you at unusual times or places. For instance, they can’t call you before 8 am or after 9 pm. Nor can they call you at work if they’ve been informed that you’re not allowed to take calls there.
Here are 5 additional debt collections rights that everyone should know about:
Right, #1- You can tell a collector not to contact you.
If you request in writing that a debt collector stop contacting you, they must heed your request. However, simply telling a collector to back off does not prevent them from reporting delinquency to the credit bureaus or filing a lawsuit against you.
No matter what, a creditor is allowed to contact you to end verification of your debt or inform you about any specific legal action they intend to take against you.
Right, #2- You can dispute a debt.
If you don’t believe that you owe all or part of the debt, you can dispute it. However, you’ve got to put a dispute in writing within 30 days of receiving a collection notice.
Send a certified letter to the collector requesting more information and a formal verification of the debt. When you do this, the collector can’t contact you until they provide this info in writing.
Right #3- Collectors can’t tell others about your debt.
A debt collector generally is not allowed to discuss your debt with anyone else except your spouse or your Attorney, and if you have an Attorney, a collector must contact them about your debt, not you.
A collector can only contact other people to find general info about you, like your phone number and address.
Right #4- You control which debt a collector pays.
If you owe more than one debt, a collector must apply your payments to your chosen debt. In other words, a collector can’t use your money to pay a debt that you don’t believe you owe.
Right #5- A collector can’t inflate what you owe.
Debt collectors are prohibited from piling on additional interests, fees, or other charges to the amount they owe. However, if you signed a contract that permits additional charges, then they are allowed.
So, be sure to do the math and verify amounts that a collector is trying to get from you before you send any payments.
When you begin communicating with a debt collector, keep good records, like the date, time, notes of the conversation, and anything you believe may be illegal harassment.
This documentation will help you if you can’t dissolve a dispute or you end up going to court. If a collector sues you, don’t ignore them even if you know it’s a mistake. You must respond personally or through an Attorney by the date on the lawsuit paperwork to preserve your rights.
Likewise, if you’ve been harassed by a debt collector, you can sue them in State or Federal court within one year. If you win the case, the collector may have to pay you for damages and court costs.
In the next chapter, you’ll learn what a zombie debt is and get more tips to protect your rights.
5.4. Facts About Zombie Debt
In this chapter, we’ll review a phenomenon known as zombie debt collections. Zombie debt is a debt that’s very old or is outside of its statute of limitations but has come back from the dead to haunt you. It’s a funny term but not a situation to be taken lightly.
Zombie debt comes alive when a collections agency purchases it from the original creditor or another debt collector for pennies on the dollar. The collector attempts to make you pay the debt, sometimes using aggressive techniques.
In the previous chapter, you learned that rules allow the Statute of Limitations to revive or restart at day one, known as re-aging an old debt.
Debt collectors have strategies to trick or persuade you to take certain actions that reset the clock, putting you back at square one so they’re allowed to sue you for the full amount owed.
For instance, in some states, the Statute of Limitations clock restarts any time you take action on an old debt. The action could be something as simple as acknowledging that an old debt is yours, promising to make payments, agreeing to a payment plan, or making payment no matter how small.
To stay safe from potentially harmful zombie debt collectors, you need to be aware of common tactics.
One is that they may verbally harass you and as I’ve mentioned, this is illegal according to the Federal Fair Debt Collections Practices Act.
They may try to misrepresent their company. Collectors cannot tell you that they are an attorney or a litigation firm when they are not. They may try to threaten a lawsuit.
Under the Statute of Limitations for your debt expired, but they can certainly scare people into paying. They can begin a lawsuit; collectors can try to sue you, even when the Statute of Limitations has expired.
If you receive your summons, don’t ignore it because you have a limited amount of time to respond. And if you don’t respond in time, you may forfeit your right to fight the lawsuit using the Statute of Limitations as your defense.
Zombie collectors may try to get you to pay for someone else’s debt. In general, you’re not responsible for the debt that’s not in your name. The only exception may be the debt of a deceased spouse if you live on community property.
If a creditor tricks you into believing that you owe a debt that isn’t yours, making a payment could be construed as an admission that the debt is yours.
Collectors may promise to stop contacting you in exchange for a small payment. As I mentioned, that can be a setup to revive your debt and reset the clock on the Statute of limitations so they can sue you for the full amount.
And they may try to promise to keep the debt off your credit reports. As we covered, past due debts stay on your credit reports for 7 years even if you settle or pay it off, so don’t necessarily believe these promises.
If a collector contacts you by phone, asks for the company name and address, and says you will only communicate through the mail, then hang up. Don’t admit that you owe the debt or engage in conversation or debate about the issue. Speaking with the collector is risky because you could accidentally say something that gives them a leg up or resets your debt.
All communications should be done through snail mail or an Attorney so you can have hard copies. You have the right to request verification of the debt by sending a certified lender back to the creditor within 35 days after receiving their first letter.
They must prove that you owe the debt and that they are authorized to collect it.
Again, for all these complexities, I encourage you to get legal help so you can consider all your options for unpaid debt and make the best decision for your financial future.
In the next chapter, you’ll learn what to do if you accidentally slip us and make a late payment on a credit account.
5.5. Minimize Damage from A Late Payment
Whether it’s because your bank account is low, you forgot, or the mail was late, it feels terrible to miss a due date on a credit card or loan. If you don’t take quick action, the late payment can negatively affect your finances for years to come.
In this chapter, you’ll learn what happens when you make a late payment and tips to minimize the potential damage.
If there’s one thing I hope you’ve learned from this guide, not paying a credit account in time is a major offense in the financial world. As we’ve covered, it’s the single most important factor that credit scoring models use to calculate your scores.
Payment history is the ‘KING of Credit!’ because it’s so important.
Having late payments or accounts in collection are serious red flags that you have not been financially responsible and may not repay debts with regularity or at all.
The consequences are stiff, even making one late payment can drastically reduce your scores, especially if you have good or excellent credit.
Once you make a late payment, merchants become wary because it could signify that you’re in financial trouble and will miss more due dates.
So, in addition to having a bad mark added to your credit file, lenders penalize you directly in several different ways:
1. Charging a late fee.
How much a creditor can tack on to your next statement depends on the agreement or application you signed and the state where you live. Credit card late fees generally range up to $35 and apply the first day you’re late.
Car loans and mortgages usually come with a “grace” period of 10-15 days, after which you get charged with a fee that could be 4%-5% of the overdue payment.
If you continue to miss due dates, you’ll pile hundreds of dollars on top of the amount that you already owe.
With credit cards, another penalty that you typically face after being late for two consecutive months is:
2. Increase in annual percentage rate up to 29.99%.
That crazy-high rate will be applied to your entire outstanding balance, not just the future charges.
3. Loss of approved credit card rewards or a zero percent interest promotional offer.
If your payment is already over 180 days past due, your creditor may sell your debt to a collector then the collections company will attempt to get the overdue balance and fees from you.
Having a debt in collections is much more serious than having a 30-60-day late notice on your reports, and it causes a bigger dip in your credit score.
Just like with a late payment, an account in collections stays on your report for 7 years from the date you first became delinquent, even after you pay it off. While you can’t make a valid bad debt disappear from your record, paying it shows creditors that you honored your financial obligation. How much a bad debt hurts your credit depends on factors such as your scores before the bad mark and the amount of debt you did not pay.
However, as you make on-time payments and add positive data to your credit reports, the impact of late payments or an account in collections lessens with time.
Here are four tips to minimize the damage if you accidentally make a late payment:
Tip #1- Act quickly to settle your account.
The sooner you pay the bill, the better your chance of squeaking by without fees or late penalties. The good news is delinquency cannot be reported to the nationwide credit bureaus until 30 days after the due date.
So, if you get caught up on the account before 30 days, your mistake will not show up in your credit file. However, the credit can still charge the fees I just covered if you miss a due date.
And if you don’t get caught up quickly and a late file is reported on your credit file, it can stay there for 7 years. On the flip side, your on-time payments and all good marks stay on your credit record for 10 years.
If a creditor pegs you as late and it’s an error, dispute it with the credit bureaus right away. Inaccurate or unverifiable information must be removed by law.
However, if you were at fault for the late payment, the creditor is under no obligation to retract it even if you eventually paid up. The purpose of your credit file is to reflect an accurate history of your account activity, even when you’re late.
Tip #2- Contact the creditor
Contact the creditor to discuss if you get your past-due account settled, but you’re disappointed because you got charged a late fee. If your payment was late by accident, such as getting lost in the mail, explain the situation, and ask to have the fee credited.
Lenders and credit card companies typically want to keep good customers happy, so they may do you a favor, especially if you’re polite on the phone.
Remember that customer service representatives have leeway, but they won’t be keen to help you if you’re in a panic or you’re rude.
Tip #3- Pay all your credit accounts on time
If your credit scores went down or you got hit with a high penalty APR after making a late payment, be extra cautious about never being late again.
If you make 6 months of on-time credit card payments, your issuer is required to reset your interest rate back to the pre-penalty rate plus. Your credit scores will slowly improve as you build a history of positive info and the late payment ages.
As I’ve mentioned, credit scoring models tend to favor new data more than old data, so be vigilant about staying on track.
Tip #4- Set up automatic reminders
If you made a late payment because you just don’t have a good system for paying your bills, now is the time to get organized.
You can use a spreadsheet, calendar reminders, or smartphone apps like Mint, Bills Monitor, or Evernote. Many financial institutions allow you to create email or text notifications to remind you about the upcoming payment due dates.
That’s a great way to make sure a deadline never slips past you.
One strategy to ensure that you never miss a minimum credit card payment is to set it up to pay automatically. Even making the minimum payment helps you to build credit.
You don’t get extra credit for paying more, but it’s wise to pay your balance in full each month, so you don’t have to pay any interest in the following month.
Few people, including me, can say that they have never missed a payment due date. It’s not fun to slip up and get penalized for it, but it’s not the end of the world either if it’s an occasional slip-up.
Don’t beat yourself up about it; just follow these tips to minimize the damage and consider it a learning chapter.
Now that you understand how to deal with old debt: Let’s learn how to Maintain Excellent Credit For Life.