Advice on Settling a Five Year Old Debt

Whether you should attempt to negotiate a settlement with this creditor depends on your state's statute of limitations (SoL) for the collection of debts.

Let us step back a moment and talk about SoLs. All states have a body of statutes in their codes of law called, "Limitations of Actions," commonly referred to as the statutes of limitations. The idea behind these laws is that we as a society have decided that we do not want old debts hanging around forever. We want people and businesses to be able to move on with their lives without worrying about being sued. The length of time a creditor has to sue you depends on your state of residence and the type of debt.

For example, many states allow longer for creditors to file suit to collect on closed-ended consumer loans than on credit card debts. Most states give credit card issuers three to four years to file suit after default, but some states allow as many as 10 years. Check out Bills.com page Collection Laws and Statute of Limitations.

That page has more information about statutes of limitations and a list of limitations by state. If a creditor files a lawsuit after the allowed time, the court will usually throw the case out and not allow the creditor to file suit again (called dismissed with prejudice). However, you must raise the issue of expired statute of limitations in a written response to the lawsuit, or else the court will not know that the statute of limitations has expired. Although the periods vary from state to state, I believe there is only one (Ohio) that is longer than 10 years.

I encourage you to consult with an attorney licensed to practice in your state to discuss the specifics of your situation and to help you determine if the statute of limitations for your creditor to sue you has expired.

Keep in mind that in most states, the SoL begins running from the date you last made a payment on the account. This means that if you paid just a few dollars to a collector a couple of years ago, the running SoL for that debt could have been reset. Also, keep in mind that the passage of the SoL does not forbid a creditor from calling you to collect on the debt; it simply provides you an absolute defense in court if the creditor files suit. You can generally stop collection calls by sending a cease and desist letter to the creditor. For more information about sending cease and desist letters, see the Bills.com Debt Self-Help Center.

Credit reports and SoLs

Your state's SoL has little to do with how long accounts can appear on your credit report.

Federal law (US Code Title 15, §1681c) controls the behavior of credit reporting agencies. This law is known as the Fair Credit Reporting Act (FCRA). Under FCRA §605 (a) and (b), an account in collection will appear on a consumer's credit report for 7.5 years. The clock starts approximately 180 days after the date of first delinquency on the account. To learn when an account will be removed by the credit reporting agencies (TransUnion, Equifax, and Experian and others), add 7.5 years to the date of first delinquency. Subsequent activity, such as resolving the debt, is irrelevant to the seven-year rule. However, if the debt is a tax lien, that can appear for seven years from the date of payment. A bankruptcy will appear for ten years from the date of the final order. Delinquent federal student loans can be reported indefinitely, i.e., for as long as they are delinquent.

Just because a debt is removed from a credit report does not mean the statute of limitations has passed. Federal credit report laws and a state statute of limitations laws are separate and independent from each other.

If your state's SoL is five years, an account can appear on your credit report for a bit more than two years after your state’s SoL has passed. A new company purchasing your account cannot lengthen the time that the account can appear on your credit report. Be careful, though, because many debt purchasers try to change the date of first delinquency on old accounts so they appear on your credit report for a longer time.

You need to pull your credit report and carefully review the accounts in question to make sure that no unauthorized changes have been made. If you find any suspicious information on your credit report (for example, if an account’s delinquency date had been changed) you should dispute the listings with the credit bureaus. The FCRA Web site offers a helpful guide to disputing credit listings. To find out more about credit, credit scoring, and credit reports, I encourage you to visit the Bills.com credit resources page.

Credit reports and settling debt

If you choose to settle your debt, either because you determine that the statute of limitations has not expired, or because you wish to remove the delinquent balance from your credit report, you should contact the creditor or the collection agency handling the account to discuss what amount the creditor will accept to settle the debt. You may wish to offer 30% of the balance to begin, observe the creditor’s reaction, and then increase your offer as you feel appropriate.

I would expect that a creditor with a debt as old as the one in question will likely settle for 40% to 50% of the balance owed. See Debt Negotiation and Settlement Advice for tips and tactics when negotiating a debt settlement.

If a creditor accepts a reduced balance settlement, it will usually expect the settlement to be paid within a matter of days, so you should make sure that you have the necessary cash available to tender payment before you begin negotiations in earnest.

You should also remember that settling a debt should cause the account to report a $0 balance to the credit bureaus, but it will not cause the past derogatory marks to be removed from your credit report, so settlement may not be worth the money if the statute of limitations will expire in the near future. For more information about negotiating with your creditors, you can read this debt settlement article in Bills.com.

I hope the information I have provided will help you Find. Learn. Save.

Best,

Bill

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