Debt consolidation is the first option that comes to mind for many consumers who find themselves struggling with debt.
There are basically two types of consolidation loans available to consumers in your situation:
- Secured loan
- Unsecured loan
A secured consolidation loan is basically a home equity loan which would tap into your home equity to repay your unsecured creditors. This type of loan does not reduce the balance of your debt, but it generally lowers the interest rate and monthly payments. The downside of a secured debt consolidation loan is that it will convert what was previously unsecured debts into debt secured by your home. This means that if you are unable to make your monthly payments, the lender could foreclose on your home. However, secured debt consolidation loans work for many people, so if you own a home this is an option you may want to explore.
An unsecured consolidation loan is essentially a personal loan used to repay other creditors. Since this type of loan is unsecured, the interest rates are usually higher than those on secured consolidation loans. Also, if your credit is less than perfect you may have difficulty finding an unsecured consolidation loan that will actually improve your financial situation, because the interest rate on the loan will be based primarily on your credit score.
Check your state’s statute of limitations for the collection of debts before you decide how you want to proceed with resolving this debt. Once the statute of limitation expires, a creditor can still call you to try to collect, and can still report the account to the credit bureaus. However, if the creditor sues you, you would need to tell the court that the statute of limitations has expired, and the case should be dismissed. To read more about statute of limitations, and to find out if your debts are past your state’s statute of limitations, see the Bills.com Statute of Limitations Laws by State page.
If you find the statute of limitations in your state has passed, you would do yourself a great disservice by borrowing money to pay this debt. By taking out a new loan, you would restart the statute of limitations on the debt.
As I mentioned, accounts outside the statute of limitations can still appear on your credit report and have a negative impact on your credit rating. However, according to the FCRA a federal law, negative listings on your credit report must be removed 7 years after the date of first delinquency, which is typically 30 days after your last payment. Given your debt is already 6 years old, you may want to wait for the account to fall off your credit report on its own. Paying the debt now will likely not result in its being removed from your credit report.
As mentioned above, I encourage you to check your state’s statute of limitations for revolving debts, also called open accounts. If you determine that the debt in question is outside your states statute of limitation, there is little reason for you to worry about repaying the debt.
Some creditors attempt to keep accounts on credit reports longer than they are legally allowed to do so. I encourage you to obtain a copy of your credit report from each of the three major credit bureaus — Experian, Equifax, and TransUnion — to check that the reported date of last payment matches the date you last paid on the account. You can obtain a free copy of your report from each bureau at AnnualCreditReport.com.
If your state’s statute of limitations has not expired, you should probably contact the creditor to attempt to resolve the debt. If you can access a lump sum of cash, the creditor may be willing to settle the bill for a percentage of the balance — possibly 50% or less of the current balance. If you cannot raise a lump-sum to settle the account, you could offer the creditor an affordable monthly payment amount to repay the bill over time.
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