Should You Pay Off Old Debts?
Recently I had a client come into the credit union and talk to me about his situation. He’s had a bit of trouble financially over the last several years and he wanted some advice on how to proceed so that he could start cleaning up his credit. He was working at a new job earning more money, so he wanted to take care of some of the older debts and public records against him.
However, he was concerned. He’d read some articles on the internet and told me he thought old debt fell off of your credit report after seven years from the date of last activity. Since he was reaching that point, he was afraid to pay them off and have them stay on another seven years. He had about three old credit card debts, a utility debt, and some small medical bills showing up. All of the debts were less than $500, but he was more concerned about them staying on the credit report.
There’s really two parts to this. The first part is the notion that debt falls off your credit report after seven years, so why bother paying it? Yes, debt that is in collections will fall off after seven years; however, collection agencies can have that debt put back on your credit report by stating that you still owe the money. You can dispute it if you’d like, but if you still owe it, it goes back on. It sort of becomes a new debt, though I should mention that some collection agencies may not put it back on there. They can do a couple of things, either write it off or sell it, or they can take you to court for it. The best option for you is if they write it off. That means they’ve pretty much given up on ever collecting from you and after seven years, they don’t bother to reapply it to your credit report.
If they sell it, then a new company assumes the debt and they will do what they believe necessary to collect. Each time a collection agency sells your debt, the more harassing the phone calls get - at least in my experience. However, as it’s a new company that you are indebted to, it goes on your credit report as a new debt, I believe for another seven years from time of sale, but I’d have to verify that to be sure. Either way, it’s still not in your best interest. Now, if they take you to court for it, then you’re talking additional fees if they win. There’s legal and court fees on top of what you owe, and if they have really good attorney’s, then you may get slapped with punitive damages as well.
The second part of this is the phrase “date of last activity.” This phrase is highly misleading to people and one of the reasons I think people choose not to pay their debts. This does not mean if you make a payment it counts as recent activity and then the clock for seven years starts from that point forward. That would mean the negative report is on there for more than seven years which is a violation of federal law.
So, as I explained to my member, it is in your best interest to pay off these small debts. A paid collection looks better than one that still has a balance on it. Granted, both are hurting your score, but lenders and other creditors like to see that you’ve paid your bill. The saying “better late than never” is quite true in this case. Besides, even if it is close to the seven year mark, you don’t have to worry about them sticking it back on there or taking you to court.
What are your thoughts on this? Do you think it’s important to pay off small debts on your credit report?
I can see your client’s confusion, and I’m glad that you were able to clear it up. As a bonus, I learned some stuff from this post. Thanks!
He should just ignore it.
I think Kristy needs to do some research…she is wrong is so many areas it is disgusting. Please, anyone reading this DO NOT take her seriosuly. She is wrong.
First - negative marks are removed from your credit report 7 years from your last payment, collection agencies may still contact you and try to collect but is illegal for them to report that debt on your report. If they do, and some may try, you can have it removed as it is NOT a new debt just because it was sold to a new company. The “clock” would only start up again if you were to make a payment at some point before the seven years lapsed. Barring that, SEVEN YEARS IS SEVEN YEARS, regardless of who is trying to collect on the debt.
Second- If they take you to court and it is past the seven year threshold, chances are the SOL has run on their right to collect on the debt (it varies from state to state but is usually 4-6 years on open ended debt, ie credit cards) and all you have to do is go to court and bring any evidence you have that the SOL has expired and the judge will find in your favor. They have the right to sue you, so show up to court, but assuming you do not live in Rhode Island, you will win as the law limits how much time they have to collect on the money you owe. They will not get punitive damages or anything rediculous like that.
Obviously, paying your bills on time is always the best way to go. But no one is perfect. The laws in this country are designed to protect you as long as you learn from your mistakes and stay informed of your rights! Kristy, stop misleading people.
@ J - I’m sorry if you found this article unhelpful to you; however, I have done my research. Advocating to people that they can forget their debt as long as they’ve learned their lesson is wrong. That’s not how the system is designed and that mentality is the reason people in real need of a bankruptcy are having a hard time getting it with new bankruptcy laws. It seems to me that you’re suggesting all of a person’s debt is forgiven so long as they learned from their mistakes. Pardon me, but talk about misleading.
I did state that I would have to verify when the “clock,” as you put it, would restart on the selling of debt. I am still waiting on a return call from our rep with the credit bureau, but since you’ve reminded me of it, I’ll call him again. Of course, you’re entitled to think and believe as you like. The statute of limitations does vary by state and so in some states they may not be able to reclaim that debt unless by written consent of the consumer, as you mentioned. I don’t know all of the states’ rules and don’t profess to. I can only tell you the experiences that I’ve witnessed in the state I live in and the many years I’ve been in banking here. If your state deems that placing old debts back on the credit report to be illegal, then so it does and I’ll stand corrected and agree with you. However, not all states will rule in favor of a consumer who simply doesn’t pay their bills and waits for the seven years to run out.
The point of this post is the ensure, as you said, that consumers learn their rights, and that they understand it is important to pay their old debts. I’m not sure what you find misleading in that, but I do apologize for any confusion.