finance

Rules differ for reporting debt, collecting debt

Dear Debt Adviser,
In your column, "New collector, new credit woe," you did not mention that there are state statutes of limitations regarding debt collection -- she still owes the money, yes, but she may legally not be required to repay it, hence the threat of a judgment may not exist.
-- K.C.


Dear K.C.,
Thank you for writing and pointing out something that I want to clarify regarding my answer to Julie who was worried that paying a 7-plus-year-old debt would mean that the debt would be reflected on her credit report for another seven years.

I said in the column, which has since been updated, the start date for the seven-year credit-reporting period on a debt is the original date of charge off. Making a payment on that debt does not restart the clock for the credit reporting agencies. The debt can only be reported legally for seven years from the original charge-off date.

While not Julie's original concern, some of my readers wrote to point out there are two clocks: One for how long a debt can appear on credit reports and another for how long the legal system considers a debt to be enforceable under state statutes of limitations. The credit-reporting clock can't be restarted, but the statute of limitations clock can restart when a payment is made.

Also, since I don't want to get letters from my legal friends and I am not a lawyer, let me just add that this should not be considered legal advice, which you can only get from an attorney. However, I did ask my older cousin, Fred Costello, who is a lawyer, for some legal insights.

I said that Julie still morally owes the debt even though it is seven years old. However; the debt may not be legally collectible due to state statutes of limitations. You can check the particular statute that applies to your state in the Bankrate feature, " State statutes of limitations for old debt."

A state statute of limitation does not prevent a creditor from either trying to collect a debt or even taking you to court to collect on a debt, what it does is provide you with a defense whereby the court will dismiss the case if you claim the defense and meet the court's criteria, but you have to go to the court hearing to defend yourself for the statute to be useful.

Once you make a payment, the clock restarts on the statute of limitations. Unlike the law that prevents debts from being reported to the credit bureaus more than seven years after the original charge-off date, the statute of limitations date is based on the last activity. So when you make a payment there is activity on the account and the clock begins ticking once again. That action gives the creditor another chance to collect if you did not pay the account in full.

For those readers out there who are looking up the statute of limitations for your states and deciding not to pay but rather to wait until the debt is no longer legally collectible, be aware that collection activity often increases just before a debt reaches its statute of limitation.

Hope this clears up my answer to Julie and helps other readers to understand that it is always smart to get legal counsel in legal matters, in addition to reading the Debt Adviser column!

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit MMI for additional debt advice or click here to ask a debt question.

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