What to do about mystery debt

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Dear Debt Adviser,
I have a large debt on a credit card that I stopped using in 2005. This debt does not appear on my credit report and I have never heard a word from the creditor about collection of the debt. I find this baffling, as it is a substantial amount. From an insider perspective, do you have any ideas about what might be going on with this debt? At this point, in my 60s and with little income and no steady work, I will never be able to pay the full amount back but have thought about offering a settlement amount paid over several years. Does this make any sense? Or should I just stick my head in the sand and hope I never hear from them?
— Cheryl

Dear Cheryl,
The problem with sticking your head in the sand is that it usually exposes your backside! No, I don’t recommend it, but I do have three options for you to consider:

  • Check your state statute of limitations.
  • Save for possible payment.
  • Don’t call until you are ready, if at all.

It is rare but possible that your debt record may have been lost. In my nearly 20 years of helping people with debt issues, I can only recall one instance of a debt completely slipping through the cracks and not being targeted for collection. My guess is your debt may be showing up on someone else’s credit report through an identity error, or it may have been lost in a system update or bank merger. The problem is that you can’t bank on it to be lost forever.

Drawing once again on my past experience, I predict that the debt will resurface at the worst possible time. Although part of me says that your idea of offering a settlement may be the morally responsible thing to do, my practical side says that once you do, you may be exposed to the full force of the debt collectors and lawyers who will not have to settle anything and may just tack on four years of interest, penalties, late fees and more. So what to do? Read on.

I suggest that you begin by checking on the statute of limitations for collecting an unsecured debt in your state. You can find the information by clicking on your state’s attorney general link on the National Association of Attorneys General Web site or by looking at Bankrate’s “State statutes of limitations for old debt.” In my state of Rhode Island, the statute of limitations for collecting a credit card debt is 10 years. Most other states’ statutes governing credit card debt are between three and six years.

Once the statute of limitations has passed, you can still be contacted regarding the debt, and while you still owe the debt, it is no longer legally collectible. That means a collector will generally leave you alone once they know that you know (and possibly your lawyer knows) that the debt is unenforceable in court. To continue to harass you without recourse in the courts is expensive and time-consuming.

If your debt is still within the statute of limitations or even if it is not, I want you to begin saving some money each month. Should the radar at your creditor’s shop finally detect your rather substantial debt, having some money set aside will lessen the blow and may give you the option of offering a settlement for less than full balance to resolve the issue. Put the money into a separate savings account that you do not have easy access to and keep adding to it.

But wait, there’s more. If the debt is beyond the statute of limitations, this account will allow you to hire an attorney to handle any discussion with a collector if the debt resurfaces. And best of all, if the debt never shows up, you will have a good start on an emergency savings cushion of three to six months of living expenses.

Should you decide that you want to make good on this debt, I would advise you to wait to contact the creditor until you have saved the amount that you have in mind to offer as a settlement. My suggestion is to save between 50 percent and 60 percent of the balance. The creditor is not likely to accept monthly payments at this late date and certainly could pursue the matter in court if the debt has not passed the statute of limitations.

Good luck!

To ask a question of the Debt Adviser go to the “Ask the Experts” page. Read more Debt Adviser columns and more stories about debt management.