There’s actually one good thing about debt: it doesn’t always last forever. While everyone knows that there’s just no escape when you’re paying off a federal student loan, debt collectors actually have a limited amount of time to make a grab for your money when you’re dealing with things like insurmountable credit debt, private student loans or a difficult mortgage situation. Of course, it can be tricky to figure out how everything works, and there are consequences for letting your debts expire. So how do you navigate this magical world of disappearing debt?
The first thing to know is that the statute of limitations on debt varies from state to state. It’s generally from three to six years, although in some states it’s as long as 15. But what most people don’t know is that your state’s laws don’t determine how long an unpaid debt will appear on your credit report. The Fair Credit Reporting Act guarantees that it can be reported for seven years, and that’s why it’s a good idea to pay off a young debt if you can. After all, when debt hangs around, it messes up your credit score. That makes it harder to get credit in the future. And that makes it harder to repair your credit score when you’re finally in the clear.
So, the magic number is seven years if you’re worried about your score. But there’s a catch (and isn’t there always). A bad mark on your score can potentially last longer if a judgment has been filed against you. When you get served with court papers over a debt, that’s a judgment. The specifics depend upon your state’s laws and the terms of the judgment, but after that period of time is up, finally you’ve got a clean slate. Yes, you still owe the money, but no additional damage will be done, and you can’t be sued for it. Do you owe the money? Yes. But, you know. Hey look – this is your call.
Now what about those pesky debt collectors? Well, it’d be a mistake to expect them to see it your way. Debt collectors, as we all know, will do just about anything for a dollar, and in some states, one measly buck is all it takes to start the whole nasty cycle all over again. If a collector contacts you about putting “a little bit down” on an old debt, don’t do it. Even a payment as small as five dollars on an expired debt can reactivate it.
Even worse, the mere acknowledgement that the debt is yours can start the seven-year cycle again. (Again, it varies from state to state, so do your research.) It doesn’t take much to constitute an acknowledgement, so when speaking to the collector, tell him that you’re not sure that the debt is yours and that you’d like some more information. Then, tell the person to stop contacting you.
If the collectors continue to hassle you, take them to court. Under the Fair Debt Collection Practices Act, it’s actually illegal for them to bother you about expired debts once you’ve told them to stop. If you can prove the debt is expired, you’ll automatically win your case, and you must be left alone.
And there you have it: the disappearing debt, your new magic trick. What do you think about disappearing debt? Would you pay off an old debt? Or would you just let it disappear? Let us know in the comments.