Ask the Experts: Should I pay off an old debt?

Ask the Experts: My account is six years delinquent.  Should I still pay it?

I have a collections account on my credit from 2007. What are the repercussions of paying this off? Will it stay on my credit longer? Should I pay it off now, or just let it fall off at the 7 year mark? – Lauren

Lauren,

This is a great question – and a popular one, too!

I wish the answer was a simple “Don’t pay anyone!” because I’m pretty sure that’s the answer everyone is hoping to get. Unfortunately, it’s a bit more complicated than that.

The common misconception here is that you can inadvertently "reset the clock" on delinquent items on your credit report. Fortunately, that's not possible.

The Fair Credit Reporting Act was amended in 1996 specifically to prevent unscrupulous collectors from taking actions that kept delinquent items alive on your credit report for years and years and years.

Now it’s pretty cut and dry. The reporting period runs 7 years and 180 days from the date of the last delinquency or missed payment. It doesn’t matter when the account was charged off, when it was sold or if you ever paid a single penny towards the debt. That means if you had a payment due in February of 2006 and never paid it, that account should have fallen off of your credit report by now.

(As an aside, it’s important to remember that even if you pay off an account all delinquencies still stay on your credit report until the reporting period is over. The difference is that the account is listed as paid, rather than unpaid, which is definitely better for you.)

The idea of “restarting the clock” comes from the statute of limitations for collecting on a debt and has nothing to do with how the debt is reported by the credit bureaus. The statute of limitations is set by each state, so the timeframe varies. It’s completely separate from your credit report. In fact, if you live in a state where the statute is greater than 7 years, a collector could sue you for a debt that has already fallen off of your report. And yes, in certain circumstances, paying on an old debt – or even just agreeing to a repayment plan with a collector – restarts the clock.

So Lauren, unfortunately there’s no simple answer. Generally, if you have the funds to pay off a debt, I’d say do it. There’s never any harm to paying off a debt (just make sure you keep adequate records of everything). Your old delinquency will fall off your report next year at the same time, regardless of whether or not you pay the debt. But in the meantime, anyone looking at your credit report will see that unpaid debt. If you’re considering getting a loan or looking for a new job or even moving into a new home or apartment, it might be worth it just to be certain that you don’t miss out on something good because of a six year old debt.

Good luck!

Ask the Experts

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Carla asks an interesting follow-up question:

Each state sets a time limit on how long a creditor has to file a lawsuit on an unpaid debt, but which state law governs – the state where the account was opened or the state where the debtor currently resides?

Great question, Carla. The answer – perhaps unsurprisingly – isn’t simple.

The first thing to keep in mind is that a statute of limitations (any statute of limitations) doesn’t do anything to prevent you from being sued. Instead, you would use a statute of limitations in your defense to have a case against you dismissed.

(Here’s where we need to remind you that MMI is not a legal service and the author is not a lawyer. If you’ve been sued or need more specific information please consult with a lawyer.)

So basically, a collection agency would sue you for a debt. You or your lawyer (I vote lawyer) would then cite the corresponding statute of limitations on collection activities in your defense.

To Carla’s question, you can cite the statute of limitations for whichever state you’d like – it’s ultimately going to be up to the judge to decide if that statute is applicable. If you entered into a contract in one state, but made 90 percent of your payments while living in another state, a judge might be more inclined to rule that that statutes of the second state are the ones that matter.

Unfortunately, there’s no concrete answer, because every situation is unique and would ultimately be left up to the discretion of the presiding judge. Not a very cut and dry answer, I know, but hopefully that clarifies things a little.

Thanks for asking!

Do you know what's on your credit report?  Have you received collector calls and aren't sure if they're legitimate?  MMI now offers credit report reviews - we can pull a copy of your credit report and review the information with you.

Jesse Campbell is the Content Manager at MMI. All typos are a stylistic choice, honest.

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