Debts, unlike fine wine and my wife, do not improve with age. Unpaid debt doesn’t go away. Until the debt is either paid or forgiven, you still owe the money. This is true even if it’s a credit card debt that is sold to a collection agency and even if you think it’s unfair.
Why do you still owe the full amount if the original creditor sold it and made some money on the sale? Let’s look at this issue a little closer.
Why is credit card debt bought and sold?
Original credit grantors usually will pursue a debt as long as they believe there is a good chance you’re going to pay the bill. Good customers are hard (and costly) to come by and you are your creditor’s customer. So, they want to keep you if they can. They will go through their own in-house collection process with you to try to work something out. But there comes a time (usually 90 to 180 days later) when it is no longer profitable to carry the debt, and they decide you are not the good customer they thought you were.
That’s when the credit grantor will sell the debt. These old debts are then bought by other companies for less (most of the time far less) than the amount owed. Professional debt collectors are confident in their ability to get you to pay up, so they can recoup their investment and make something for themselves. And once an outside collector gets involved, your value as a customer is gone.
Debts can be resold time and again, as the debt ages. Each time a debt is sold, it’s sold for less because of the increasing risk of not being able to collect an older debt when others have tried and failed. Each time, the documentation of the original debt is supposed to change hands with the debt sale. Often it does not. This becomes important, as you will see.
Do you still have to pay?
As I said, until the debt is either paid or forgiven, it is still owed. But other factors may come into play, limiting the collector’s ability to collect from you. Here are two of the biggies:
Statute of limitations
If the debt becomes too old (we’re talking years), your state’s statute of limitations on debt may effectively make the debt uncollectable. Again, uncollectable does not mean you don’t still owe. You do. But reaching the statute of limitations threshold means you can’t be taken to court and compelled to pay through a judgment.
For this reason, if a debt is getting close to the statute, collection activity is often ramped up because the collectors know this, too, and will be anxious to close out the file before it comes to that.
Let me caution you here. State statutes of limitations vary widely and can come into play in as little as three years or as many as 15. You should also know the debt will remain on your credit report for seven years, even if your state has a statute of limitations under seven years. This will likely be a drag on your credit score (and your lending and hiring attractiveness) until it drops off.
Proving it is really your debt
The second thing that might prevent the collector from getting you to pay is if they cannot prove the debt is yours. So, your first move, if contacted by a collector, is to ask them to prove the debt they are collecting is actually yours. Mistakes do happen, and in order to pursue collecting a debt, the collector must be able to validate that the debt is yours. This involves producing a trail that shows the debt was yours and not already paid. As I mentioned before, this data can get deleted or lost as debts get older and are resold. No proof, no pay!
Do your rights change if your debt is sold?
If your debt is sold, the law requires that you receive written notice within five days of the collector’s initial attempt to contact you. That debt validation letter must include the amount of the debt, the original creditor and a statement of your right to dispute the debt.
According to the federal Fair Debt Collection Practices Act, it’s against the law forcollection agencies to misrepresent themselves, the amount you owe or their plans to get you to pay. There are also limits to the legal actions a collector can take and to the collection fees they can add.If the statute of limitations in your state has passed on the debt, for example, a debt collector may not be able to take you to court, in which case threatening a lawsuit is illegal.
Can overdue credit card debt be forgiven?
Yes, you can offer to settle the account for less than you owe. The collector may not agree to your terms, though, and is under no obligation to do so. However, if the collector does take you up on your offer, you should know that any forgiven amount above $600 is considered taxable income, meaning you will have to pay taxes on that amount when the next tax day rolls around.
A word of caution: Any time you agree to terms with a collector, be sure to get all the terms in writing before you send any money. Otherwise, the collector can keep your money, continue to pursue you for more, and restart the clock on your statute of limitations all over again, simply because you made a payment.
Complete forgiveness, outside of the confessional, is another story. That story is called “bankruptcy.” Bankruptcy exists in the U.S. for good reasons, but it is also, in my opinion, a last resort option. That’s because of the damage a bankruptcy will do to your credit score and how long it will affect you.
While a collection item will drop off after seven years, chapter 7 bankruptcies stay there for as many as 10. This is a high price to pay when there are other options for taking care of overdue debt that are not as damaging to your credit score or your self-image.
What to do if you’re struggling with credit card debt
Ask your issuer for help
The sooner you make the call saying you’re having trouble paying a bill, the better. Early requests for help are easier to grant, and there are usually more options for a good customer in a tight spot, as opposed to someone who has to be chased to pay. Remember, you are still a valued customer and the credit grantor wants to keep your business. Reduced payments, fee waivers or lower interest rates are available for a short period of time, to get you through a tough spot.
Cut spending and sell items you don’t need
You can also make some changes at home to free up some cash. To help pay off debt,move to a bare-bones budget and only spend what you must until you catch up. Consider having a garage sale or selling unessential items online to generate income you can use to pay down your debt. You might consider a temporary second job to do the same.
Contact a credit counselor
However, if you just can’t figure out a way to pay off your debt on your own and you’re out of hope, bankruptcy might be an option. You will be required to get credit counseling from a qualified agency.
The good news is you can contact a credit counselor without having made any decision about bankruptcy. I would suggest you choose an agency approved for bankruptcy counseling, even if that is not what you ultimately end up doing. The National Foundation for Credit Counseling is a great place to find a qualified, local non-profit agency that can help you with your questions. I call these agencies “the good guys” because they will work with you to find a way out of your problem debt for free or very little cash.
When you make first contact, you will be connected with a credit counselor who will examine your situation in full and help you come up with whatever solution is in your best interests. These options may include some kind of debt settlement (where you will pay less than you owe), as well as your bankruptcy options. But you may also qualify for a debt management plan through the agency.
The bottom line
The point of all of this is that there are options available, so you don’t have to dread the phone calls and letters demanding payment. Instead, you can resolve the debt to everyone’s satisfaction and move forward. I wish you luck!
Have a credit question for Steve? Drop him a line at the Ask Bankrate Experts page.
