In this article:
- How Does Time-Barred Debt Work?
- How Time-Barred Debt Affects Your Credit
- Should You Pay Off Time-Barred Debt?
Time-barred debt is unpaid debt that a debt collector can no longer legally sue you to collect because it's beyond the statute of limitations.
Every state has a statute of limitations that restricts how long a creditor can file suit to force payment. For example, the statute of limitations for consumer debt is four years in California. So, debt older than four years is time-barred debt and cannot be collected.
Find out how time-barred debt works, how it affects your credit and if paying it off is a good idea.
How Does Time-Barred Debt Work?
If a debt is time-barred, it means a debt collector can no longer sue you for payment. In most cases it doesn't mean your debt disappears, and you may still be contacted by debt collectors looking for payment—they will just not be allowed to take legal action against you to collect it.
The statute of limitations on consumer debt can vary from one state to the next. It can also vary depending on if the contract is written or oral, the type of debt and other factors. In most states, the statute of limitations falls between three and six years, but the point at which you start calculating statute of limitations can vary based on your state, the type of debt you owe and the state law cited in your credit agreement.
Some types of debt, such as federal student loans, income taxes owed and child support (in some states), do not have a statute of limitations. It is important to understand the two timelines for debt—credit reporting and statute of limitations—when determining whether you have to pay a debt and when it will show up on your credit report.
- The credit reporting time limit is the amount of time a debt collector or creditor can report information about a delinquent account to the credit reporting bureaus (Experian, TransUnion and Equifax).
- The statute of limitations is the amount of time that debt collectors or creditors have to file a lawsuit to collect a debt you owe.
When a debt becomes time-barred, it doesn't necessarily go away. The only states where the expiration of the statute of limitations snuffs out debt are Mississippi, North Carolina and Wisconsin.
By the same token, the Consumer Financial Protection Bureau (CFPB) rules do not prohibit debt collectors from contacting you for time-barred debt. However, the Fair Debt Collection Practices Act (FDCPA) outlines how long a creditor can take action to collect a debt from you and what debt collectors can and cannot do. This includes using false, deceptive, unfair, unconscionable or misleading means to collect time-barred debt.
It's worth pointing out that in some states, if you make a payment or admit that you owe the debt in writing, a new statute of limitations period begins. In this case, your old unpaid debt is no longer time-barred. More on this below.
How Time-Barred Debt Affects Your Credit
Becoming debt-free is a goal worth pursuing. Without debt, what would you do that you can't do now? How does paying off your debt benefit your life? And how does time-barred debt affect your credit profile?
If your debt becomes extremely delinquent, it may be sold to a collection agency. Collection accounts remain on your credit report for seven years from the date the debt first became delinquent and can have a serious impact on your credit score.
Even if your debt has passed the statute of limitations and become time-barred, it will still be visible to creditors. It can have a negative effect on your credit score and also show creditors you might have trouble paying your debts.
Unpaid debt and the effect it has on your credit can make it much more challenging to get a mortgage, buy a car, get a job and apply for a credit card or personal loan. And, if you do qualify for a loan, the interest rate you'll pay could be significantly higher than if you didn't have the unpaid collection dragging down your credit.
Should You Pay Off Time-Barred Debt?
If your debt is time-barred, you don't need to make payments. If you do, you risk the debt no longer being time-barred, allowing collectors to sue for payment again. In some states, the same thing can happen even if you simply acknowledge the debt in writing.
You have several options if collectors come after you for a time-barred debt:
- Choose not to make any payments. You can't be taken to court or sued after the statute of limitations expires. However, debt collectors can still contact you, and your unpaid debt will remain on your credit report for seven years from when it first became delinquent. Keep in mind that the longer you delay making payments, the more you may be charged in interest and late fees. Many newer credit scoring models exclude collection accounts that have been paid off when calculating your credit score, so not making payments can be risky.
- Make only partial payment. It's possible that a debt collector will accept an amount lower than what you owe to close your account. However, if you choose this route, make sure your payments are documented in writing, releasing you from future obligations. Settling your debts for less than you owe, however, will have a negative impact on your credit scores.
- Pay off your unpaid debt in full. You could decide to pay the debt in full, which may help improve your credit scores right away. Additionally, many lenders view a paid-off collection account more favorably than an unpaid one.
The Bottom Line
You are protected from being sued by debt collectors for time-barred debt by the statute of limitations. Even so, that doesn't mean you no longer owe on your debt, and debt collectors can still contact you to collect on the debt. Just as important (maybe more) is the fact the debt will remain on your credit report for seven years after your first missed payment. To keep track of any debt that may be holding you down or in collections, get your free credit report from Experian.
As an expert in personal finance and debt management, I've extensively studied and provided guidance on various aspects of debt, including time-barred debt and its implications on an individual's financial standing. My expertise stems from years of research, professional experience, and assisting numerous individuals in navigating complex debt-related situations.
Regarding the concepts covered in the article "How Does Time-Barred Debt Work?":
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Statute of Limitations: This legal timeframe sets the limit within which creditors or debt collectors can file a lawsuit to collect a debt. It varies by state and type of debt, typically ranging from three to six years. For instance, in California, the statute of limitations for consumer debt is four years.
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Time-Barred Debt: It refers to unpaid debt beyond the statute of limitations, where creditors or debt collectors can no longer sue to collect the debt. However, this doesn't erase the debt, and collectors can still contact individuals to seek payment, though legal action cannot be taken.
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Credit Reporting: There's a distinction between the statute of limitations and credit reporting time limits. The credit reporting time limit is the duration during which delinquent accounts can be reported to credit bureaus, typically seven years from the date of the first delinquency.
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Impact on Credit: Time-barred debt can significantly affect one's credit score even after it becomes time-barred. It remains visible on credit reports for seven years from the first delinquency date and can make it challenging to obtain loans, mortgages, credit cards, or even affect job applications.
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Options for Handling Time-Barred Debt: Individuals facing time-barred debt have choices: refrain from making payments (as they can't be sued after the statute of limitations expires), negotiate partial payments with documented agreements, or pay off the debt in full, potentially improving credit scores.
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Risks of Acknowledgment or Payment: Making a payment or admitting the debt in writing in some states can restart the statute of limitations, nullifying the time-barred status and exposing individuals to legal action again.
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Credit Report Monitoring: Regularly checking credit reports, such as through agencies like Experian, is essential to track and manage any outstanding debts or collections affecting credit scores.
Understanding these concepts is crucial for individuals dealing with time-barred debt, as it can significantly impact their financial health, creditworthiness, and decision-making regarding debt repayment strategies.
