Debt Re-aging Dangers: Use Caution When Contacted About Old Past-Due Bills

The Federal Trade Commission has just cracked down on debt collector Asset Acceptance LLC for misrepresenting itself when trying to collect old debts. But this story is much bigger than just one company. There is an entire industry out there, called the debt-buying industry, that you may not know about. Sounds weird, but your old, unpaid debts have value and can be sold to other companies. These companies buy your old debt for a fraction of what you owe in hopes that they can collect the whole amount from you and make a big profit. Old debt like this is dubbed "zombie debt," because it never seems to die.

Here's the tricky part: All states have statutes of limitation on how long they can be sued to collect a debt. And after seven years, unpaid debts usually fall off your credit report and are no longer held against you. The FTC accused Asset Acceptance of implying to debtors that it could sue them for debts that were past the statute of limitations. They can't do that unless you let them. Asset Acceptance had to pay fines in a $2.5 million settlement and must now disclose that they can't sue over old debts that passed the legal time limit. But the company said the settlement does not represent admission of the FTC's claims.

That's where "debt re-aging" comes in. Some consumers, out of principle, will agree to make a payment on an old debt, not knowing that, depending on where they live, that can reset the statute of limitations, giving the debt collector a fresh opening to take legal action against them. The other way it can happen is when a collection company reports an old debt that has fallen off your credit report to the credit bureaus, so that the seven-year time period begins again.

As I write this, it sounds so confusing, but here's the bottom line: You are still responsible for debts past the statute of limitations. But if you are in tough financial straits, you should do your homework before starting to pay them down, because you may be forced to pay the entire debt when you're not in a position to do so. Worse yet, you could find yourself in court, where a debt collector could possibly garnish your wages or put a lien against your house to collect.

Your choices, as a consumer faced with a claim for an old debt, sometimes called a "time-barred debt," have so many "ifs" and "buts" that I'm going to do something unusual and cut and paste the FTC's own advice brochure in here, so that I don't mess up the explanation. First, here is the entire FTC brochure to review. And below are the most important parts:

The Federal Trade Commission's Advice on Time-Barred or Old Debts:

"The statute of limitations varies from state to state and for different kinds of debts. It is also tricky because, under certain circumstances, the clock can be reset, and the time period can be started fresh. That's why the Federal Trade Commission (FTC), the nation's consumer protection agency, says it's important to understand your rights if a debt collector contacts you about an old debt.

When is an old debt too old for a collector to sue?

Typically, state law determines how long the statute of limitations lasts. Usually, the clock starts ticking when you fail to make a payment; when it stops depends on two things: the type of debt and the law that applies either in the state where you live or the state specified in your credit contract. For example, the statute of limitations for credit card debt in a few states may be as long as 10 years, but most states impose a period of three to six years. To determine the statute of limitations on different kinds of debts under each state's law, check with a legal aid lawyer, another attorney, or your State Attorney General's Office.

What should I do if a debt collector calls about a time-barred debt?

Collectors are allowed to contact you about time-barred debts. They might tell you that the debt is time-barred and that they can't sue you if you don't pay.

If a collector doesn't tell you that a particular debt is time-barred — but you think that it might be — ask the collector if the debt is beyond the statute of limitations. If the collector answers your question, the law requires that his answer be truthful. Some collectors may decline to answer, however. Another question to ask a collector if you think that a debt might be time-barred is what their records show as the date of your last payment. This is important, because it helps determine when the statute of limitations clock starts ticking. If a collector doesn't give you this information, send him a letter within 30 days of receiving a written notice of the debt. Explain that you are 'disputing' the debt and that you want to 'verify' it. The more information you give the collector about why you are disputing the debt, the better. Collectors must stop trying to collect until they give you verification. Keep a copy of your letter and the verification you receive.

Must I pay a debt that's considered time-barred?

The decision to pay a time-barred debt is up to you. You have options, but each one has consequences. For example, whether you pay the debt and how much you pay will affect your credit rating. Consider talking to a lawyer before you choose an option.

Pay nothing on the debt. Although the collector may not sue you to collect the debt, you still owe it. The collector can continue to contact you to try to collect, unless you send a letter to the collector demanding that communication stop. Not paying a debt may make it harder, or more expensive, to get credit, insurance, or other services because not paying may lower your credit rating.

Make a partial payment on the debt. In some states, if you pay any amount on a time-barred debt or even promise to pay, the debt is 'revived.' This means the clock resets and a new statute of limitations period begins. It also often means the collector can sue you to collect the full amount of the debt, which may include additional interest and fees.

Pay off the debt. Even though the collector may not be able to sue you, you may decide to pay off the debt. Some collectors may be willing to accept less than the amount you owe to settle the debt, either in one large payment or a series of small ones. Make sure you get a signed form or letter from the collector before you make any payment. This document should state that the entire debt is being settled and that the amount to be paid will release you from any further obligation. Without this document, the amount paid may be treated as a partial payment on the debt, instead of a complete payment. Keep a record of the payments you make to pay off the debt.

The FTC's brochure goes on to discuss what you should do if you are actually sued for a time-barred debt, but let's hope you take the steps above and never let it get to that point. Here are additional helpful FTC consumer education links: • Debt Collection FAQs: A Guide for ConsumersDealing with Debt Collectors (video)

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