In These Times You Need To Know Your State’s Statute of Limitations on Old Debt
If you have a rocky credit history and perhaps you are in better shape now and are beginning to take on the task of repairing your credit, then you should know about the Statute of Limitation on old debt. Each State in the U.S. has a Statute of Limitations on old debt, and most people I come into contact with are not aware of this.
The reason it is not promoted much in the media is that it is information that banks and creditors do not want too widely known. Essentially each State had defined a time period as to when a debt is considered too old, and is no longer collectable.
What this means is that if the debt passes beyond that defined date, the creditor can no longer collect it legally. They can no longer sue for collection or seek judgment, etc.
An important thing to know about this, however, is that if you discover you have an old debt, and let’s say you live in Michigan. The debt you find out about is 5 years old, so you contact the creditor, and they set up a payment arrangement with you. From the moment you make that first payment, the statute of limitations on that old debt re-sets, and so in
the case of Michigan, you have another six years ahead of you where the debt can now be pursued for collection. If you knew in advance that the debt was in its 5th year, you could have had it disappear if you waited another 12 months.
So knowing the Statute of Limitations is good information to have. Other important information to know is that many old debts are often bought by 3rd party collection companies for pennies on the dollar, so they can often be settled for a lot less than was originally owed. So balancing this information with the knowledge of your State’s Statute of Limitations is god information to have in your negotiating arsenal.
Another important accounting information to know, is that when a creditor settles a debt with you for less than full balance, they are required per the IRS tax codes to send you a 1099 on the difference, and you have to report it as income on your taxes. Consult with your tax advisor on this to determine if an old debt is better to let expire or settle.