Just because a debt drops off a credit report doesn’t mean a debtor doesn’t owe it anymore. Just because the statute of limitations for a debt passes, doesn’t mean a creditor can’t still collect it. We’ll look at debts and how they hang around even if people think they’ve gone away or are uncollectible. It’s in the best interests of the person or company owed the money to do whatever is legally possible to get what is owed.
After seven years, an unpaid debt drops off a credit report. But it’s not gone. Sure, when someone pulls a credit report, that aged-out debt has vanished. Debts are considered uncollectible when they go 180 days old. That’s when collection agencies work their collection machinations. The letters start, the phone calls become more and more invasive, the threats, idle or not, get worse and worse and continue as long as legally possible. Collection agencies work on the badgering principle. Get tired enough of our harassment and you’ll pay up. Squeakiest wheel. When the badgering doesn’t work, the debt vanishes from the credit report after seven years.
The debt remain in full force when the statute of limitations prevails. Statutes of limitations vary state to state, and after the debt passes that time period, it’s no longer owed—officially anyway. A couple of wrinkles can make it collectible again. We’ll look at those in a minute. Six states have statutes of limitation of 10 years. Illinois, Indiana, Iowa, Kentucky, West Virginia, and Wyoming say a debt is collectible for 10 years. That means, yes, it’s dropped off the credit report after seven years, but the state says you still owe it. The largest number of states, 21, have a six-year statute of limitations, and nine give it three years, which means, of course, that the statute of limitations expires before the credit report drops the debt. To find out your state’s law, call your attorney or do a search online.
But written into laws are a couple of caveats: tolling and partial payments. Tolling is a legal term for suspended. The statute of limitations can be tolled for several reasons. First, the debtor is in jail. You can’t collect a debt from a prisoner, so the statute of limitations time waits until the prisoner re-enters society. So if an unpaid debt is a year old and the debtor goes to jail, the counting stops until he’s out. Thus, if the statute of limitations in that state is six years and he’s in jail for six years, the counting doesn’t start again until the prison sentence is over. That means the state says the statute of limitations applies for one year plus six years plus six more years, or 13 years.
Second, the counting stops when someone leaves the state where the debt is owed. Same drill as when someone is in jail. Thus, if an unpaid debt is a year old and the debtor moves from Wyoming (10 years) to California (3 years) and lives in California for 10 years then moves back to Wyoming, the counting starts where it left off. That’s one year plus 10 years plus nine years, or 20 years. What a surprise to move back and the letters and phone calls start again.
Insanity also stops the count, as does being a minor. Once the debtor is no longer insane or a minor turns 18, the clock renews or begins.
Covid-19 may also toll a debt. Some states have stopped the count until the pandemic is judged to be over. How they will decide when the pandemic ends varies state to state, so asking an attorney how it affects your delinquent debt might be worthwhile.
Once all the permutations get satisfied, the debt becomes “time-barred.” That means the collector can’t sue for payment but still has other options. They can still contact a debtor about the debt. The Federal Trade Commission says that if a collector contacts a debtor about a time-barred debt and the debtor asks if the debt is time-barred, “the law requires that his answer to truthful.” The FTC suggests three possible responses to the debt. One, pay nothing on the debt, two pay off the debt, or three make a partial payment. However, a partial payment revives the debt and the counting begins as if it were a new debt. “It also means the collector can sue you to collect the full amount of the debt,” reports the FTC. It also shows up on the credit report again.
The FTC further warns, if a collector sues, the debtor had best go to court to show that the debt is time-barred. Otherwise, the collector gets a default judgment and it’s as if the debtor agreed to pay the time-barred debt.
For a creditor who figures never to get paid, there’s a way for that creditor to give some sleepless nights to a debtor, even though the creditor won’t get paid. The IRS can be the collection agency by filing a Form 1099-C, Forgiveness of Debt. Investopedia explains, “Form 1099-C is used to report a canceled or forgiven debt of $600 or more. The lender submits the form to the IRS and to the borrower, who uses the form to report the canceled debt on his or her income tax return.” Many debtors won’t know what to do with the form, but the IRS considers the forgiven amount to be income, income that must be reported. Fail to report it, and the IRS investigates. It doesn’t matter if the debt is time-barred, off a credit report or anything, save a few exceptions listed on the IRS’s instructions for using the form. The only time the debt could appear on a credit report is if the IRS prosecutes or gets a judgment for a debtor’s failure to report income.
The important consideration is that it is rare for any time-barred debt and debt that’s dropped off a credit report, to appear when a landlord or employer pulls credit on an applicant. Thinking creatively about unexplained discrepancies on an application and credit report could protect against getting stuck with someone who hasn’t paid, or doesn’t or won’t pay bills.
By Robert L. Cain
