What happens to my debt as time passes?
By Erica Sandberg
September 6, 2013
What happens when your bad debt has timed out but was sold to another company? Do they have the same collection rights as the original company? And if you pay them, does it clear your credit with the original company? — Linda
Get ready for a slew of laws, dates and circumstances! You see, the questions you ask may sound simple, but the answers can sound a little complicated. I will try, of course, to be as succinct and clear as possible.
There are several circumstances in which a debt can “time out:”
- When the original company sells your debt to a third party. After about 180 days of nonpayment, the financial institution you did business with gets rid of the bad debt and sells it at a discount to a collection agency.
- When it can no longer be listed on a credit report. Most negative items can be reported only for seven years, from either the date of the last payment or when the creditor charged it off (and typically sold it to a collector). The clock does not restart if it gets passed on to another collector, but it would if you contacted the collector and promised to pay.
- When you can no longer be sued. In some states, a creditor only has three years to take you to court for an unpaid debt, and in others they have up to 15. So while a debt may have “timed out” from appearing on a credit report, legal action can still be taken if you live in certain states. Oh and if you are sued, the judgment will be listed on your reports for another seven years from the date of entry. Here's a chart that details the statute of limitations by state.
Regarding collections practices, if the debt were still with the original creditor — such as a credit card issuer — state law generally governs the way the creditor is able to collect what's due. However, if the issuer sold the balance to a third-party collection agency, federal law — the Fair Debt Collection Practices Act (FDCPA) — stands.
In general, federal and state laws are similar when it comes to the behavior of those who are trying to get you to pay. For example, your state may prohibit a bank representative from calling later in the day than federal law lets a collection agency call. Still, it's a good idea to know the standards of the FDCPA, even if your debt is still with the original creditor, because most state's collection laws so closely match it.
If abuses occur (for example, if the person on the line swears at you or tells you that you're going to prison if you don't send the money), report them. File a complaint with your state's attorney general, the Federal Trade Commission and the Consumer Financial Protection Bureau (a federal consumer watchdog agency).
So that should answer the first two questions. As for the last one: When you pay a debt that has gone into collections, does the original lender get paid, and is the debt expunged from your credit report? The answers are no and no.
When a creditor sells an account, they permanently remove it from their books. The collection agency that buys it owns it. Therefore, if you were to pay, it would be to the collector, not the original lender. When you pay, though, the collector would update the status of your account to “no payment due” or “zero balance.”
Yet the fact that you missed payments and that your debt went into collections will remain on your reports until the entire seven years have run. I can offer some solace, though: A paid debt looks better than an outstanding one, and the older the entire affair becomes, the less it will matter — until it has finally fallen off your record for good.
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