About 'pay off a debt'|Paying Off Student Loan Debt is a Priority
Credit cards are sexy. These tiny pieces of magnetized plastic live quietly in your wallet, seducing you with a siren's song to spend, spend and spend some more. Yet, when you have spent a bunch of money you do not have, you may very well find yourself without the money to repay. In these cases, the bill defaults and usually sold to a collection agency. It is at this point that you need to do some strategizing before your credit record is utterly devastated. How old is the debt? According to the Fair Debt Collection and Practices Act (FDCPA) a bad or defaulted debt can only survive on a consumer's credit report for 7 years after the last missed payment. Sometimes, some borrowers choose to let the clock run out on old debt. Other borrowers find themselves in better financial health after several years and opt to pay the debt in full. This is where you need to both start and stop the process. The age of the debt matters, and the explanation about why the age matters is a little further in this article. Statute of Limitations Each state has a predetermined number of years that a debt collector can legally pursue a borrower for any debt; both written and oral in agreement. Mind you, the statute of limitations has no bearing on the credit reporting agencies,-negative items are not going anywhere for seven years no matter what. However, once the statute of limitations for your state runs out, paying off old debt does more harm than good. The Clock is Ticking As an example: Amber had a Visa card and racked up $10,000 worth of debt in a year or two. While Amber was charging it up on her Visa card, she was also using her store cards, gas cards, buying a new car and Amber bought a house. Before she knew it, she was up to her eyeballs in debt. For Amber to keep her house, she had to stop paying her Visa bill. Naturally, Visa is not a fan of that mentality, but Amber did not have a choice; so, after awhile, the Visa balance was placed in the nefarious hands of a local collection agency. Yet, Amber still could not pay. Six years go by The collection agency was still calling Amber and sending her letters. It was around this time that Amber received a promotion, and is now able to pay the debt. Wait Amber! Do not pay that Visa bill. If you do, the debt that was scheduled to "disappear" from your credit report in less than a year will now follow you for an additional seven. How is that possible? Paying any old debt resets the timer. Therefore, an old account set to expire and drop off a credit report, becomes new again. The poor repayment record of that bad debt will follow Amber for seven more years. However, if Amber found herself with the money to pay the bill within a year from the account being placed in collection, Amber should pay the bill. She may even be able to reconcile the debt, paying less than the full balance of the Visa. This will vary on a case-by-case basis, but negotiating a settlement offer can be a money saving alternative to penning a check for the full balance of a bad debt. Timing is everything...even when it comes to debt Timing is essential when selecting a debt repayment strategy. If the statute of limitations on an account has run out and if the seven-year limit is inching every closer, do not pay off old debt. However, if the debt is still under the statute of limitations and you find yourself with the means to repay, negotiating a settlement is typically the way to go. More from this Contributor: Collection Agencies and the Rinse and Repeat Strategy The 5 Most Common Credit Card Traps Debunking the Top 5 Credit Myths |
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