The rules about when to pay off old debts are confusing. But personal finance expert David Bach only helped to muddy the waters in his recent appearance on the Today show. To clear the mud and get the facts, we spoke with Credit.com’s own credit advisor, Gerri Detweiler.
In the segment, “Claudette” from Texas wrote that she’d received letters from several debt collectors regarding debts that were over five years old. The collectors offered to let her settle the cases by paying just 10% of the original debt.
“It sounds like it would be a good idea,” Claudette wrote. “Should I do it?”
Bach eventually got to the correct answer: No, Claudette, you shouldn’t. But along the way he made things so confusing, and got enough things wrong, that viewers following his advice could do terrible – and unnecessary – damage to their finances.
At the beginning of his response, Bach says, “The credit card company already wrote it off, and it’s showing on your credit report as a charge off. So it’s already hurt your credit report.”
So far, so good. But then Bach goes off the rails, Detweiler says. He tells Claudette to go to the Federal Trade Commission’s website page for “time-barred debts.”
Doing so takes people here. But that doesn’t help, because time-barred debts are covered by state laws, not federal ones. In Texas, where Claudette lives, creditors get four years from the date you take out a loan to sue you if you fail to pay. In Kentucky, they can sue for up to 15 years. (See Credit.com’s handy-dandy summary, here.)
So if Claudette pays off the debt, Bach says, she’s wasting money, because the uncollected debt fell off her credit report after four years.
“In Texas, it’s already fallen off,” Bach says.
Actually no, it hasn’t. Here’s the problem: Those state laws have nothing to do with your credit report, which is governed by the federal Fair Credit Reporting Act.
“He’s mixing two different things here,” Detweiler says.
According to the federal law, unpaid debts stay on your credit report for seven years and 180 days from the date you fall behind on payments. Claudette can pay the debt collectors’ 10% if she wants to. But it won’t change the fact that, if she stopped making payment five years ago, she’ll still have those unpaid bills fouling up her credit report for another two years and 180 days.
She could move to Alaska, and that wouldn’t change.
“It doesn’t matter whether you pay it, whether you settle it or whether you don’t pay it,” Detweiler says. “It’s still negative. It doesn’t change your credit history.”
The question is not whether Claudette can improve her credit by paying part of the old debt — she can’t.
The real question is whether the debt collectors can sue her – they can’t. In some states, companies that try to collect on debts after the statute of limitations has run out can get sued for breaking the law. In other states, if the debtor successfully brings the case to court, the collection attempt will be struck down because the statute of limitations has run out.
Either way, there’s nothing for Claudette to do. The debt collectors can’t sue her, because she’s already passed the time limit in Texas. And she can’t erase the debt from her credit report yet. So unless she feels enormous guilt over not repaying a debt, and unless she has the best money to pay it off now, the best thing for Claudette to do now is just wait it out.
Bach does eventually come around to saying exactly this. But even then, he gets it wrong, Detweiler says.
“If you go and pay it right now,” Bach says, “it will in fact appear back on your credit report.”
In fact, no it won’t. Paying the 10% now could re-start the statute of limitations in your state. In Claudette’s case, that could open her up the possibility of more debt collectors trying to get her to pay the full amount for another four years under Texas law.
But even if she chooses to pay the 10%, the damage to Claudette’s credit report is already done, and it won’t disappear until the 7 years and 180 days is up.
“Paying a collection account does not affect how long it’s reported on your credit report,” Detweiler says.
So Bach eventually gave Claudette the right answer: Don’t pay the debt collectors a nickel. But for anybody who was watching, don’t get confused like Bach did. Bill collectors are governed by state law, which means any deal they offer has no effect on your credit.
“It could still be on your credit report even if it’s outside the statute of limitations,” Detweiler says.