Millions of people have collections on their credit reports. They can often surface even years after an unpaid debt occurs.
This is hardly an unusual situation.
A collection account suddenly shows up on your credit report, and you’re completely bewildered as to why.
Once a debt goes unpaid, it can go through a long and twisted road before it reappears. That’s what creates the surprise.
But let’s say that you’ve become financially stable since the original nonpayment, and you have an old debt on your credit report.
Should you pay it off, especially if it’s with a collection agency?
In most cases, the answer will be ‘yes’ – at least if you’re looking to preserve and improve your credit score.
Don’t Call the Debt Collections Agency Yet
It may be that you become aware of a collection account either by receiving a phone call or a letter from a collection agency.
If you do, avoid the human inclination to respond or to provide additional information. When collection agencies make contact with consumers, it’s often a fishing trip.
They may be trying to tie a debt to you that isn’t yours, or to convince you to pay a very old debt that’s no longer legally enforceable.
If you receive a letter, don’t respond immediately.
And if it’s a phone call, provide no information whatsoever.
Before contacting the collection agency, first do your homework. You’ll need to verify for yourself that the debt is, in fact, your obligation. If it’s not, but you in any way confirm to the collection agency that it might be, you may be legally obligating yourself to make payment.
Be aware that any time a collection agency calls you the phone conversation is almost certainly recorded.
That recording can be used in court, so be very careful what you admit or agree to.
Pull Your Credit Report to Verify the Debt
Your first step should be to get a copy of your credit report.
See if the information provided by the collection agency matches any obligations on the report. If it doesn’t, then contact the collection agency and require that they document the debt, as well as provide evidence that it’s yours.
An obligation isn’t yours simply because someone else – particularly a collection agency – says that it is. If it’s not on your credit report, put the burden of proof on the collection agency.
What if it turns out the debt is yours?
Follow the next few steps.
Check Statute of Limitations on Collection Accounts
Consumers often believe that a collection account will automatically disappear after seven years.
But that’s only partially true.
The collection will disappear from your credit report after seven years, but that doesn’t necessarily mean it will disappear from your life.
Contrary to popular belief, there is no federal statute of limitations on collection accounts.
The Fair Debt Collection Practices Act (FDCPA) is a federal law that sets limits on the strategies and tactics collection agencies can use to collect a debt.
It also spells out debtor’s rights against collection agencies under federal law, and it can be used to limit or completely stop certain actions by the agencies. But it does not set a limit on the collectability of debts.
Instead, the statute of limitations on collection accounts is set on a state-by-state basis.
It can range anywhere from as few as three years to as many as 10.
For example, the statute of limitations is just three years in Alaska, Delaware, the District of Columbia, Maryland, New Hampshire, North Carolina and South Carolina.
But it’s 10 years in Illinois, Indiana, Iowa, Kentucky, Louisiana, Missouri, Rhode Island, West Virginia and Wyoming.
It’s between four and six years in most other states.
But you should be aware that a creditor can still contact you over an unpaid debt even if the statute of limitations has been exceeded, and they can no longer bring legal action against you for the debt.
Never ignore the threat of a lawsuit by a creditor
This is a point that needs to be emphasized.
If a creditor brings a legal action against you for an unpaid debt at any point in the process, you must respond with a legal defense.
If you don’t, the creditor will win a summary judgment against you that will remain open until it’s fully paid. You can’t simply cite the statute of limitations, then ignore the action.
In most cases, the statute of limitations set in each state limits the amount of time a creditor has to bring a lawsuit against you for an unpaid debt. The statute usually begins when you first fail to make a payment on the debt.
Once the statute of limitations has expired, the debt is considered to be time-barred.
However, even if the statute of limitations on a debt has been exceeded, the creditor may still threaten you with legal action.
To prevent that, you’ll need to prove the age of the debt to invoke the time-barred defense. You’ll need to do that legally to have the collection set aside. If you don’t, you’ll be presumed to have waived your right to the time-barred defense.
Never make a payment on a time-barred collection (unless you plan to pay in full)
If the statute of limitations on a collection account expires, under the laws in some states either making a payment or acknowledging your debt in writing can restart the statute of limitations.
For example, let’s say the statute of limitations in your state is six years. The debt is now considered time-barred. But in year seven, the collection agency contacts you and convinces you to make a partial payment on your debt.
Once you make that payment, the statute of limitations will restart, and the collection agency will be once again able to bring legal action against you for another six years.
If you are persuaded to make a payment on a collection account that’s exceeded the statute of limitations in your state, make payment in full.
Otherwise, make no payment at all.
Consider Your Options – And You Do Have Options
If you have an old collection debt and you’re not sure how to handle it, get evaluate your options..
If the account hasn’t yet exceeded the statute of limitations in your state, and you need to pay it off, pursue a debt settlement if you can’t pay the full balance.
This is an arrangement in which you offer to pay less than the full amount owed, and the creditor agrees to accept the partial payment in full satisfaction of the debt.
If you do decide to go the debt settlement route, be sure to get a signed letter from the collection agency agreeing the partial payment will fully satisfy the debt and release you from further obligation.
If you’re uncomfortable requesting such a letter, you’ll need to get professional help negotiating the arrangement.
Again, this can be done with either a credit counselor or a credit attorney.
This is a strategy sometimes advocated to have a collection account completely removed from your credit report. You request removal or the collection entry from your credit report entirely if you pay off the debt in full.
While this practice sounds good to a consumer who knows little about credit reporting, it has the potential to go horribly wrong.
If you legitimately owe a debt, the collection agency is not required by law to remove the entry from your credit report simply because you’ve paid the debt in full.
The collection agency may agree to a pay-for-delete arrangement, collect the full amount owed, then fail to remove the entry from your credit report.
And, they’ll have no legal obligation to do so.
What is the Impact on Your Credit Score?
If a collection account exceeds the statute of limitations for legal action in your state, and it falls off your credit report after seven years, it should improve your credit score.
However, don’t be surprised if the improvement isn’t substantial.
Old and particularly small collection accounts have only a minimal impact on your credit score in the first place.
Once they disappear from the report, your score may rise by only a few points.
Should You Pay Off Old Collections?
If you have a collection account that’s less than seven years old, you should still pay it off if it’s within the statute of limitations.
First, a creditor can bring legal action against you, including garnishing your salary or your bank account, at least until the statute of limitations expires.
Second, a paid collection has less of a negative impact on your credit score than an unpaid one.
If a collection account is a debt you legitimately owe, you do have a moral obligation to pay it off, even if the statute of limitations has expired and you no longer have a legal obligation.
Paying off the collection account, regardless of its age or legal status, will avoid any possibility of complications with borrowing in the future.
But since it is a collection account, make sure you retain evidence of the payoff, as well as a letter from the collector promising to report the payoff to all three major credit bureaus.
You should also plan to pull your credit report at least 30 days after the account has been paid to make sure the payoff has been reported.
If not, you’ll need to follow up with the collection agency.
If they’re not cooperative in updating the information (they often aren’t), you’ll have the collection agency letter and evidence of the payoff. You can send copies to each of the three major credit bureaus, and they’ll update the information directly.
Never assume a debt is yours simply because a collection agency says so.
Follow the steps above, paying particular attention to the laws in your state regarding the statute of limitations on debt. If the debt is still within the statute of limitations, either pay it off or settle it, to prevent complicated legal entanglements.
And if it’s outside the statute of limitations, it’s between you and your conscience as to how to handle it.