How to Handle Old Debt and Debt Collection Agencies

January 25, 2012

With identity theft and fraud being such common threats, it’s important to exercise caution in every facet of your financial life. You likely know not to give out your social security number to anyone you don’t trust, nor should you ever invest in any get-rich-quick work or investment schemes. The list goes on.

If you have debt issues, you may be further at risk of having your identity or financial information stolen. You may also be pressed for payment for a debt for which you are, in fact, not liable, despite what a debt collection agency may say. If you have any old debt or are faced with the hassle of dealing with a debt collection agency, there are a number of ways you can deal with the situation.

Monitor Your Credit

Monitoring your credit is very important to not only avoid accruing debt, but to check and see if you have any old outstanding debt that is weighing you down. Be sure to review your credit report and continue to check it on a regular basis.

Forget about the companies that want to charge you a fee for this service – you can request a free copy of your report once per year from all three credit reporting agencies via AnnualCreditReport.com. If you have any debt from the past seven years, this is where you will find it. Any debt older than seven years should not appear on your credit report.

Know the Law

It is important to realize that there is a statute of limitations on old debt, which varies by state. Usually, it ranges from three to six years.

Next, understand that if you do have old debt, the collection agency must send you a written notice explaining the amount of money you owe and to whom. If you respond to them within 30 days to dispute the debt, they cannot contact you again until they verify the debt. Send your response via certified mail and keep copies of all correspondence.

Know What Debt Collection Agencies Cannot Do

Here is a list of tactics that debt collectors are not allowed to employ:

  • Call before 8am or after 9pm
  • Use obscene language
  • Call you at your place of employment after you ask them to stop
  • Falsely claim to be someone else (such as a lawyer or someone associated with law enforcement)
  • Threaten to have you arrested
  • Continue to harass you after you’ve asked them to stop
  • Talk with friends, family, or professional references concerning the debt – they can only talk to you or your lawyer
  • Threaten you with wage garnishments unless they have the authority to do so (check with your state guidelines)
  • Threaten to sue, unless it is allowed in your state – in some states, suing is not an option

Hypothetical Situations

Here are four hypothetical debt situations and how to handle them:

  • Debt that is older than seven years and outside the statute of limitations: There is no liability here whatsoever. Due to the statute of limitations, no collection agency can come after you for payment, and it should no longer be included on your credit report. If it is, dispute it and get it removed.
  • Debt that occurred within the last seven years but is outside the statue of limitations: You may want to consider settling this debt to have it removed from your credit report. However, before you pay the entire amount, consider negotiating a settlement with the collection agency by offering to pay back a percentage of the total owed. However, realize that if you opt for a settlement (rather than paying the debt in full) this will more significantly hurt your credit score.
  • Debt that is older than seven years but is not outside the state of limitations: This is a very rare occurrence. Such a debt will no longer have an affect on your credit rating, but you still are exposed regarding collection agencies. Use your best judgment here as to whether you should pay off the debt in full or via a settlement.
  • Debt that occurred within the last seven years and is not outside the statute of limitations: Pay this debt in its entirety if you have the ability to do so. It is damaging your credit score, and collection agencies are legally authorized to come after you for it.

Additional Tips

If you are ever contacted by a collection agency, say as little as possible over the phone, and just hang up if anything makes you uncomfortable. Never agree to pay back the debt (even verbally), and do not acknowledge the validity of the debt over the phone. If you do either one of these, it could actually reactivate the debt and put you on the hook for the amount owed.

If you do get taken to court over an old debt, you must show up in court, regardless of the validity of the debt. Not showing up could result in a claim against you.

Finally, keep in mind that older unpaid debt cannot hurt you nearly as much as new or recent debt. If you have debt issues, focus on the more recent ones.

Final Thoughts

No matter the age of your debt, there is always the moral obligation to pay it back. You can address this issue as you wish; however, I would not suggest that you avoid paying back any valid debts in your life just because there is a loophole. But remember that there are many predatory collection agencies out there that may come after you for “zombie debt” that you do not technically owe.

Do yourself a favor: If faced with the issue of old debt, educate yourself. Know the ins and outs of the entire scenario before making any final decision, and do what’s best for you.

Do you have any old debt horror stories? What are your tips for dealing with collection agencies?

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