A common question asked about collection agencies is how long they have to collect on a debt. The simple answer is they can try to collect as long as they want to. After that answer, the truth get a lot more complicated.

collecting debt

The Fair Credit Reporting Act, which was enacted in 1970 and last revised in 2004, has rules for how long a bad debt can stay on a credit report. The statute of limitations for that is seven years. Afterwards, a collection agency could decide to still try to collect from the debtor, but they have no power behind them to make a debtor pay them anything. Almost no collection agencies will contact debtors after this time limit, because it’s a waste of their time.

The starting time of a bad debt on a credit report begins when the original creditor does what’s known as a charge-off on the true amount of the debt. This is the amount the debtor owed, minus late fees and finance charges, when payments stopped. Therefore, if the debt occurred in October 2001, it will be removed from a credit report in October 2008.

There is a caveat to add here. If a debtor has agreed to a payment arrangement with a collection agency, makes at least one payment, then at some point defaults, the collection agency can report on that, and the new time period starts when the debtor defaults on the payment agreement.

Filing Lawsuits

A way for collection agencies to get around that statute is to file a lawsuit against you in state court. If they win, then even though the original default action won’t show up on a credit report anymore, the debtor will have a legal judgment showing up instead. On this front, there are two different statutes of limitations a debtor has to deal with.

The first is each state’s statute of limitations on how long a creditor has to file a lawsuit against you. There are four categories a lawsuit can be filed under, and in some states, the amount of time a creditor has to file under each of these categories is different. Those four categories are: Oral Agreements; Written Contracts; Promissory Notes; and Open Accounts.

The length of time a creditor can sue you can be drastically different from state to state. For instance, in California, creditors only have 2 years to sue you on an oral agreement, whereas in Rhode Island, creditors have up to 15 years. Credit card balances are considered as Open Accounts, and the range there runs in many states from three years to, once again, Rhode Island, which goes for 10 years. The average for all states is just under 5 years.

The second is each state’s statute of limitations for how long a creditor can collect on a judgment they win against a debtor. Creditors can also attempt to collect on interest accrued on the judgment amount. Many states take this seriously, and set the time limit as high as 20 years. The lowest time limit is in Washington D.C., at 3 years. Michigan has the highest interest rate, at 20% for a period of 10 years.

Know Your Rights

Debtors need to know their rights to protect themselves. They need to get a credit report any time a creditor sends them notice that there’s an intention to collect a debt. On the credit report, they need to look at the amount that was charged off, as well as the date it was charged off. Collection agencies will try to get them to pay on the entire amount the original creditor stated was the balance when the debtor stopped paying, but that figure includes late fees and interest. Charge-off amounts are always lower, and debtors who want to enter arrangements have the right to start negotiations at that amount.

If the amount owed is less than $2,000, odds are low that a debtor will be sued, as it’s not cost effective for a collection agency to go after that amount. If it’s near the statute of limitations, a debtor can pretty much ignore collection calls and letters, unless they get a letter stating an intention to sue.

Finally, debtors have the right to request proof that the balance is owed. There are many unscrupulous collection agencies that are going after debtors who don’t really owe those balances, but if requested the collection agency can’t contact the debtor until proof has been given. Since most creditors don’t keep records themselves longer than 4 years, except in extreme situations, it might be enough to have the collection agency leave a debtor alone.

Don’t Fear Reprisals

Collection agencies only have three things they can legally to do debtors: they can make phone calls; they can send letters; and they can file lawsuits. They can’t do anything to a debtor unless they sue and win a judgment. If you wish to try, you can negotiate with them in good faith. And if they step over the line, you can report them to your state’s Attorney General. A debt may be owed, but collection agencies have to follow the rules.

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