Dear Liz: I am astonished you would counsel someone to try to negotiate a settlement of credit card debts from 2003 that were written off in 2007. Why? The statute of limitations is no more than six years in California and can be much shorter in many other states. If a reader of your column begins to negotiate over debts that are that old, they risk creating a new debt or resurrecting the old one, thereby becoming liable for repayment of a debt that is not collectible. When there is a stale claim, the response to the collection agency needs to be: “This is a stale claim, the statute of limitations has expired. I do not owe this debt to you or to my original creditor. Please stop contacting me.”
Answer: Statutes of limitations limit how long a creditor is supposed to be able to sue a borrower in court. The statutes vary by state and the type of debt, but range from three to 15 years. The expiration of that limit doesn’t make the debt somehow disappear or prohibit a creditor from continuing collection efforts.
Many people feel a moral obligation to pay their debts when they can. Others want to negotiate to remove collections from their credit reports in return for payment. (Time limits for reporting negative items on credit reports are different from state statutes of limitations; in most cases, the limit is seven years and 180 days from the time the account first went delinquent.) If someone wants to get a mortgage, for example, a lender may require payment of an open collections account regardless of the state statute of limitations.
You’re correct that anyone who wants to negotiate a settlement of an old debt should be aware of the statute of limitations affecting that debt. If the limitation hasn’t passed, the borrower needs to be aware of the danger of getting sued. If the limitation has passed, the borrower needs to avoid restarting it by making a small payment. Instead, the best approach is to settle for a lump sum and to get the collector’s assurance, in advance and in writing, that the remaining debt will be forgiven rather than resold.
By the time this debt gets to a bill collector, it’s in “Third Party Collections”, also known as what Liz has called “zombie collectors.” They pay so little for the debt that they can make a profit on virtually any settlement. I’ve been sued by a “zombie collector” and won, because they had no case. If you do make a settlement offer, make it in writing, and get the acceptance in writing. Then be sure to get a “Release of Claim” from the collector, as well as a “Confidentiality Agreement.” This will keep the collector from releasing the debt information to credit reporting agencies. If they violate this agreement, then the collector can be sued.
People should also be aware that things like student loans and tax liens are very different animals from ordinary private debt. In many of those cases, negotiating a settlement is a much more difficult process. For instance, a collections agency tasked with collecting a government-backed student loan may have to adhere to a very restrictive set of guidelines when negotiating a settlement; negotiating tactics that would work in other situations may not be appropriate for a case like that.
That’s a really good point, Andy. Anyone thinking of trying to settle a student loan should read Mark Kantrowitz’s advice on FinAid.org: http://www.finaid.org/loans/settlements.phtml. With tax liens, I’d hire an attorney who specializes in “tax controversy” (that is, fights with the IRS) rather than trying a DIY approach.