The idea that if debt remains unpaid for 7 years it will simply disappear is a myth in the United States. If you’re under the impression that your unpaid debts will disappear after a 7 year period, you’re certainly not alone.
Written by Attorney Kassandra Kuehl.
Updated August 11, 2020
There are times when misinformation is repeated so consistently over time that the misinformation becomes a myth. A myth is defined as a widely held but false belief or idea. The idea that if debt remains unpaid for 7 years it will simply disappear is a myth in the United States. If you’re under the impression that your unpaid debts will disappear after a 7 year period, you’re certainly not alone. However, it’s critically important to learn about what really happens to unpaid debt over time so that you don’t make decisions about your personal finance situation based on misinformation.
What Happens When You Default on a Debt?
When you fail to pay a credit card bill, medical debt, student loan, mortgage, car loan, or other debt for more than a few months in a row, you risk defaulting on that debt. When you default on a debt, it doesn’t go away. The consequences of default include negative reporting on your credit report and a possible dip in your credit score. The debt will likely be sent to a debt collector or collection agency. Depending on which type of debt you’re defaulting on, you could have your property repossessed; which is what is likely to happen if you default on a car loan or other secured debt. Additionally, legal action could be filed against you if a creditor chooses to hold you legally responsible for the unpaid balance on your account.
Creditors often hand their debts off to a collections agency if an account is more than a few months past due. This arrangement can be confusing, as consumers may be understandably left wondering why someone other than their creditor is calling to demand repayment of their credit card debt or personal loan. An example of this kind of debt collection arrangement is Midland Funding, which is a collection agency, calling overdue credit card account holders on behalf of Discover Card.
If your old debt is now being managed by a collection company, you’ll start receiving a lot of phone calls and urgent letters soon, if you’re not facing this reality already. Debt collectors sometimes purchase collection accounts outright. In doing so, they become empowered to sue debtors for the full amount of the past due account, plus fees and penalties. If you’re sued by a debt collector, you’ll be served with a summons and complaint. If the company that now owns your debt is particularly aggressive, they may try to garnish your wages or place a levy on your bank account.
Fair Debt Collection Practices Act
Collection agencies are notoriously aggressive in their attempts to collect “bad debt.” However, consumers are protected by law from exposure to certain collections tactics. The federal Fair Debt Collections Practices Act specifically restricts collection agencies from calling debtors at unreasonable hours, taking collection-related action without first notifying debtors, and asking non-parties certain questions. If creditors violate these regulations, they may be sued by the debtors they are harassing.
What if I am Pursued for an Old Debt?
If a debt collector tries to collect a particularly old debt, they are limited by some additional regulations. This is not to say that old debt “goes away” and can’t necessarily be collected if it is several years old. However, collection agencies are legally limited in the ways they can approach old debt accounts.
Statute of Limitations
Almost all civil actions in the United States are subject to statutes of limitations. In the context of debt collection, these legal restrictions limit the time period during which a creditor, collections agency, or individual debt collector may attempt to collect missed payments or bad debts. Every state sets its own statutes of limitations for the collection of nonpayment. Most states set their statutes of limitations somewhere between 3 and 10 years. However, these statutes of limitation may be “paused” by tolling events. A tolling event is some factor, outlined by each state’s statute, that can suspend the ordinary time limit permitted by statutes of limitations. For example, if an old account hasn’t been paid for 5 years but then a debtor starts making payments again, that may serve as a tolling event that either suspends or resets the statute of limitations for collection actions related to that debt.
Note that statute of limitation violations are usually argued as defenses to debt collection and may not generally be argued as an affirmative action raised by a debtor before a lawsuit is filed. However, you’ll want to check your state statutes if you’re interested in bringing a creditor harassment action inspired by a statute of limitations violation. State laws vary on their treatment of affirmative actions brought by debtors regarding this issue.
Statutes of limitations do limit the ability of creditors and collections agencies to take action against a debtor for outstanding credit card balances and personal loans. However, negative information affecting an individual’s credit history may impact that debtor’s FICO score even after the statute of limitations has run on a specific debt. Each of the three major credit bureaus (Experian, Transunion, and Equifax) may keep negative items on your credit report for years. This is one of the many reasons why it’s important toreview your credit report from each major credit bureau annually. By understanding what your credit history looks like to potential lenders, landlords, and employers, you can make informed decisions about the kinds of loans, housing, and jobs for which you choose to apply. This information can also help you to make sound debt management decisions when formulating a credit repair strategy.
Fair Credit Reporting Act
Credit reporting related standards for old debt are regulated by the Fair Credit Reporting Act and other statutes that regulate the actions of credit bureaus. Generally speaking, charge offs and negative information may generally remain on a credit report for 7 years, although legal judgments may remain on a credit report for much longer. Significantly old debt may remain on a credit report longer than anticipated when it is sold to a debt buyer or collection agency. Therefore, don’t be surprised if you see old medical bills or credit card debts on your credit report long after they first had a negative impact on your credit history if they were sold to a debt collector somewhere along the line.
Note that if you’ve paid a credit card debt or other overdue account and it is still listed in your credit report(s) at this time as negative information, you will need to dispute that debt with the collection agency and report the misinformation to the credit bureau so that it can be corrected. Each of the major credit reporting agencies have a dispute procedure that you’ll need to follow when correcting misinformation. Unfortunately, old debts are harder to trace than new ones are and the dispute process can be cumbersome. However, it is generally worth your time and energy to dispute misinformation on your credit report, as doing so will help to improve your credit history and may raise your credit score.
Will a Bankruptcy Case Address Old Debt?
If you have more than a single outstanding debt weighing you down, it may be less expensive and burdensome to file for a Chapter 7 bankruptcy or a Chapter 13 bankruptcy rather than battling with credit card companies, other unsecured creditors and collection agencies to resolve every outstanding balance. A Chapter 13 bankruptcy will allow you to restructure your debt so that you can make a manageable 3-5 year payment plan to address your overdue balances. By contrast, filing for Chapter 7 bankruptcy may allow you to erase your eligible debts in as little as 90 days. Utilizing bankruptcy as a debt management solution allows you to obtain a fresh start so that you can move on with your life instead of endlessly haggling over old debts years after you’ve made your last payment. Once your bankruptcy case is complete, you’ll simply need to keep on top of your finances and monitor your credit report annually to ensure its accuracy.
Old debts don’t simply disappear when you stop paying them. It’s important to confront your debt by mounting a collection defense, an FCRA action, or by utilizing a debt relief solution such as entering into a debt management plan or filing for bankruptcy. By being as proactive as possible when it comes to your debt, you’ll place yourself in the best possible position to reduce immediate collections-related stressors and to build a strong financial future.