Once the statute of limitations for a debt has passed, it becomes uncollectible. But in the meantime, it can still do lotsof financial damage.
We all know that diamonds are forever, but what about unpaid debts? Do those come with an expiration date? While paying back the debts you owe is super important, sometimes circ*mstances make it difficult. But do debts ever really expire?
The completely accurate answer is: No, they don't. But the more realistic answer is 'sort of.'
When do unpaid debts go to collections?
When you fail to pay back a debt (with loans, this is referred to as "defaulting"), it gets sent to collections. Sometimes this is a separate department at the lender itself, but most of the time, the lender sells the debt to a collections agency.
The timeline for debts going to collections can differ for each creditor, type of debt, and specific situation. To avoid having your debts go to collections, staying in touch with your creditors and working out a payment plan or getting help if you're having trouble making payments is best.
When you've been sent to collections, the agency will usually try to contact you and demand payment. They may do so by phone, email, regular mail, or text message.
Third-party debt collection is mainly governed by the Fair Debt Collection Practices Act (FDCPA). Check out our blog post: What Debt Collectors Can and Can't Do to learn more about legal and illegal debt collection practices.
How do collections affect your credit?
Collections for unpaid debt can have a significant impact on your credit and lead to various consequences. Here's how unpaid debt might affect your credit and impact you in other ways:
- Lower credit score: When a debt goes into collections, it is reported to the credit bureaus and appears on your credit report as a negative item. This can cause a substantial drop in your credit score.
- Difficulty obtaining new credit: A lower credit score resulting from going to collections can make it challenging to qualify for new credit, such as credit cards, loans, or mortgages. Lenders may view you as a higher risk borrower and may deny your application.
- Impact on renting or employment: Landlords and employers often check credit reports as part of their screening process. A collection account on your credit report might be seen as a red flag, making it harder for you to rent an apartment.
- Increased interest rates: If you do manage to obtain new credit, the presence of a collection account on your credit report may result in higher interest rates, as lenders may perceive you as a higher risk borrower.
Is medical debt treated differently?
Yes and no. Medical debt is a bit different from other types of debt, and credit bureaus recognize that it's often the result of unexpected events and expenses.
When it comes to medical debt, credit reporting agencies generally give you a bit more leeway. For instance, medical collections usually have a 180-day grace period before they're reported to the credit bureaus. This grace period is designed to give you some time to resolve any disputes or issues with your insurance company or the medical provider, or to set up a payment plan, if needed.
Credit scoring models have also evolved to treat medical debt differently from other types of debt. For example, the FICO Score 9 and VantageScore 4.0 models, which are newer credit scoring models, weigh medical collections less heavily than non-medical collections. This means that medical debt in collections will likely have a smaller impact on your credit score compared to other types of debt, depending on the credit scoring model used by lenders.
However, once the grace period for an unpaid medical debt has passed, it will be sent to collections, reported to the credit bureaus, and appear as a negative item on your credit report. For a deeper dive into the management of medical debts, check out our blog post: Does Medical Debt Really Go Away After Seven Years?
How long do collections stay on your credit report?
When you have a debt that goes into collections, it appears as a negative item on your credit report and can stick around for a while.
In the United States, according to the Fair Credit Reporting Act (FCRA), a collection account can remain on your credit report for up to 7 years from the date of the first delinquency. That's the date when you first missed a payment and didn't catch up on it. However, state nuances also play a role in managing collection accounts, particularly regarding the statute of limitations.
While the FCRA governs credit reporting on a federal level, the statute of limitations for collecting a debt is determined by state law.
What is the statute of limitations on debt?
The statute of limitations on personal debt is a legal rule that sets a time limit for creditors to take legal action to collect the money you owe them. It's in place to make sure the debt collection process happens within a reasonable time frame.
Also, the type of debt you have plays a role in determining the statute of limitations. Generally, personal debt can be divided into a few categories:
- Oral agreements are verbal contracts between you and the creditor, and they usually have the shortest statute of limitations.
- Written contracts are formal agreements, like a loan document or a credit card contract. The statute of limitations for written contracts is typically longer than oral agreements.
- Promissory notes are promises to pay a specific amount, usually with interest, at a set time. Promissory notes often have a longer statute of limitations as well.
- Open-ended accounts are revolving lines of credit, like credit cards. The statute of limitations for open-ended accounts can vary depending on the state.
And now, here's where it gets entertaining. There are four different types of contracts, each of which has statutes of limitation that vary across all 50 states.
Is the statute of limitations a "get out of jail free" card for debt?
In general, it could be more helpful to consider the statute of limitations on a given debt as a finish line you must cross. It is there to protect people from getting taken advantage of by predatory collectors who will dredge up old loans or medical bills and intimidate people into paying them.
If you are having trouble paying back a loan, credit card, or other debt, you should talk to a credit counselor or even contact your creditors directly to try and negotiate more favorable terms.
Don't try to outlast your debts. Instead, you should face them head-on and take responsibility for them. In the long run, you'll be much better for it.
