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Old credit card debt can come back to haunt you

By Ben Woolsey

Credit card debt can sometimes be like a bad penny that keeps turning up. Obviously, the only wise course of action is to pay bills promptly and never get oneself overextended. But for those who have found themselves drowning in credit card debt with no way out, this hasn't always been an option.

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In cases where people have been unable to repay a credit card balance, the lending bank normally is forced to "charge off" the amount owed. The banks will usually do this after a period of time, such as after three to four months of delinquency. But this doesn't mean that the debt has been erased, by any means. It is more of an interim accounting measure on the part of the bank to reclassify the funds that appear doubtful in terms of repayment.

Credit card issuers will normally try to collect delinquent credit card balances long after the money owed has been reclassified on their books as "charged off." If these collection efforts prove to be fruitless they will sometimes settle with the card holder for some amount less than is owed. But more often they will sell delinquent balances to third party collection companies for pennies on the dollar. Banks consider this type of arrangement better than nothing in terms of repayment. And, it is these third party collectors that consumers must be wary of because they often are much more aggressive in terms of collecting payment from borrowers.

Declaring bankruptcy can normally protect a person from original creditors, but this isn't always the case if the delinquent receivables have been sold to another creditor, such as a collection agency. Consumers are finding out the hard way that past financial difficulty or indiscretion is not actually forgiven or evaded, but is now coming back to insist on resolution. These situations will only become more common as recently enacted bankruptcy reform will make it more difficult to consumers to avoid eventual debt repayment.

In favor of consumers who have declared bankruptcy is a statute of limitations after which a debt can not be legally collected, which is seven years from the date of charge-off. If collection agencies come after someone beyond this period then consumers can take legal action to have the collections stopped.

Another tactic employed by aggressive collection agencies involves the threat of reporting the card holder to the credit reporting agencies unless the amount owed is repaid. For those who have come out of bankruptcy and have rebuilt their credit, this can be a very effective ploy. But, if more than seven years have transpired since the original due date this tactic can be countered with legal action, since the statute of limitations also applies to credit bureau reporting.

What should a person do if confronted with aggressive collection efforts for a debt that should have been erased years ago? First, determine if the debt is legitimate. Sometimes collection agencies have inaccurate information and use intimidation to drive their revenue despite the consumer not recognizing the origin of the amount to be repaid.

Second, if the amount is actually owed, find out how long it has been since the delinquency clock started. If beyond seven years, it is up to the consumer whether to settle up with the collection agency, since by law the clock has run out on any legal obligations.

The bottom line with credit card debt is to avoid it if possible. But, if a person finds themselves consumed by card debt (even very old credit card debt), they should use every method possible to dig themselves out of the hole. Methods include stopping new credit card spending, developing a strict budget and transferring balances to a 0 percent APR credit card (if the person's credit situation will allow them to qualify) or a low interest balance transfer credit card. No hole is too deep to get out of, so with a strong dose of self discipline and a plan of attack, a new financial future can be on the horizon.

Published: May 3, 2006


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