Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006).
Dear To Her Credit,
I have an old credit card debt from 2002. When the collector called today, I told him the debt was too old to collect. (I live in Oklahoma.)
He replied that if he wanted, he could send a form to the IRS and then I would have to pay taxes on the money owed. Is that true? What good is a limit on the time a collector can come after me if I have to pay tax on the amount of the old debt anyway? -- Judy
Dear Judy,
I'm sure the collector was disappointed to discover that you knew about the statute of limitations on credit card debt. You have to give him credit for making a quick recovery, however, by bringing up the tax you might owe. He doesn't give up easily!
The first issue is whether the debt is really too old to collect. In Oklahoma, the statute of limitations period is three years. That's one of the shortest periods in the country. As of 2009, you're well beyond the three-year period for a 2002 debt.
Remember, though, just because the debt was from 2002 doesn't mean the statute of limitations started in that year. Did you make the last charges on your card in 2002? Or was 2002 the last time you made a payment or otherwise acknowledged the debt? The statute of limitations period may begin the date the last payment was due or the date the account became delinquent, or even six months after the last payment. It depends on your state laws. And if you acknowledge the debt or make even a small payment after the time period starts, it resets and starts all over!
Assuming you haven't made a payment or in any other way restarted the statute of limitations, your three years is probably up. Unfortunately, that doesn't mean you can just ignore collectors. Here are some things to consider:
If the debt is legitimately yours, you may want to pay it, for your own conscience's sake.
Creditors can still legally try to collect from you even after the statute of limitations expires. In fact, they are under no obligation to try to determine the statute of limitations period for you.
The unpaid debt still shows up on your credit report for seven years. That alone motivates many people to pay old debts. And don't think that once an account is delinquent, you might as well leave it unpaid on your record. A debt that was delinquent but is now paid off does far less damage to your score than an old, unpaid debt.
When creditors sue you for collection, it's up to you to prove that the statute of limitations has run out. If you get court notices, pay attention! Get legal help, if necessary.
If the creditor cancels the debt, as the collector told you, you probably have to pay tax on the amount canceled. The creditor can send a Form 1099-C to you and to the IRS showing cancellation of debt.
The collector who told you he could send the IRS a form and you'd have to pay taxes may be bluffing. He can't send the notice unless he actually cancels the debt, and why would he do that?
Even if you do have to pay the tax on the amount of the old debt, you're still a lot better off paying the tax than having to pay the entire debt. For example, if you're in the 25 percent tax bracket and a creditor reports a cancellation of debt for $10,000, you'll owe about $2,500 in taxes. (It's never quite that simple, but it's close.) I'd rather pay $2,500 than $10,000 any day.
Sally Herigstad answers questions about credit every week for CreditCards.com. Herigstad is a certified public accountant, author and speaker. She also writes regularly for MSN Money, Interest.com, Bankrate.com and RedPlum.com, and has been a guest on Martha Stewart radio and other programs. You can read more about personal finance and download free budgeting worksheets at her website: www.sallyherigstad.com
To Her Credit answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to Sally.
Published: January 23, 2009
Three most recent To Her Credit stories:
Can bankruptcy tap surprise inheritance? – Having filed for Chapter 13, a woman discovers a surprise inheritance and worries whether she has to turn over the funds to her trustee ...
Joint credit cards don't dissolve with divorce – Getting divorced? If you jointly share credit cards, be prepared to cancel those cards and dissipate the debt before things are finalized d ...
Do you marry someone who has big debt? – He may be Prince Charming, but marrying someone who is carrying a lot of debt can put a serious crimp in your ability to plan for the future ...
Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!
