Even for old debt, settling beats other options


To Her Credit
To Her Credit, Sally Herigstad
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). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs. See her website for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive

Dear To Her Credit,
My husband and I have old, unsecured, unpaid credit card debt that is 6 to 7 years old. The creditors are offering major discounts if I pay them. Some of them are offering an 85 percent discount. We are finally at a point that we could pay the discounted amounts.

I'm wondering if we should do that, or should we finally just go bankrupt? Or since we're so close to the statute of limitations in our state, should we just wait it out? Will the old debt drop off when the statute of limitations runs out? -- Tina


Dear Tina,
It's always better to pay your bills, or a negotiated amount on your bills, when possible.

Of course we have legal remedies for extraordinary situations, such as major illness or someone being left in the lurch by an ex-spouse or business partner. For our banking system to work, however, we need to pay for the goods and services we buy in all but the most extreme circumstances.

You've given yourself three options: Paying the negotiated amounts, filing for bankruptcy or waiting it out until the debts go away. Here's how each option would play out.

Paying the negotiated amounts is the fastest way to resolve your debts and be done with them. Because the creditors are already offering steep discounts, you don't even have to go to the trouble of starting negotiations. Be sure to get everything in writing from your creditors before you send checks to them.

Be aware that paying less than the full amount negatively affects credit scores. However, at this point, your credit score has already been damaged by past-due accounts. You're better off resolving the debts. The sooner you do that, the sooner they can start fading off into the past and finally dropping off your credit history altogether.

I don't recommend bankruptcy in your case. Bankruptcy is expensive. Those fees you see advertised are just the beginning. You also have to pay trustee fees, which can be substantial. Bankruptcy requires a lot of paperwork, and you hand over a good deal of control of your finances to the courts. You may be required to go to the courthouse and meet your creditors, or representatives of your creditors. Even if they don't show up, it's stressful.

Having gone with someone to a bankruptcy hearing, I can tell you it's not a happy place. Bankruptcy is hard on your credit score, and it stays on your report longer than a negotiated or even unpaid bill does. Chapter 7 bankruptcy, the type of bankruptcy most people think of, should only be used a last resort when there are no other viable options.

Your last option is to just ignore the bills and hope they go away after the statute of limitations, when they become time-barred debt. That might work -- or it might not. Creditors have recourse when people don't pay their bills. Before the statute of limitations runs out, they may seek a judgment against you. They could attach a lien to your house, or garnish your wages -- likely for the full amount plus interest, not the negotiated amount you are looking at now.

Even if your bills eventually go away by being ignored, this option takes a toll on you. You can stop creditors from calling you on the phone, but you can't stop them from sending you mail, and the debt is dangling over your head as long as that is a possibility. Ignoring debts is not a good financial strategy.

You're in a better position with your debts than many people are. Your creditors are ready to settle, and you have the money to do so. I'd recommend getting their negotiated offers in writing and paying them off. You'll soon be able to start rebuilding your credit history and taking care of your credit!

See related: State statutes of limitation for credit card debt, Get that debt settlement offer in writing, Time-barred debt can still do damage even after 13 years

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Published: May 1, 2015

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