When does bad debt fall off credit reports?
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I have an amount that went to collection more
than seven years ago, and was also
discharged in bankruptcy over three years ago. Does this creditor/collection agency reserve the right to
keep that on my credit report? If so, for how long? -- Sam
Seems to me you ought to
get acquainted with the Fair Credit Reporting Act (FCRA). Because of this
federal law, the majority of bad debts may appear on a consumer's credit report
for only so long.
Notice that I
specifically say "bad." Those accounts that you've kept in fine standing,
before and after the bankruptcy, can be listed on your files indefinitely. That
includes loans that you've satisfied and credit cards that are either open or
closed, but that you've never paid late. Your history with such well-handled
accounts will work in your favor, as paying debts on time and in full is what
future lenders want to see.
As for the negative
information, most types can only be listed on credit reports for seven years.
These include evidence of late payments and accounts that were sent to
collections. This seven-year rule can be a little complicated, so I'll explain.
To illustrate, I'll
assume that you had and used a credit card. You charged with it, and the
company sent a statement requesting that you send at least a minimum payment by
the due date.
If you missed that date
but paid soon after, the company may have applied a late fee, but still
reported an on-time payment. However, if you skipped an entire cycle --
meaning that technically you were 30 days late -- the company most likely would
have reported that fact to the three credit bureaus (Experian, Equifax and
The first "ding" would
appear on your credit reports for seven years from the date it initially showed
up. Had you gotten back on track the following month and then paid perfectly
from that point forward, no big deal. Many people forget about a bill
occasionally. But it doesn't seem that the problem ended there. The 30-day late
turned into a 60, then a 90, and so forth. Each recorded late payment would
remain for seven years from when it first appeared.
After the account was 180
days past due, the credit card company probably charged it off and sold the
balance to a collection agency. The seven-year clock began again on that date.
It would not restart if and when the collector gave up and sold it to a
different agency, but it would have had you made a payment (or even promised to
Which leads me to that
Chapter 7 bankruptcy of yours. A notation that you used this legal process will
be on your credit reports for 10 years, not seven, from when you filed. The
accounts that you included in the bankruptcy that are within the seven-year
time frame will still be on your credit reports. They will show that you've
discharged the balances and no longer owe on them, though. When their reporting
limit has run, they should disappear from your files.
And the debt that had
already dropped off your credit report? It's not going to pop back on because
you discharged it. The FCRA rules stand.
Now, if the item in
question does make an unwelcome encore, file a dispute with one of the credit
reporting bureaus (they'll notify the others). By knowing the dates of your
actions as well as your rights, you should be able to stop the debt from
appearing again easily and permanently.
See related: How to dispute credit report errors, Why the credit report dispute process is broken
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: April 24, 2013