Did you hear the one about how making even a small payment will stop debt collectors in their tracks? If you believe that, you need some myth-debunking
From the perils of acknowledging old debts to the odds of “inheriting” financial obligations, here are nine myths that need to be permanently busted, along with a few things it pays to know about debts:
Myth No. 1: Paying old debt always raises your credit score.
Not always. This much is true: If a debt is seven years old or younger, and it’s on your credit report, paying it could improve your credit score, says Anthony Sprauve, spokesman for myFICO, a division of FICO. How much depends on how old the debt is.
The myth part comes in if a debt is too old, or isn’t on your credit report.
If a debt is older than seven years, by law it should have already come off your crdit report. So repaying it won’t raise your score because it’s no longer considered, says Sprauve.
In fact, if the debt is younger than seven years old and for some reason is not on your report, paying it could potentially lower your score, Sprauve says. The reason: If the collector reports the payment to credit bureaus, suddenly that old debt will be added to your report. Even though the debt is now paid, it’s a negative mark your report didn’t previously have.
When it comes to debt, time really is on your side. New debts affect your score more than old ones, says Laura Udis, senior financial services advocate at the Consumer Federation of America.
Myth No. 2: Paying an obligation ‘restarts’ the clock on your debt.
Half right. There are two clocks to consider. One is the length of time in which a creditor can force payment on a debt. The second is the length of time a debt can stay on your credit reports.
Forced-collection clock: Under state statutes of limitations for debts, creditors can use the courts system only so long to sue you for debt, get a judgment and garnish wages. But watch out: A consumer can unwittingly restart the collections clock on old debt, says Gail Hillebrand, associate director for consumer education and engagement at the Consumer Financial Protection Bureau. Acknowledging a debt (verbally or in writing), making a partial payment or accepting a payment plan can all risk “re-aging” the debt, restarting that clock.
Credit history clock: No matter who owns the debt, how many times it has been sold or whether you acknowledge it, it has to come off of your credit history after seven years, says Chi Chi Wu, staff attorney at the National Consumer Law Center.
And it’s illegal to tag an old debt with a new “birthday,” she says.
This seven-year clock starts 180 days after the last payment the consumer made on the accounts.
One notable exception to the seven-year reporting rule: collection judgments. A judgment is considered a separate item from the original debt, Wu explains.
Myth No. 3:Once the statute of limitations on forced collection passes, creditors can’t sue.
Not entirely. You have no legal obligation to pay a debt that’s passed the state statute for forced collection, says Ira Rheingold, executive director of the National Association of Consumer Advocates. But creditors or collectors can still file a lawsuit.
If a creditor or collector sues, and you don’t have someone in court to contest the claim, the courts may assume it’s valid and grant the judgment, Rheingold says. Then, just like a B-movie zombie, that once-expired debt is alive and kicking again.
So if a collector sues, you or your attorney need to show up in court and demonstrate that the statute of limitations has expired, he says. Merely sending a letter to the courts or the creditor often isn’t enough to prevent a default judgment, he adds.
Short on funds? You can contact NACA.net to find a consumer attorney who will take the case for a reduced fee, Rheingold says.
Myth No. 4: Making a small or partial payment stops lawsuits and debt collection attempts.
No matter who owns the debt, how many times it has been sold or whether you acknowledge it, it has to come off of your credit history after seven years.
|— Chi Chi Wu|
National Consumer Law Center
Not true, unless that’s part of a payment arrangement you have in writing, says Udis.
When dealing with representatives for creditors or collectors, get any promises or payment arrangements in writing or record those calls, if that’s legal in the consumer’s state, she says.
Myth No. 5: Paying old debt removes it from your credit report.
Nope. If an old debt is on your report and you pay it, that doesn’t mean it will stop appearing on your credit history, says Udis.
What’s most likely: It will still be reported, along with a status of paid or settled, she says.
And if the original debt is more than seven years old, it shouldn’t still be on your report, which means it won’t be included in your credit score, whether you pay it or not.
Myth No. 6: If you’re in debt, collectors’ efforts will make sure everyone around you finds out.
“Not true at all,” says Udis. In fact, just the opposite.
“Under federal law, they cannot discuss the debt,” she says. The Fair Debt Collection Practices Act prohibits collectors from even disclosing that there is a debt, Udis says.
So while a debt collector could conceivably call friends or family to find you, he or she may only call one time, she says. Collectors are not even allowed to say they’re calling because of a debt, she adds. And that reason doesn’t hold water if they already have your contact information.
While the federal law applies to third-party collectors (companies collecting debt for the original creditor or companies who buy the debt), some states also impose the same confidentiality restrictions on the original creditors, says Rheingold.
Worried about your job if a creditor gets a judgment to garnish your salary? Again, you’re protected, says Udis. Federal law prohibits employers from firing employees because they’re having wages garnished, she says.
Myth No. 7: Telling debt collectors to ‘buzz off’ means they can’t call you.
Again, half right. You have the right to tell collectors (verbally) not to call you at work, and they are required to obey, says Tracy S. Thorleifson, attorney at the Federal Trade Commission.
You also have the right to ask them not to contact you again, and they have to comply. But to invoke that right (granted under the Fair Debt Collection Practices Act), you want to put the request in writing, says Udis. After that, the collector is barred from contacting you again.
One right you don’t give up with a “drop dead” letter: Collectors still have to serve notice if they file a lawsuit.
Don’t want to draft your own letter just to tell collectors to go away? The Consumer Financial Protection Bureau has issued a series of debt collection sample letters.
Myth No. 8: Divorce decrees split debts into piles of ‘his’ and ‘hers.’
Definitely a myth. Sometimes divorce courts will parcel out the payment of debts (joint and otherwise) during a divorce. (She pays the card bill; he pays the house note, etc.)
But “the court order is between you and the ex-spouse,” says Hillebrand. “It doesn’t change the obligation you have with the credit card company.”
When you walk into court with your name on certain bills and obligations, you are just as responsible to those creditors when you walk out, Udis says.
The best options for joint debt during a divorce are to either pay it all off before the divorce is final or contact the creditors to put the entire obligation solely in one name.
Whichever move you opt for, get proof in writing and hang onto it.
Myth No. 9: You can ‘inherit’ debts.
Totally wrong. Unless a friend or family member of the deceased was already liable for a debt before the death (think joint debts or community property situations), they’re not responsible for it after the death, says Robert Hobbs, deputy director of the National Consumer Law Center.
Debts can’t be reassigned by creditors or collectors after death or “inherited,” he adds.
What is supposed to happen: Once the creditors find out someone has died, they contact the estate and ask to be paid. The estate pays the applicable bills and distributes the assets, says Hobbs.
The best move: If you’re getting calls from creditors or collectors insisting you’ve “inherited” debts, it may be time to chat with an attorney.