Paying a time-barred debt before mortgage application

Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.

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Question for the expert

Dear Speaking of Credit,
In February of 2009 I was taken to the hospital via ambulance service. I was in college and held a part-time job. I signed up for insurance that did not begin before this happened (which I found out later when I was made aware that I had a past due account). I never paid this debt.

Last month in February of 2015, I received notice that I owe for this trip to the hospital and I have been getting calls ever since. I am at a different point in my life than when I was in college, therefore I would pay it off over time, but simply cannot afford well over $1,100 in a lump sum. In one year it will be seven years that have passed, but unfortunately my wife and I are trying to purchase the house we are renting in June or July of this year.

Is there anything that I can do, other than waiting until next year or pay money we don't have? Regards. -- Johnny

Answer for the expert

Dear Johnny,
With that home purchase as your goal, your first order of business needs to be addressing that unpaid debt by either finding a way to pay it or waiting until it falls off of your credit report next year.

From your letter, I can see you're familiar with the seven-year limit on how long accurate but negative items can keep smirching your credit. Be aware that for credit reports, the clock actually starts 7.5 years from the date the debt went "bad," since lenders typically wait six months after the first missed payment before writing off a debt, the action that puts the debt into collection and triggers a negative credit report item.

But you may not be aware there is a second time clock that runs on unpaid debt, and that other ticking sound comes from your state's statute of limitations. Every state has its own, and they determine how much time creditors and debt collectors have to sue debtors to recover unpaid debts. Statutes of limitations generally run from three to 10 years, and you should start by understanding whether your debt falls within or outside this window.

Then once you've determined the likelihood of being sued and how badly you want to purchase this home in the next few months, you'll want to decide whether to resolve the debt sooner. It makes more sense to settle if it's still within the statute of limitations and there's some urgency to the home purchase. If buying a house isn't that urgent, you can simply do nothing until the bad debt falls off your credit report next year. Let's examine a couple of the possibilities.

Resolving the debt while within the statute of limitations
It's important to understand that if you don't resolve this debt and are successfully sued, the creditor or debt collector will obtain a judgment against you. This judgment will be added to your credit file, where it will remain for at least seven years, seriously damaging your credit score and, until paid, preventing you from qualifying for a mortgage.

A good strategy to consider while your debt remains within the statute of limitations is to find a way to settle it for less than the full amount due. While getting the collector or ambulance company to agree to settle could require some hard-nosed negotiating on your part, considering how long they've been trying to collect from you and their ever-shrinking window of opportunity to sue for the full amount, I would think your chances of reaching such an agreement are quite promising.

If you are able to obtain a settlement, along with agreeing to cease all further contact and pursuit of a lawsuit, you will also want to receive assurance that your credit reports will be updated to show that the debt has been paid. A paid rather than unpaid collection appearing on your credit report could open the door for mortgage approval even before the collection is removed next year -- assuming your credit scores, income and other factors meet the mortgage lending criteria.

Options once the debt becomes 'time barred'
Despite the statute of limitations having expired -- at which point the debt is considered time-barred -- a creditor or debt collector can still attempt to sue you. Should this occur, to protect your rights you must respond to the legal summons and appear in court to assert your right to have the suit dismissed by advising the court that the debt is now time-barred. In other words, if sued for a time-barred debt, the statute of limitations can only protect you if you defend yourself in court.

If, on the other hand, you simply ignore the lawsuit and don't appear in court, the creditor or debt collector can successfully obtain a judgment against you for the full amount of the debt with all of the negative consequences to your credit and home buying possibilities I've described above.

Should you decide to do nothing about the debt after the statute of limitations window has closed you may be able to simply ride out the last remaining year that the collection remains on your credit report. Keep in mind, however, that the debt collector may not go away and your home purchase will have to be put on hold until there's no further trace of the debt on your credit report.

To pay or not to pay
What this all boils down to is that if you want to buy that house in the next few months, whether settling or paying the full amount due, you will have to pay that debt or the mortgage lender won't consider your application. Or if you're willing to wait, and the statute of limitations window has closed, you may be able to avoid paying the debt entirely, but at the cost of putting that home purchase on the back burner for at least a year.

See related: 5 credit don'ts for homebuyers applying for mortgages, Don't restart the clock on expired debts, Time-barred debt can still do damage even after 13 years

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Updated: 11-24-2017