When does bad debt fall off credit reports?

Opening Credits columnist Eric Sandberg
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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Question for the CreditCards.com expert 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 

Answer for the CreditCards.com expert Dear 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 TransUnion).

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 do so).

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

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Updated: 01-20-2018