Debbie made a mistake when she was in college. ...she maxed out a Citibank credit card with a $300 limit and never paid the bill. Debbie said Citibank charged off the debt sometime between 1987 and 1989, and the liability has long since disappeared from her credit report.Companies buy old debt for pennies on the dollar, often less than one penny for old, out-of-statute debts, and then use credit scoring to determine who's most likely to pay.
Besides that, the statute of limitations – the amount of time a creditor can sue over an old debt – expired in the early 1990s. ...
That’s why she was stunned when a collection agency called her last summer, demanding she pay the 17-year-old bill. The calls have continued off and on since then, along with monthly bills listing varying amounts that the collection agency wants her to pay.
A growing number of companies are discovering that these very old accounts, once thought to be uncollectible, are just the opposite. Squeezing even a small payment from these debtors can make collection activities worthwhile.
"The economics are pretty simple. For $100 of (old debt), you pay 25 basis points – a shiny quarter," said McVity, whose investment banking firm tracks debt-buying trends. "If you get (the debtor) to pay you $1, you got your money and covered your costs."
What if you pay a rusty quarter?
While you really do have an obligation to pay the debts you incur, and your moral obligation may well last after any legal obligation has expired, many of these folks use tactics that are, at best, questionable.
Among the worst practices attorneys have seen:
- Suing or threatening to sue over debts even though the statute of limitations has long expired.
- Illegally “re-aging” debts on credit reports. The collectors tell credit bureaus that an old debt is, in fact, a new one. The goal: To extend the seven-year limit on reporting negative items and put more pressure on the consumer.
- Promising to delete a negative mark from the consumer’s credit report in exchange for a token payment. Not only does the collector fail to follow through, but the payment can revive the statute of limitations and lead to a lawsuit. Even if the collector does back off, the unpaid debt could be sold to another company that might renew collection activity.
- Bait-and-switch credit cards. Some credit card companies have offered borrowers low-rate credit cards and then tacked old, charged-off debts -- often purchased from other lenders -- onto the balance. The card issuers typically insist they disclosed that the old debts would come with the cards, Szwak said, but the borrowers say no such disclosure was made.
- Verbally abusing and harassing consumers. My readers have reported being cursed, berated and called repeatedly despite requests to stop -- all violations of federal laws.
So what to do about it? Talk show host Bill Handel has a Saturday call-in legal advice show, and his favorite method of handling abusive collection agents is to announce, "I'm recording this call to document violations of the Fair Credit act." Usually, the caller hangs up half way through the word "call". Other advice:
Sometimes it's best to just hang up.
In fact, paying these old debts -- or even talking to the collection agency about them -- can make a bad situation worse.
As mentioned above, the smallest payment can revive the statute of limitations in some states, leading to more aggressive collections and lawsuits. Even acknowledging that the debt is yours can restart the clock in some jurisdictions.
That’s why Robin Leonard, author of the "Money Troubles: Legal Strategies to Cope with Your Debts," advises consumers simply to put the phone down and walk away if collectors call about an out-of-statute debt.
What’s more, paying an old debt potentially can wreak havoc on a consumer’s credit score, as I discussed in “When paying bills can hurt your credit.” Such a payment can update a delinquency so that it looks more recent and takes a heavier toll on a credit score.
Paying the debt is also no guarantee that the nightmare will stop. The collector may decide that if you’re willing to pay at all, you could be made to pay more. Settling a debt for a smaller amount than the collectors says you owe could result in another agency trying to collect the unpaid portion. Or the collector might inform the Internal Revenue Service (IRS) that you’ve received “income” in the form of forgiven debt.
If you’re being contacted about an old debt, here’s what consumer attorneys advise:
- Know the statute of limitations.
- Know your rights. Credit and debt collections can be an extremely complicated area of the law.
- Consider ignoring the call. If the statute of limitations has expired, put the phone down and walk away.
- Write them. If ignoring them isn’t working, consider writing a letter demanding the agency stop contacting you. Send it certified mail, return receipt requested. Federal law requires them to comply with your request. Make sure in the letter you specifically say that you aren’t acknowledging you owe the debt.
- Negotiate carefully. If the statute of limitations hasn’t expired, you may want to negotiate a settlement rather than risk a lawsuit.
- Keep an eye on your credit report. If a collection agency tries to repost an old debt or lie about the date it went delinquent, you’ll need to fight back vigorously. Dispute the entry with the credit bureaus and with the collection agency.
If the collector persists in its deception, you can demand that the collector produce a copy of the documentation that created the debt, such as the credit card agreement you originally signed, along with an account history, said consumer attorney Daniel Edelman of Chicago. Chances are the collector won’t have this documentation, and continuing to report the account without providing proof that you owe the money is a violation of the Fair Debt Collection Practices Act, Edelman said.
Personally, I once had a store try to collect on a check they claimed had not been honored. When I produced a copy of the cancelled check, they wanted bounce fees. However, they never documented that they had actually incurred those fees, and went away instead.