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Ask an Expert: Answers

Ask an Expert: Is it alright to run out the clock on an old debt that’s in collection?

By Bruce McClary | Tuesday May 11th, 2021

The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.

This week’s question: I have received a settlement offer on an old credit card debt from years ago when I was out of work. Would it be better to let it fall off after the six-year statute in Arizona? I am in great financial health and this is the only bad mark on my credit.

Based on the question, it appears that you are taking extra care to make the best decision regarding your credit health. For that, I applaud your efforts to research the facts. Sometimes an offer to settle a debt can lead to a hasty decision that may not always be best. Let’s take a moment to examine all of the elements to consider before rendering a decision that will impact your financial future, one way or another.

Deal or No Deal

First, there’s the settlement itself. Settling your account is commonly viewed by lenders as being less favorable than paying the balance in full. If reported accurately following the settlement, the account status would appear as “settled for less than the full balance” on your credit report. When it comes to the credit score impact of settling or paying a collection account, the answer depends on the scoring model being used. More recent versions of FICO® and VantageScore® won’t factor collection accounts that have a zero balance. That seems like great news, but some lenders use older versions when reviewing loan applications for approval. This is most commonly the case when applying for a mortgage. In those situations, your credit score will not likely experience the same lift.

Running Out the Clock

Apart from the settlement, there’s the matter of the account’s age. We have addressed the topic of the statute of limitations and time-barred debts in previous posts, but I can’t place enough emphasis on the wild card variable that involves the debt collector’s decision to escalate the account. Having worked as a debt collector in the past, I am quite familiar with the process of evaluating unpaid accounts for escalation before the clock runs out. In Arizona, the timer starts when the account charges off. That means the debt collector is now asking that you pay the entire balance in full. For that specific state, you are correct that the statute of limitations is six years.

Will They or Won’t They

If they know where you live and work, and if they determine that the unpaid balance of the account is sufficient enough, they may decide that it is worth the effort to file a case in civil court in pursuit of a judgment against you for the amount of the debt plus interest and court costs. Again, this is also driven by how much time is left on the clock. If the court decides in their favor, they could proceed to recover the balance through legal processes allowed in your state. In Arizona, for example, wage garnishment is allowed at one-quarter of your non-exempt weekly paycheck or an amount of your weekly earnings that are greater than 30 times the federal minimum wage, whichever is the lessor of the two. There are other factors influencing wage garnishment in Arizona, and the rules for other states vary, so it’s always a good idea to check with an attorney to confirm what might directly impact your situation.

Ultimately, the decision on the next steps rests in your hands, but whatever you decide should leave no room for surprises. That’s why I would recommend spending a little time consulting a nonprofit credit counselor for a more detailed and personalized review of your situation. Armed with their advice and what you have learned through your own research, you would be in a much better position to make the most informed choice for yourself. Good luck with your next steps!