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Ask an Expert, Homeownership

Should I pay my old debt before applying for a mortgage?

By Bruce McClary | Friday March 18th, 2022

Decorative image holding a house in hands

The NFCC often receives readers debt collection 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.

I have a debt collection account aged 4 years 10 months. It is currently owned by a debt purchaser, and I would like to be able to purchase a house in the next couple of years and this is the one glaring mark on my report. I believe the California statute of limitations has run out, but I am worried that it will reset if I contact them. If I reach out and attempt a negotiation, will that even help if successful? 

When it comes to debt collection in California, it is essential to keep in mind two different timelines. One is the statute of limitations, and the other is the time a debt can legally remain on your credit report. Let’s look at what each means and how they can help you decide what to do about your debt. 

Statute of limitation vs. the time a collection stays on your credit report 

A debt’s statute of limitation indicates how long a creditor can take you to court to collect payment from you by any legal means permissible, like wage garnishments. As you mention, the statute of limitations for debts with written contracts in California is four years. This means that this new collector does not have legal grounds to sue you to collect payment. Yet, they can still call and attempt to collect from you because you still owe the debt. Keep in mind that contacting the new collector or even making a partial payment on this debt can reactivate it. So, the collector can then legally take you to court for the next four years. To be sure where you stand with this new collector before you make any moves, I recommend that you consult a consumer debt attorney about it. Some creditors start counting from the moment you missed a payment, while others do so from your last purchase. 

The period an account stays in your credit report is different from the statute of limitations. Most negative information stays on your credit report for seven years, some a bit longer, like bankruptcies that can stay there ten years. A collection account stays on your report for seven years from the date you first missed a payment on the original account and then should automatically fall off. 

Contacting your collector 

If you are planning to buy your house in a couple of years, it may be enough time for this particular debt to fall off, and along with it, the negative history of late and missed payments that goes with it. This negative history is what causes the most damage to your credit score and weakens your credibility as a trustworthy borrower. Paying your debt now will not erase or remove it from your credit report. The main benefit of having a paid-off collection is that it looks better on your credit report by showing lenders that you made a mistake, but you are finally paying back what you owe.  

Whenever you have a debt, and you can pay it back, it is best to do so, even if you legally do not have to. Only contact your creditor if you already have a thorough plan to pay your debt and you know you have enough income to do so. As you know, collectors are not required to work with you or give you a payment plan. So, it pays to know what you are dealing with. If you have questions or need further guidance handling this old debt, reach out to an NFCC certified credit counselor online or by calling 1-800-388-2227 for personalized advice. Good luck!