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If you’ve put off making payments on a debt, your credit score has certainly taken a hit. But if you haven’t had the means to make payments, you may have had little other choice than to ignore calls from your creditor or debt collectors.
Depending on how old your debt is, however, you may no longer be obligated to repay it. Here’s what you should know about time-barred debt and your rights surrounding it.
What is time-barred debt?
Time-barred debt is the debt you owe after the statute of limitations on it have passed. The statute of limitations is the period of time creditors and debt collectors have to sue to recover your debt.
The statute of limitations vary based on the state you live in. For example, some states stop collections at three years, while others stop upward of 10 years. Student Loan Hero offers this guide, which lists the statute of limitations in each state. (ValuePenguin and Student Loan Hero are owned by LendingTree.)
However, collectors may continue to contact you over your time-barred debt. The statute of limitations only stops you from being sued over the debt. Your unpaid debt won’t disappear, and it will stay on your credit report for close to seven years.
Should you repay time-barred debt? 3 options to consider
Paying off a time-barred debt may not be worth the trouble. Your credit has already suffered due to that defaulted debt, and if you start making payments on it, you’ll reset the statute of limitations. Instead, focus on your newer debts, ensuring you make on-time payments on them.
However, repaying time-barred debt would stop annoying debt collectors from calling. And it can relieve you of the emotional burden of carrying around old debt.
Here are some options to consider with time-barred debt.
Pay off the debt
While time-barred debt means a debt collector can’t sue you, the debt is still crushing your credit. Paying it off not only rids your credit history of the old debt, but also your mindset. It means you can start fresh.
If you’re looking to make a major purchase, like buying a home or car, you’ll want the cleanest credit report you can muster up. If that means paying off a debt from a few years ago, it may be worth it. Lenders have a difficult time giving money to potential borrowers who have a record of not paying back money they owe. If you can remove that blemish to prove your creditworthiness, you’re helping your future self potentially qualify for a loan you’d otherwise be denied.
Pay a portion of the debt
Any money you put toward your time-barred debt resets the clock, so to speak. It reopens your debt and a new statute of limitations begins. It means you’ll have the debt on your credit report for longer. It also means debt collectors have the opportunity to contact you about repaying that debt in full.
While an option, it may not be a worthy one. If you’re going to repay the debt at all, try to pay it in full. If it’s a fairly large debt, try to pay it as close to full as you can if you start making payments on it. The sooner you pay it off, the sooner the bad mark is removed from your credit report. And the faster debt collectors will leave you alone.
If you decide to pay nothing, that means a debt collector can’t sue you for the debt you owe, once the statute of limitations has expired. Keep in mind that you still owe that money and your credit report will continue to suffer. After 10 years, however, the bad mark will be removed from your credit report.
Having a bad credit report impacts many factors in your life, from applying for a credit card to completing a rent application. If anyone does a credit pull on you, they’ll see your bad marks and can reject you for not using credit responsibility.
Technically, it’s fine to do nothing if you don’t mind waiting it out. But if you plan on making any purchases, whether it’s buying a cellphone or even applying for insurance, you’ll face many more hurdles with this unpaid debt.
How to pay your time-barred debt
If you make the choice to pay back that old debt, you have a few different ways to go about it. It can be overwhelming if you aren’t sure which choice is right. Try to evaluate all your options before making a decision. You may not realize how many choices you have.
Negotiate and settle
If you want to make a payment in full but don’t quite have the full amount, contact your debt collector about paying a portion of the debt to settle it. You can say you can pay a certain amount of it and ask if they’d be willing to work with you.
Many lenders would prefer your debt be paid in full but if you can pay some and get it over with, that’s helpful, too.
Set up a payment plan
If you have a big debt that you want to start paying off, you can work with your debt collector to set up a payment plan. Like a loan or other bill, you agree to pay a certain amount of money toward the debt every month for a certain number of months until it’s paid off.
While it’s better to pay off your debt in full, having a payment plan is also helpful. Update your budget to include your new debt repayment strategy. That way, you can move money around to accommodate your new bill.
Use your savings
If you were building up an emergency savings or regular savings account, you could use that cash to pay off your old debt. If it’s enough to wipe out the debt entirely, you’ll feel better that it’s not lingering over you — or your credit report — anymore. However, wiping out your savings to repay a debt puts you in a precarious situation: Until you rebuild your savings, you may have to take out more debt to pay for any emergencies that occur.
Take out a loan
A personal loan can help you pay off your old debt to avoid a payment plan. Then you’d pay installments every month until your personal loan was paid off. It helps wipe out negative debt while also building up your credit score as you make on-time payments.
While a decent credit score is needed to qualify for a loan, you may not get the lowest interest rate. As you consider lenders, carefully review their credit requirements, loan terms and rates, conditions and fees.
In the end, if your debt is time-barred, you can no longer be sued over it. Debt collectors and creditors may continue to try to collect the debt, however. And that unpaid debt will hurt your credit until it drops off your credit report. However, you have options for how you may approach this situation. Do what is best for your financial situation.