my two cents
By Charlotte Cowles, the Cut’s financial-advice columnist. In addition to “My Two Cents,” she writes about work and parenting for the site. Previously, she was the senior features editor at Harper's Bazaar and a senior editor at the Cut. She was also the editorial director for MM.LaFleur. Her work has also been published in Glamour, Art in America, Politico, and other places.
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I have outstanding credit-card debt that I haven’t looked at in a couple of years. I can’t afford to pay it, so I feel like what’s the point in trying? I accrued most of it during college (I’m 28 now), but I dropped out before I got my degree. I think it’s probably somewhere around $15,000, with interest. As a result, my credit score sucks.
I know you’re probably horrified by this, and sometimes I am too. I never pick up unrecognized calls because I’m worried it’s a collector. I get mail from collectors too. It does scare me — I know they can technically sue me for what I owe — but I’ve been through worse. My parents both died when I was in my early 20s, so I don’t have family to help me out. It also made me realize that life is short, and I don’t want to spend it stressing out about this debt I can’t afford to deal with. At this point, I’m just holding out hope that the credit-card companies will give up eventually. I’ve heard that after seven years, they can’t come after you for outstanding bills anymore. I’ve researched this, and it seems to be true? So basically, that gives me two more years to dodge them. Unless I’m missing something. What’s the deal?
I’m so sorry about the events that led you here. No one deserves the constant stress of old debt they can’t afford to pay off. Remember that you can and will be free of it someday. The questions are, how and when?
I understand why you feel like ignoring it is your best option, and you’re not entirely wrong. Here’s how the “seven-year rule” works: Under the Fair Credit Reporting Act, federal law requires that delinquent debts drop off your credit report after a seven-year period since you stopped making payments. “Technically, the clock starts ticking at six months after the account is past due, so it’s more like seven and a half years,” says Becky House, a certified credit counselor affiliated with the Financial Counseling Association of America. Once you hit that finish line, creditors can no longer report your delinquent debts to the credit-reporting agencies that determine your credit score and you can start rebuilding it.
If at any point you do make a payment toward your debt, it restarts the clock on your seven-year timeline. So I can see why you’d prefer to try to wait it out.
That said, keeping your head in the sand for a few more years doesn’t necessarily mean you’re home free. The other risk you take by ignoring your debt is that your creditor — or a third-party collection agency that has taken over your debt — could sue you for the amount you owe, plus interest and penalties. There’s a time limit on when they can do that too, but it varies depending on the state you live in. You can check on your state’s statute of limitations on debt here; it typically ranges from three to six years but could be as long as ten. (This is where I should note that I’m not a lawyer and this does not constitute legal advice —it’s just information you can use to weigh next steps.)
If your creditor does decide to sue you, things can get ugly. First, you will need a lawyer. “And if your creditor is successful in the lawsuit, they can garnish your wages and freeze your bank accounts,” says House. “If you own a home or a car, they can put a lien against your property. There can be a lot of negative outcomes to not paying.” Alternatively, you could work out a settlement deal that involves you forking over a chunk of money to your creditors and then everyone walking away. If you don’t comply with a court order to pay the settlement, you can be arrested. Either way, no one’s happy.
However, the likelihood of a creditor taking the trouble to sue you is less clear. It costs money to chase you down, serve you with a lawsuit, hire a lawyer to oversee the process, and seize your money and property. If you really can’t afford to pay your creditors, they may not consider your case worth their effort and resources. According to a 2017 report by the Consumer Financial Protection Bureau, about 15 percent of delinquent debtors were sued for money they owed. I can’t tell you whether it’s worth taking that risk.
I can tell you lots of people do, though. I first learned about the statute of limitations on debt when I was teaching a seminar on personal finance at a prison. Several of the inmates in my class had delinquent debt but were serving terms longer than seven years. As a result, they figured most creditors wouldn’t bother suing them for what they owed. (They weren’t in prison for white-collar crimes; none of them had much in the way of savings or property.) Their plan wasn’t foolproof — technically, a creditor could still sue them — but they were banking on the probability that collectors had bigger fish to fry.
I want to be clear: No financial expert would endorse this plan. But if you decide to try it anyway, that doesn’t mean you should just do nothing, says House. One action you can take to protect yourself is to save whatever you can, in cash. “If you can afford to set a little bit of money aside, then you could potentially approach your collector and say, ‘Okay, I have X much money. Would you accept this as a settlement and we can put this all behind us?’” Alternatively, she adds, if you do get sued, that savings could help you pay whatever settlement the court decides on. “I would never tell people not to pay their debt, but in situations like this, you have to decide between the lesser of two evils,” she says.
Either way, you should speak to a certified credit counselor directly. Both the National Foundation for Credit Counseling and the Financial Counseling Association of America are nonprofit organizations that can help. (You can learn more about the credit-counseling process here; beware of debt-settlement or debt-relief agencies, many of which are predatory.) After reviewing your case, a credit counselor may suggest a modified repayment plan you could afford. That would require you to reengage with your creditors, however, which would restart the seven-year clock. (This will happen only if you agree to it.)
No matter what you decide, keep your eye on what’s ahead. Says House, “Focus on the future. I’m not saying to forget about your debts, but everybody has a limited amount of income and you have to put it in the best direction.”
That includes working to improve your credit score in other ways. You don’t need me to tell you that having bad credit can make your life extremely difficult and affects everything from housing prospects to job opportunities. I know trying to build credit while you’ve got this old debt sitting there may feel like bringing a knife to a gunfight, but it will help your score rebound more quickly once the seven-year term is over.
“Make sure that, going forward, everything is paid on time, every time,” says House. “You’re trying to add positive information to your creditworthiness. And that includes your regular bills — your phone bill, electricity bill, and so on.”She also recommends getting a secured credit card —which is similar to a debit card —or something called a credit-builder loan, which is basically a reverse loan (you make payments into an account that becomes yours after a certain period of time, thereby proving your ability to fulfill your financial obligations).
Ultimately, you’ll have to deal with whatever comes first —a settlement or the seven-year mark and the statute of limitations on debt in your state. Collectors may still come sniffing around after that, but they won’t have any legal ability to make you pay (“no teeth,” as House puts it). From there, you can continue to rebuild your credit without your old debt dragging it down. It will be a huge relief to get out from under this, but it will take patience. The best thing you can do now is be strategic and set yourself up to recover when you’re free and clear.
The Cut’s financial-advice columnist, Charlotte Cowles, answers readers’ personal questions about personal finance. Email your money conundrums tomytwocents@nymag.com.
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