To Pay or Not to Pay? How to Handle Old Debts

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Past Due Bill
It's the perfect Catch-22. Because of the lingering foreclosure crisis and the nation's stagnant economic recovery, the Federal Reserve is holding interest rates at near-record lows, making right now the perfect time to get a mortgage.

But also because of continued problems in the mortgage industry and the economy as a whole, banks are more risk-averse than they've been in decades. Which makes it difficult for nearly everyone but those with sterling credit to actually succeed in getting a mortgage.

A Credit.com reader using the screen name "Von" finds herself caught in exactly this bind. To take advantage of lower interest rates, she and her husband recently applied to refinance their mortgage. But in the process, they discovered an unpaid medical bill that, unbeknownst to them, has been weighing down their credit score.

Now Von faces a conundrum. Her lender says that the couple needs to repay the medical bill, which is in collections, before it will approve her for a new mortgage. But the bill is 42 months old. And in Texas, where Von and her husband live, the statute of limitations on old debts is 48 months.

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"We want to resolve" the collections issue, "however do not have the entire amount" needed to pay off the old bill, Von writes in response to a Credit.com story.

What to do? Begin a payment plan, which will use up money that Von and her husband need for monthly expenses? Or ignore it entirely, knowing that in another six months the bill can no longer be collected anyway?

On the one hand, there is an argument to be made that Von and her husband should ignore the debt. After all, paying the debt off now won't have any immediate impact on improving their credit score. Rather, it will linger there for seven and a half years after it first went to collections, hurting their score all the while. And making payments on the debt now might hurt the couple's ability to meet daily expenses or save up for the next big purchase they make, whether it be a new house or another car.

But Von and her husband have lots more to think about than just running out the statute of limitations, says Barry Paperno, Credit.com's credit scoring expert. One problem is something that the couple has already run up against: their lender is "encouraging" them to clear up this unpaid medical bill before it will approve them for a refinanced mortgage, Von says.

That situation may not change, says Paperno. That's because the relevant frame of reference here may not be the four years it takes for an unpaid bill to become uncollectible. Rather, it's the seven and a half years that unpaid bill lingers on a credit report. As long as that unpaid bill remains on the couple's credit history, lenders may refuse to extend additional credit.

"It has nothing to do with the score," Paperno says. "Let's say they take their chances and don't pay it. The lender or credit card company may still decline them. As long as it's on there and it's unpaid, don't go applying for credit anytime soon.

[Related Article: 8 Things Debt Collectors Won't Tell You]

That's assuming the couple makes it through their six-month window unscathed. The collections agency could still sue Von and her husband in court. It could also sell the debt to another, more aggressive collections company, which would have time to sue before the statute of limitations is up.

"They could just come after you tomorrow," Paperno says.

The judge in the case might side with Von and her husband, or maybe with the collections company. If the company wins, the couple will be forced to pay the debt. But even if the couple wins, Paperno explains, that judgment becomes another negative stain on their credit report, another mark documenting an unpaid bill. And that judgment will linger there for another seven-and-a-half years.

"Even if you pay the next day, right after you receive the judgment, it doesn't help your score," Paperno says. "So there is a risk there."

Von and her husband are right to pause now and weigh their options before moving forward to pay an old debt, especially one she says they did not know existed for more than three years. But adding up all the risks for long-term harm, Paperno says, it's probably best to tackle the issue head-on and pay the debt if they can.

"Flat out, I don't like to recommend that someone not pay a debt that they owe," says Paperno.

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Susan Williams

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November 23 2013 at 11:11 AM Report abuse rate up rate down Reply
Emily M

I had a mortgage broker tell me not to pay anything on our credit that was older than 2 years. Let sleeping dogs lie, so to speak. We paid off the newer stuff and have let the old stuff sit. With all the credit repairing my husband I have been doing, it doesn't seem to matter that we've paid off most of our debt, what really has screwed us in not having new GOOD credit That same mortgage broker told us to keep paying our car loan, which is a high risk loan (aka high interest), so even though its 'good', it's not THAT good because it's clearly a loan for people with bad credit (which we were at the time), and our credit score would jump up after a few months. Well, it didn't. What we should have done was pay of our car loan, and get a secured credit card and have been using that for the last year to build credit. A credit card in good standing (while being used every month) is better 'good credit' than a high risk car loan.

July 12 2012 at 12:40 AM Report abuse rate up rate down Reply
britishsteel

Declare bankruptcy or quit your job and go on welfare like the 48 % of this country does , join the illegal immigrants filing tax returns claiming 5 kids and getting paid go ahead they do not prosecute illegals , is the law any different for you? and if it is why do you stand for it?

July 11 2012 at 11:53 PM Report abuse +1 rate up rate down Reply
jen.jeni

Chances are that unless the bill is huge or the couple has a bunch of money, no one is going to sue them. If they were going to be sued, it would have been done by now.

What will probably happen is that the collection agency or whomever owns the debt will begin calling and getting more agressive in the next few months because they'll want to collect before the statue of limitations runs out. They'll probably continue calling in the hopes that the couple doesn't know they don't still legally owe the money.

The best thing this couple (and anyone in debt) can do? Educate yourself. Do your research and you'll learn that just because you owe someone money does not mean you have lost control. The worst thing that can happen if you owe money is you'll be sued, and even this doesn't mean you'll have to pay the debt (courts don't force you to pay a judgment; the winner has to use their own resources to collect. If they don't know where you live, work or bank, this can be quite expensive). There are no such things as debtor's prisons, so the worst thing that will happen is your credit will be lousy and you'll get a lot of phone calls.

If this couple doesn't have the money to pay off the debt, they likely don't have the money to own a home. The best thing for them to do is probably to ignore the debt and live within their means. If you are paying cash for everything, your credit score doesn't matter. Save enough money for a down payment and you'll be able to buy a house regardless of your credit score. The way the credit system works, even paying off the debt will not wipe it off your report, so why pay?

July 11 2012 at 6:16 PM Report abuse +3 rate up rate down Reply
1 reply to jen.jeni's comment
chantillytitle

I would try to negotiate with them to pay only the amount of the original debt, not all of the penalties and interest, which are quite possibly far more than the original amount. I know this works in some cases. However, if they plan on not paying and waiting it out for 6 months, I've also heard that when they call, you are to stick to your guns and tell them repeatedly "I do not have the money to pay this". Apparently, anything you say to the extent of "ok, I'll make a payment soon" can impact how they go after you to collect.

July 12 2012 at 12:09 AM Report abuse rate up rate down Reply
Freedom Chyld

If you buy goods from someone or get a service from someone you should pay your debt. You owe them that money. Cut off your cable for a couple of months, cut off your internet for a couple of months. Eat out less, cut down on your smoking etc etc... and pay off your debt because it's mone you owe someone that they lose just because you don't pay your bill.

July 11 2012 at 2:41 PM Report abuse -2 rate up rate down Reply
1 reply to Freedom Chyld's comment
Sheryll

Doesn't always work that way. You make it sound so easy. A freind of mine had her job for 10 years. She was making 6 figures. She abruptly lost her job. Luckily she had a savings that got her through a few months, but being she was a single parent of 2 kids it was not easy. She tried for over a year to find a job in her field and could not so she worked at Macy's for around $10 an hour. Her credit cards went into collections and she fell behind on her mortgage. She had no cable, no home phone, a basic cell plan, had to take her kids out of their extra curricular activites and still have a difficult time putting food on the table. The point is, you never know someone's situation until you are forced to face it yourself. Never judge someone without knowing ALL the facts.

July 11 2012 at 6:29 PM Report abuse +1 rate up rate down Reply
1 reply to Sheryll's comment
morine44

Anyone making SIX FIGURES who had savings that only got her through a FEW months after losing her job was clearly living beyond her means. That's a boatload of money, Sheryll. Even if she only saved 10% a year, she should have had over $100,000 saved, not including interest, dividends, etc. If she was smart enough to earn the "big bucks," she sure is stupid when it comes to managing it. Did she have anything at all saved for her kids' education?? And she had a hard time putting food on the table?? No sympathy from me, sorrry. Plus, I don't believe you. Or maybe it's her, feeding you a line of crap. But, hey, your "story" is a geat illustration of people who are actually living that life. I guess common sense isn't all that common.

July 11 2012 at 9:25 PM Report abuse +2 rate up rate down
Freedom Chyld

If you buy goods from someone or get a service from someone you should pay your debt. You owe them that money. Cut off your cable for a couple of months, cut off your internet for a couple of months. Eat out less, cut down on your smoking etc etc... and pay off your debt because it's mone you owe someone that they lose just because you don't pay your bill.

July 11 2012 at 2:41 PM Report abuse -1 rate up rate down Reply
1 reply to Freedom Chyld's comment
chantillytitle

Agreed - if you are honestly able to pay it. Make payments wherever you can until it is paid off - negotiate a lower amount if possible - the amount owed minus some of the penalties & interest... There's karma to think about, too... :-)

July 12 2012 at 12:12 AM Report abuse rate up rate down Reply
scoots714

you should be giving this advice to d.c.

July 11 2012 at 1:42 PM Report abuse +4 rate up rate down Reply
wbischo

I don't think the Government should ''pay off our debts'', but I do think the Government should take responsibility for the bad economic conditions which have led to the struggle people have had in trying to pay the debts themselves, and which led to late payments, credit card cancellations, and forclosures. It would be beneficial if people could just get their ''credit'' cleared of these things which make if impossible to get anything on credit for years to come, and even if they can make purchases their new interest rate is so high it is prohibitive to buying anything. We had good credit , but now it is not as good, even though we didn't have a foreclosure due to selling our home ''prior'' to the worst of the economic downturn. We had a loss of income, and couldn't afford the payments, so we sold the home and gave up our car.. We continued to make payments onother bills and credit cards. We would like to buy a home again, because prices are so low and payments would, now, be within our budget, but we can't ''qualify'' now because of our credit. If the Government would just wipe everyone's ''credit '' clean. It would be the biggest boost to the economy they could ever give.

July 11 2012 at 12:08 PM Report abuse +3 rate up rate down Reply
Joan in Houston

How about HONOR? If someone used or purchased the goods or services of the vendor, would it not be honorable to pay?? Would it not be polite to apologize for having overlooked the bill for so long?? Or for having somehow been ignorant of it for so long?? Think about how one would feel if on the other side of the fence, so to speak. Am I too old-fashioned to value character above concerns about a credit-score?? Joan in Houston ((And if someone is short on cash, how about a promise to pay the bill off in small amounts monthly!))

July 11 2012 at 10:38 AM Report abuse +3 rate up rate down Reply
1 reply to Joan in Houston's comment
kehquest

Most companies send out a bill every month that it's not paid. Because I don't have insurance, I set up monthly payments for a hospital bill. They work with me and the outcome is fine.

July 11 2012 at 10:44 PM Report abuse +1 rate up rate down Reply
Sam Huston

Just sell your dept to the Chinese like the US government does. What could go wrong with that?

July 11 2012 at 10:25 AM Report abuse +2 rate up rate down Reply