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

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By Bryce McClary 05/11/2021

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!

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Michigan license number:   DM-0016282 Available to the public and licensed in Michigan.

Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

(6) A licensee shall not contract for, receive, or charge a debtor an amount greater than authorized by this act. A person that violates this subsection, except as the result of an inadvertent clerical or computer error, shall return to the debtor the amount of the payments received from or on behalf of the debtor and not distributed to creditors, and, as a penalty, an amount equal to the amount overcharged.

530 W Allegan Street, 7th Floor
Lansing, MI  48909-7720
877-999-6442

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