This is actually for a friend of mine (I had problems like this earlier in the year, but thanks to a nice inter-family loan, mine were taken care of)-- neither of us have any idea about the questions herein, but I related my own similar debt experiences and told him to get a better job and pay something.
Anyway, basically, he has a job that pays diddly squat (what he does make goes toward monthly tuition payments he is making), and owes $2500 on an AmEx card and $1500 on a MasterCard (both of which are in collections). Moral obligations aside (GQ, not GD), what is likely to happen to him?
He is a very low income student with a heavy courseload and probably has a negative net worth. He has no assets. I told him that if he wanted to be a real moral jackass, he could probably just avoid the collections calls (I don’t know anything about collections, but my GUESS is that they wouldn’t even bother suing a poor student – no blood from turnip, and all that) and tough it out for 7 years and it would be erased from his credit report. Of course, I told him that he should send them something and just try to pay it off ever so slowly.
During our discussion, we came up with a couple questions:
First, it IS true that if he can manage for 7 years, it’ll be forgotten forever, right? When would that period start? From the time he got the card, or the time he stopped paying, or the time it went into collections, or what?
What is the likelihood that a debt collection agency would take someone in his situation to court for a ruling over this? Given that he actually has nothing, wouldn’t suing him actually be an overall loss for the debt collector?
Would it be better (again, ethics aside) for his credit report to ignore the collections and wait, or pay something (I said even $10 a month would probably be well received)?
If he did wait for 6 or 7 more years, and interests and late fees kept piling up month after month, can the debt collector decide in 6 years, 11 months to say “hey, now you don’t owe $2500, you owe over $10,000 and we’re suing”?
All this has taught me that thankfully, for me, I took care of my credit card fever. I have one card now with a balance that gets paid off every month, and a slightly damaged credit score to show for my first year of irresponsibility. But it did make me wonder if it is possible for him to just shrug it off and forget about it for 7 years.
Difficult to speculate. Remember though, a judgment is good for a very long time–decades–so the creditor can sue and wait. Creditors differ in their attitudes toward suing debtors, and their decision usually has more to do with the amount owed than the collectibility of the debtor.
It’s complicated. On the one hand, making payments (probably) extends the statute of limitations. On the other hand, if he makes payments, he may pay the debt off, in which case he’ll be better off, at least in the long run.
The effect of the payment on his credit will depend on several factors. First, how the credit scoring model grades such things. See the discussion that Philster and I are having in the first thread cited above.
Second, what arrangements he has made with the creditor. You can work out an agreement with the creditor to report the debt as current (credit counselors call this “re-aging”), in which case, it will be excellent for his credit.
Third, if he comes into some money and wants to settle with a lump sum payment (less than the amount that he currently owes). Hindsight would then dictate that he should not have made payments. Creditors generally won’t settle with someone who is making payments.
Yes. They can sue, and they can sue for any amount they can prove he owes.
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Your friend might benefit from a chat with a credit counselor. While credit counseling is not for everyone, a reputable non-profit credit counseling service might be able to set him up with a payment plan that includes reduced or waived interest and the afforementioned re-aging of the accounts. He could come out almost squeaky clean.
Now that the moralizing rant is out of the way, let’s answer the questions of fact.
Yes, bad debts fall off your credit record in 7 years plus 180 days from the date of the last deliquent payment.
It is unlikely that either credit card company will take him to court, because credit card debt is unsecured, and can be easily discharged through bankruptcy.
“Better” is a subjective term. If he waits it out, it falls off his credit report in 7.5 years. If he makes payments, it won’t fall off until 7.5 years after he makes the final payment.
A good faith payment can prevent creditors from taking you to court; it depends on the laws in your state.
Debt collectors may not collect any amount greater than your debt, unless allowed by law. (some states allow interest, penalties, and collection fees while other states prohibit them or limit the amount).
Although it seems like a massive amount of money to a student, $4,000 is a pretty small sum to be ruining your credit for, especially because the just-out-of-school years would be a bad time not to have good credit – your friend will be looking for an apartment, wanting to buy a car, and so on. Those 7 years would pass pretty slowly.
You didn’t say when your friend is graduating, or whether he has a job lined up. Is there a chance of getting more income over the summer that could be used to pay down the debt? I’d suggest talking to a debt counselor (I’d be surprised if the school didn’t have one) and maybe try working things out with the credit card companies.
Once again, this is absolutely wrong. It seems like we have to debunk this fallacy in every collections/credit rating thread.
There are 2 “clocks” on past due credit:
The “credit report” clock regulates how long data will stay on your credit report. It starts on a debt as soon as it is reported past due. For most debt this is a 7 year clock. Payments DO NOT, under any circumstances, reset this clock.
The “collections” clock regulates how long the collector can contact you about the debt. This clock may vary by state and type of debt. It also starts as soon as a debt is past due, but it may (probably will) be reset by a payment.
If you don’t believe in 7 years you will be able to pay back at least half your money, then just don’t pay. If you have a crummy job, no assets you are basically judgement proof.
This is in regards to Credit Card debt. Remember that student loans are different. They are the easiest to collect on. I know a lady who collects and they have access to the Social Security Admin which will give them your place of employment and they will simply attach your salary. So you can’t really default on those. These loans tend to be the worst. She has shown me people in their 50s who STILL have student loans. It’s awfully hard to pay back $100,000 for college even spread over decades, unless you have no life other than working a second job to pay that off. Be careful of how much student debt you incurr. The big salaries that were out there just aren’t happening.
I had horrible credit, 7 years to the month I was fine again. I have a great credit score now. I looked at bankruptcy, and the lawyer laughed. She told me I had nothing, so don’t worry.
This is the way to handle collectors. First ask for debt relief. Most will let you pay off only the actual balance. YOU MUST BE FIRM AND INSISTANT to get this. They will say no that’s not fair. Simply say, fine I’ll declare bankruptcy and you will get nothing.
THEN they will work with you. Don’t expect them to keep your account active while you are paying it off.
Bad points of bad credit. One I could not get even a secured credit card until my credit got better. YES right not even a secured card. Here I was giving them the money to hold and they STILL said no. So you will be on a cash only basis for years to come. Do you fly? Rent a Hotel Room? Rent A Car?
Think about it.
Also if you are considerig debt reconsolidation, be careful. There are a lot of scam companies that won’t make payment. Also many lenders consider this as bad as bankruptcy and so you will be stuck with the stigma with no debt relief.
Credit Collectors sound mean and scary but in the end they can’t kill you, they can’t put you in jail, so the worst that will happen to you is bankruptcy and having to live on a cash basis for 7 or so years.
This is basically what we decided after talking. I told him it would probably be in his best interest to pay something, but if worse came to worst, I pretty much said what you said above.
Thanks for the replies, guys. I’ve passed them along, and am interested to see where he takes it from here.