It’s not always a good idea to pay off old debts. In fact, making even a small payment on an old debt can be the worst thing you could do for your finances.
Debt collectors can be aggressive, despite the laws that are in place to prevent them from hounding you. When you’re being pursued by a collector, your first instinct is probably to get rid of them as fast as you possibly can. The debt might be so old you don’t even remember where it came from, but you decide to make a payment anyway — a small one — just to appease them and buy yourself some time. Next thing you know, you’re getting hit with a lawsuit for the entire debt owed.
This is what happens when debt collectors try to recoup so-called zombie debts. Each state has a set window of time in which a debt collector can sue a borrower for an unpaid debt. That window can be anywhere from three to 10 years. But once the window is closed, it’s closed. By law, a debt collector cannot legally sue you for that debt anymore…unless you help them by restarting the clock.
If you make even the smallest of payment on an old debt, it officially “restarts” the clock on that window. When that statute of limitations is reset, collections agencies are once again able to pursue legal action. Debt collectors know this but the average consumer doesn’t. Collections agencies can easily capitalize on that ignorance and try to bully borrowers into making a payment on a zombie debt. The Consumer Financial Protection Bureau has logged over 2,000 complaints since 2013 from consumers who say collectors have tried to recoup debts that are too old.
“Some collectors are pretty sneaky and will ask you to make or commit to making a ‘goodwill’ payment for some very modest amount of money, like $20,” says credit expert John Ulzheimer. “But their intention was to restart the clock so that it is no longer time barred.”
Collections agencies may tell a borrower that making a payment is the fastest way to get the debt off their credit report, or that if they don't pay up they’ll be sued. The opposite is true in both cases. Once a legitimate debt appears on your credit report, it will remain there for at least seven years, whether it’s paid in full or not. And as long as the debt they’re after is outside of the statute of limitations in the state in which it originated, you cannot be sued for it.
Know your rights
Before you make a payment on an old debt, be sure it really belongs to you. Debts are bought and sold all the time and it’s not impossible that they could be mistaking you for someone else. If the debt is unfamiliar to you, ask the collections agency for a debt verification letter. You can also check your credit report, which should show when the debt originated (if it’s more than seven years old, this could be a dead end).
If you don’t recognize the debt a collections agency is calling you about, send them a letter asking them to explain where the debt is coming from, the account number, and the name of the original lender. You can download template letters from the CFPB’s website.
The last thing to remember is that debt collectors are still within their right to try to recoup old debts. It becomes illegal when they threaten to sue you for a debt that is too outside of the statute of limitations. Keep track of threats like those, or any other illegal deceptive or misleading tactics they try. File a complaint to the FTC or the CFPB with a record of the violation. If all else fails, know that you have the right to tell debt collectors to stop contacting you through a cease and desist letter. It won’t eliminate your debt, but it will give you some peace.