How to handle debt that has ‘expired’

When a debt is older than the statute of limitations, it’s called time-barred debt. That means creditors don’t have a legal right to sue you — though debt collectors may still try. They also can continue to pursue you with phone calls and negative credit reporting.

Proceed carefully, because debt collection has many pitfalls. There’s a chance that you never took out this debt, that the collector is seeking the wrong amount or that you already paid and the collection is in error.

A debt collector should send you a validation notice within five days of first contacting you. This notice should include the amount owed, date of last payment, who the collector is and how to request information on the original creditor. If you don’t get this notice within 10 days after the debt collector first contacts you, ask for it.

You have a few ways to handle this, and you may want to seek legal advice before you act.

Challenge it

If you’re being asked to pay a time-barred debt that isn’t yours, that was already paid off or is otherwise invalid, you can write the creditor to say you’re disputing the debt.

You have 30 days from first contact to challenge the debt before it’s deemed accepted by default. If you dispute the debt within this window, debt collection efforts must stop until the issue is resolved.

You can still challenge the debt after the 30-day period, but the collector can contact you for payment while your dispute is being investigated.

Be as specific as possible in your letter. Say why the debt collection attempt is not valid, including information about payment history or why the debt may not be yours and any other relevant information. Send the letter by certified mail so you get confirmation of receipt.

If you think a debt collector is violating your consumer rights, you can also file a complaint with the Consumer Financial Protection Bureau or the Federal Trade Commission.

Pay it off — but beware of resurrecting zombie debt

Paying off the debt can get you out of the collections misery, but be sure you can afford to pay the whole amount, including any fees or penalties.

Although you may think paying at least a little bit will get the creditor off your back, it can make things much worse. Making even a single payment on time-barred debt can bring it back from the dead and reset the statute of limitations.

“In the context of time-barred debt, making a payment can be devastating,” said Colin Hector, staff attorney at the FTC. “In certain states, if you make a single payment, even if you pay $1 or $5, you’ve reactivated the [whole] debt and you can be sued for this debt plus fees.”

If you do want to pay, you have a few options:

• Pay in full with a lump sum.
• Work with the creditor to set up a payment plan.
• Make a deal to settle the debt by paying a portion.

Paying in full can get the debt off your back for good, but make sure you get the agreement in writing first. Keep this proof in case the payment isn’t recorded correctly or the debt somehow gets sold again.

You may also get the collector to accept a percentage of what you owe as settlement, but be careful. The debt may not be gone for good. Unless you get a written agreement explicitly stating that the partial payment will cover the whole debt, the collector can sell the remainder of what you owe to another debt collection company. And the debt will be marked as a partial payment on your credit report, which won’t look good.

Discharge through bankruptcy

If you want to rid yourself of this liability for good but can’t afford to pay it off, you could file for Chapter 7 bankruptcy.

This gets the unpaid debt in collections off your plate. However, the mark from the bankruptcy will effectively replace it for the next several years. You are likely to see your credit scores improve after you file, though.

Ignore it

When debt is time-barred, you can’t be sued for payment — but the debt doesn’t go away. You may ignore it, but debt collectors and your credit reports won’t.

Furthermore, debt collectors can continue to pursue payment. If you ignore the debt long enough, you risk the current collector selling the debt again.

What to do if you’re sued

Creditors may sue you even though a debt is past its statute of limitations.

The most important thing: Don’t ignore such a lawsuit. Ignoring it probably would lead to an automatic judgment against you, which can mean wage garnishment. Pay attention to any notices you receive, act quickly and assert your consumer rights.

Consider talking with an attorney about how to proceed, and gather all documents you have proving that the debt is time-barred. If the case goes to court, you’ll probably submit evidence of the date of last payment and information about the bill. Simply stating that the debt is time-barred should be enough to get the case thrown out.

Sean Pyles is a staff writer at NerdWallet, a personal finance website.