You should always pay your debts, right? But in the case of a long-unpaid debt, doing the right thing ethically can cause problems legally. That's because every state has statutes of limitations on debt, typically from 3 to 10 years. These statutes limit how long a creditor or collection agency can sue to reclaim the money.
Collectors can buy "out of statute" debts for pennies on the dollar from credit card issuers, cellphone firms, and other companies, so anything they squeeze out of a borrower is almost pure profit. And they often won't tell you you're not legally obligated to pay. In many states, making a small payment on an old debt will restart the statute of limitations and allow a creditor to sue. That can lead to trashed credit and wage garnishment.
In a new twist, collection agencies partner with banks to offer credit cards to people with troubled credit histories. If you snap up the card, you might not realize you're also agreeing to pay the old debt, which has been added to the card's balance. In 2010 Monterey County Bank paid a $3 million settlement without admitting or denying wrongdoing after the FDIC accused it of helping a debt collector revive expired debts with deceptive card offers.
With the economy improving and borrowers looking for fresh starts, these collection efforts are on the rise. But don't take the bait: Tell the collection agency — in writing — to stop contacting you.
Also of interest: 5 tips for easing into retirement. »
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