Repairing your past financial sins

Today's question from the floor: You pull up your credit report, and it includes debts that are beyond the statute of limitations. What do you do next? (I wrote about the bad-debt issue a bit last year, but I'm researching it in greater detail for these posts.)

First: keep copies of any paperwork, such as credit reports, that documents the DLA (date of last activity). That paperwork is your key to proving that the statute has run out. Retail vendors tend to have fairly aggressive bad debt write-off timeframes -- they'll ditch it within a year, to allow them to take advantage of tax breaks for it. Once a debt is sold off to a collector, it can be resold ad infinitum. Unscrupulous debt collectors have been known to fraudulently reset DLAs so they can continue pursuing legally uncollectible debts. Documentation of a beyond-the-statute DLA is your best friend in fighting further collection action.

If the collector contacts you about an expired debt: Simply tell them to stop. The Fair Debt Collection Practices Act (linked for any masochists that want to pour over legalese) requires debt collectors to cease communication once you send them a written letter telling them to stop. If you're contacted by phone, you can make the request verbally; if they ignore it, ask for an address to which you can send your stop-communication request. If they won't give you a written address, or ignore your requests and continue communicating, tell them you'll file an FTC complaint -- then do it. The form is right over here on the FTC's website. The FTC has a helpful FAQ about debt collection that covers these points.

If you do actually owe a debt, telling the collector to go away doesn't kill the debt. However, it does require them to only communicate again if they're taking a specific action. Basically, it tells them to sue or shut up. And if you're sued over an expired debt (one that you can prove has expired, thanks to the DLA records you kept), you don't legally owe it, and the suit will be dismissed.

OK, so that takes care of the legal end of the expired debt. What about your ravaged credit report?

There, you're stuck for the infamous seven years. Both accounts not paid as agreed and accounts sent to collections remain on file for seven years from the DLA. Once the debt is expired, it's legally dead, but there's nothing you can do to stop it from lurking on your credit report.

What if you want to make the black smirch go away? Be prepared to step into a hornet's nest. Even Suze Orman, who has a nice FAQ on charged-off accounts, throws up her hands here and says 'call a lawyer.' If large amounts are involved, definitely: get legal help.

But if you're struggling with bills, or have in the recent past, you're probably not rushing out to rack up legal fees. What are the other options?

Proceed with extreme caution before paying a penny. Any payment at all -- even a $5 good-faith payment -- is an activity and restarts your DLA. Not only does that allow the black mark to stick around longer, it also means a dead debt becomes a legally viable one again.

There are still steps you can take to repair your credit report, both by establishing good, new credit practises and by vigorously contesting negative information in your report. I'll blog on that tomorrow, but in the meantime, he's a post from last year on how to improve your FICO score.