Do not assume that a statute of limitations will ever "cancel" a debt that you owe. While your creditor may not be able to win a lawsuit against you, it can still ask you to pay the debt, and the debt can remain on your credit reports long after the statute of limitations on your debt runs out.
Cancellation of Debt
Creditors cancel debts for many reasons. Personal creditors, such as friends or family, may cancel a debt if they wish to make you a gift of their original loan, or because they do not want continued conflict over the debt. Credit card companies and other commercial creditors may cancel a least a portion of a debt in response to a settlement offer. For example, if you have financial difficulties, your credit card company may settle your debt for half of what you owe, canceling the rest, because working with you will bring them more money than if you file for bankruptcy. As of 2011, creditors must report canceled debts of more than $600 to the IRS as income for the debtor, who may then have to pay taxes on the forgiven debt.
Statute of Limitations
The statute of limitations on debt is the time frame during which a creditor can collect a debt through a lawsuit. While the statute of limitations does not cancel or eliminate a debt, a debtor can ask a judge to dismiss a lawsuit filed on a debt that is outside the statute of limitations.
Time-Barred Debt Collection
Some businesses, usually collection agencies, purchase debts (deeply discounted from their original value) that are no longer collectible under a state's statute of limitations. Their debt collectors then attempt to get you to agree to pay the debt, which can restart its statute of limitations. Once a debt collector succeeds in getting you to "reaffirm" the debt, it may be able to sue you successfully. You can protect yourself by never agreeing to work with a debt collector over the phone. Instead, request that the collection agency send you written validation of the debt, including the date on which it went into default.
Credit Issues
Unpaid debts, even those that are past the statute of limitations for collection, can permanently affect your credit. Under federal law, credit bureaus must suppress negative credit information, such as charge-offs, bankruptcies, late payments and collection accounts, after that information reaches a certain age, normally between seven and ten years. Once the credit bureau suppresses this information, it will not show up on the credit reports that most creditors, landlords and employers see, so it is unlikely that it will have any significant effect on your credit or your ability to secure housing or employment. However, these credit protections do not apply to reports requested by a creditor or insurance company that may issue a loan or a policy for more than $150,000. It also does not apply to employers that plan to pay you more than $75,000 per year in wages or salary. The credit reports that the bureaus provide to these entities may include information about old unpaid debts, which may prevent you from getting the loan or job that you need.
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