In 2012 I stopped paying on a Bank of America Visa credit card with an approximate balance of $24,000. I was unable to make continue making payments because I had been out of work for almost a year and so I was just trying to make my mortgage payments and cover costs.
I also owed IRS money for taxes and early withdrawal on my 401k.
I continue to receive letters about settlement payoff but not sure what to do. It has now been seven years. Should I make a settlement plan and pay?
I don’t really have a lot of extra income at this point as I have encountered other employment continuity issues and have a daughter who is an HS senior so I will need to consider college tuition also.
Should I try to pay back this credit card debt or just leave it unpaid? If I leave it unpaid will I be unable to get a home equity loan in the future?
It is amazing how what appears to be such a straightforward question is actually very complex.
There are multiple scenarios here and ultimately it might be beneficial having a conversation with an independent debt coach like Damon Day. You see the best answer to your question really involves how you want to deal with emotionally and not just technically.
Here are some key considerations in dealing with a seven-year-old unsecured debt.
Statute of Limitations
One of the issues here is if the debt has expired from under the Statute of Limitations (SOL). The SOL is an imperfect tool because things can start and stop the SOL on a debt. You may also live in a state that has a very long SOL. Some states are shorter.
The SOL is also not a tool that would prevent a creditor or collector from attempting to get money through debt collection. It also would not stop you from being sued. Raising a defense that the debt is outside the SOL is something you can only do once you are sued.
Things like admitting to the debt or making a payment promise can restart the SOL. The SOL can also be paused if you move out of the country or even if you are voluntarily out of the state. It’s complicated.
But to determine if the debt is outside the SOL would require a legal opinion by a lawyer who is licensed in your state.
If you were to be sued over this old debt, and lose, the entity suing you might try to garnish your wages. However, wages can’t be garnished in every state. At present four U.S. states—Pennsylvania, North Carolina, South Carolina, and Texas—do not allow wage garnishment at all except for tax-related debt, child support, federally guaranteed student loans, and court-ordered fines or restitution.
Forgiven Debt Tax Liability
By ignoring the debt you may find yourself with a 1099-C notice in the mail. This is a notification that the debt owner has reported the debt as a loss to the IRS. That does not make it uncollectible. If you are not insolvent you may owe personal income tax of the amount of the forgiven debt.
If you settle the debt you may owe personal income tax on the amount of debt written off in the settlement.
I don’t think there is any doubt that debt this old can be settled. The issue is that you’d want to make sure you have the cash on hand to open and close the door on the old debt quickly. You’d need access to about $7,000 or so to settle this in a flash. Settling with a payment plan might not make logical sense since it would just extend dealing with this debt for many more years to come. And since you don’t have any extra income, making a payment plan seems unwise.
If you get some good advice on your specific situation, and you are comfortable with doing nothing, that is an option.
The account will be listed on your consumer credit report for seven years and 18- days from the date it last went delinquent. Typically around the seven year anniversary, it will drop off your credit report.
Just because a debt is not on your credit report that does not mean you don’t owe it or can’t be sued over it.
If the debt is not on your credit report it will no linger drag down your credit score. But then again, you should have been concentrating on rebuilding your credit for all these years so by now, even if it was still reported, it will not have much impact.
If you have been trained and are mentally prepared to just take your chances this debt has died, then doing nothing can be a valid approach at this time.
So You See
The best answer for you is going to only be able to be determined after a knowledge person, who is not trying to sell you something, weighs all the factors.
There is no one-size-fits-all answer here. For some people I’ve worked with over the years, bankruptcy can make sense. But those are people who absolutely want the debt to go away tax-free and want a guaranty they will no longer be legally at risk over the debt.
And that’s an example of a choice on the far end of the scale while doing nothing and sticking your head in the sand is on the opposite end of that scale.
Please come back and comment on what you decide to do.
Before You Go
It might just be possible you can’t afford to take out student loans. Make sure your daughter is committed to a degree program. Nearly 3 out of 4 students have student loan debt but never graduate.
If you don’t have the money to pay for tuition in cash, avoid student loans at all costs. And certainly, don’t co-sign or take out federal Parent PLUS loans.
You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.