Time-Barred Debt can Still do Damage Even After 13 Years

Dear Speaking of Credit,

My neighbor used to stay in California U.S., from 1998 to 2002. He came to India, but he had defaulted his credit card payments up to nearly $12,000. Now after 13 years he is planning to go back to U.S. What happens to him after he lands in U.S? Will he be arrested? Thank you.

- Deepthi

Hello Deepthi,

Fortunately for your neighbor, he need not worry about being arrested as he steps off the plane and onto U.S. soil. But that doesn't mean there aren't some potential ghosts ready and waiting to haunt him all these years later, and even further on into the future.

In the case of a debt that has gone unpaid for 13 years, a credit card company typically will have written the debt off as a loss and stopped trying to collect after about six months without payment. The late payments and "charge-off" (default) status associated with this loss to the creditor would have then remained on his credit report for seven years from the date of the first late payment, making it unlikely that any evidence of the original debt is continuing to report.

At the point of officially becoming uncollectible by the original creditor, the debt was probably assigned to a third-party collection agency that separately reported it to the credit bureaus for a seven-year period (specifically, it's 7.5 years from the date the debt first became delinquent). Another possible outcome is that the original creditor or collection agency, after unsuccessfully attempting to collect, may have obtained a court judgment that would have remained on his credit report for seven years from the date filed.

One of the first things your neighbor should do upon returning to the U.S. is order his credit reports from each of the three credit bureaus -- Equifax, Experian and TransUnion -- by going to a single website, annualcreditreport.com. Since it sounds like he hasn't requested his reports within the past year, all three should be free.

When he obtains these credit reports he should be relieved to see that, along with the removal of any evidence pointing to the original credit card account(s), it's doubtful that any collections from this debt are continuing to appear -- though, depending on if and when filed, there remains the slight chance of a lingering judgment having not yet been removed from his reports.

Now 13 years following this default, not only has all evidence of this default probably been removed from his credit reports and credit scores -- if he even still has any scores (some recent U.S. credit history is required) -- but he'll also be glad to know that this $12,000 debt is now legally considered "time-barred debt," meaning that, while collectors can still come after him for as long as he still owes, they can no longer sue for payment.

A debt becomes time-barred once the statute of limitations for the state in which it was incurred has passed, with California's statute being four years from the date the debt first became delinquent. This statute should not be confused with the length of time credit bureaus report negative information, which again, is typically seven years.

In addition to obtaining his credit reports, your neighbor should familiarize himself with his legal rights regarding time-barred debt, as there can be some instances where the statute of limitations may not prevent him from being sued. For example, in some states, making a partial payment, or even promising a collector you'll pay, can start the statute's clock ticking again and trigger the start of a new period, during which you can legally be sued. For this reason, if he agrees to settle the debt for less than the full amount due, which, incidentally, would be an excellent way to resolve the matter once and for all, it would be essential for his protection that he obtain clear written documentation from the collector indicating the debt has been satisfied.

Your neighbor should also know that despite the debt being time-barred, and despite the likelihood that no trace of the default will appear on his credit reports, that doesn't mean this $12,000 black mark can't rear its head at some future date. Suppose he tries to buy a home a few years from now? Investigations for mortgage applications often look at credit history extending back much further than typical credit reports. If this unpaid debt is discovered, he may be required to satisfy it or risk losing the house.

And lastly, before applying for a new credit card he may want to be aware of which credit card companies to avoid, as some will never lend to someone who has ever defaulted or discharged a debt through bankruptcy with them, or with any company they may have since acquired.

Hope this helps! And I hope your friend will be able to resolve his past missteps and get back on the good foot when returning to the U.S.