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We've got one family member who is the classic definition of "ne'er–do–well". I don't think he is capable of understanding money, issues or contracts. When you talk to him he seems to have good intentions but things rarely work out. He owes lots and lots of organizations money. He also has a gambling problem. We know enough from Gam-anon to never ever give him money, co-sign on any note for him, or even try to intercede to help him on issues involving money.

I do have a question though. His current plan to get out of debt is to just wait seven years for the debts to dissolve. He told us that the seven year clock starts from the time of his last payment to that organization. So, that's his excuse for not paying off any bills at all, that if he does that, then the seven year clock starts up again.

I always thought a Bankruptcy would have made more sense for this 27 year old kid to get a fresh start on life. He is violently opposed to any talk at all of Bankruptcy. When they talk of the seven year rule involving creditors, its seven years from what? Is there any validity to what this kid is saying on his plan to cheat his creditors... and er... get a fresh start on life?

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I've never heard of this seven year rule. You sure of this? –  JoeTaxpayer May 26 at 21:38
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I hate these smart-ass way of getting out of debt, without paying, without negotiating, and laughing about the creditor. The only good side of this is that they do not work. –  Quora Feans May 27 at 1:55
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"He told us that the seven year clock starts from the time of his last payment to that organization. So, that's his excuse for not paying off any bills at all, that if he does that, then the seven year clock starts up again." -- true, but debts owed don't "dissolve". Only bankruptcy or being legally forgiven by the creditor will stop him from owing the debt. –  Anaksunaman May 27 at 7:22
    
If he gets a judgement against him, his plans probably won't work out too well. In addition, any writing off of the debt by creditors will likely leave him paying a huge tax on the money as it would be considered "income" and does in fact get reported to the IRS. Good luck beating that one. –  woot May 28 at 4:46
    
@woot Didn't know that one, but I suppose it will still be money saved as you shouldn't get taxed 100%. –  Ally May 28 at 9:50

3 Answers 3

up vote 31 down vote accepted

Time-Barred Debts and STATE STATUTES OF LIMITATION ON COLLECTING DEBTS are good places to start on the issues of what can be collected and for how long. What seems to be at issue is bankruptcy vs. time-barred debts vs. what creditors (original debt owners, not collection agencies or those who buy debt) can do. You should also check out The Fair Credit Reporting Act which governs some of the question.

The Fair Credit Reporting Act and the section on time-barred debts applies to collection agencies, etc. (so-called debt owners as pointed out by @littleadv, since they buy debt from the creditors) not actual creditors (those the debt is/was originally owed to). Creditors (those to whom the debt was originally owed) have different rules than debt collectors and can do things debt collectors can't. State law generally governs what creditors, as original owners of the debt, can do legally and for how long.

  • Bankruptcy

    Bankruptcy is a legal action that frees someone from paying all or part of debt owed (they are crying "Uncle!" and stating they don't have enough money to pay their creditors). On a credit report, accounts will generally be updated to show “included in bankruptcy" or similar. Debt that is determined to still be owed often will be reduced in amount/payments.

  • Time-barred Debts

    Time-barred debts are debts that are still owed, but cannot be collected through direct legal action (suing). Each state has its own statute of limitations on how long different types of debt can be collected by suing after initial default before being considered time-barred. This period is typically 3-6 years but a few states such as Kentucky allow much longer time periods (up to 15 years).

    Being a time-barred debt does NOT prevent a collector from contacting someone about a debt. Collectors can still try to collect a debt forever -- and probably will -- but they can't normally sue and collect payment once the statute of limitations period has passed.

    There are gotchas with time-barred debts regarding collection, however, which can make them still legally actionable. Making any payment, no matter how small, making a verbal commitment to pay or even acknowledging the time-barred debt is often enough to make the debt legally collectable, even if it would normally be past the statute of limitations for collection. This is again state-dependent, but it is a pitfall for many people. The process of making a debt collectable again is often called "re-aging". Re-aging essentially means the clock starts anew on the statute of limitations, extending the time that a creditor may use the courts to collect that debt.

    If someone is taken to court over a time-barred debt that is legally noncollectable (has not been legally re-aged), nothing happens to them. However, being time-barred does not prevent legal action in the sense that you still have to prove the debt is time-barred and noncollectable in court if your sued over it.

    Being time-barred does not mean the debt "dissolves". A debt is always owed unless the debt has been forgiven or discharged in bankruptcy court. This means that, combined with the ability of debt collectors to contact someone about out of statute debt and the pitfalls of re-aging, it is entirely possible for a debt collector to get a 20 year old debt actionable again.

    Also note that while someone is trying to dodge a debt to make it time-barred (e.g. by not paying anything), creditors and debt collectors can still take legal action to sue over the debt, and if they get a judgment against someone, this can extend the debt indefinitely. Judgements will eventually lapse, but often only after 10 years or more, and many states allow dormant judgements to be "revived" within that time period.

  • Credit Reports

    Regarding credit reports, whether someone owes a debt and whether it appears on a credit report are two separate things. As previously stated, no debt "dissolves" or goes away unless some sort of legal action makes it so.

    As far as reporting is concerned, however, most "bad" credit stops being reported after seven years (by federal law). That is, accounts on a credit report will be deleted seven years from the original delinquency dates of the accounts regardless of being included in bankruptcy or as time-barred debt. This assumes no legal process allows the account to continue being reported (as is often the case with re-aging). As an FYI, a bankruptcy discharge date has nothing to do with when account information will be removed from your credit report.

    Note that some debts, such as tax liens, can be reported indefinitely.

Should bankruptcy be considered?

The decision to do bankruptcy is mostly a matter of how severe the debt is. If it is an extremely large amount and assets are very small, bankruptcy is a good route in so far as it will legally take care of a lot of loose ends and likely relieve most or all of the burden of actually owing the money. Credit-wise, 10 years is the maximum a bankruptcy (specifically) will appear on a credit report. Accounts may drop off a credit report before bankruptcy because they are past the seven years they can be legally reported. Debts owed to the state such as child support, student loans, income tax, etc. generally cannot be written off and aren't subject normal debt statute of limitations on collection.

Finally, bad credit is bad credit -- there is likely to be little difference in terms of ability to get loans between bankruptcy and attempting to dodge legal action to make debts time-barred. If the debt is significant, bankruptcy may be the only sensible option.

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Nice answer - I like to add that bankruptcy and credit laws are meant to allow honest people a chance to start over; they are a vital instrument for capitalism in the US because honest failure isn't a lifelong punishment. –  MrChrister May 27 at 13:41

The assumption is not necessarily correct. While the seven years affects the credit report, the statute of limitations for collections may be different and is based on the State law where the debt was given (or a Federal law for NA banks).

Keep in mind that the creditor can reset the clock any time by taking legal action, for example filing a lawsuit in a court to garnish some of his income or put a lien on some of his assets. Many times, just contacting the debtor is enough to reset the clock. The statute of limitations on collections is a legal issue and he should talk to a lawyer about it. Different accounts may have different statutes affecting them.

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+1 for " the creditor can reset the clock any time by taking legal action, for example filing a law suite in a court " –  Quora Feans May 27 at 1:54
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"the creditor can reset the clock any time by taking legal action, for example filing a law suite in a court" -- not necessarily. Original creditors may or may not have this option but for genuine debt collection agencies, etc. this scenario relies on state specific statutes that allow any payment to be treated as a reset for debt collectors. –  Anaksunaman May 27 at 4:14
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@Anaksunaman collection agencies are not creditors, they are debt owners. –  littleadv May 27 at 5:28
    
This is really more of a comment than an answer –  Chad May 29 at 13:27

Assume that he reformed his ways. He stopped the destructive behavior (gambling) and had enough money from a job going forward to pay for all his future expenses. Then it is true the old debts will fade away both as being collectable, and as a source of a negative mark on the credit report. Also assume that the people or companies never figure out that the the relative has a steady source of income, also assume that all the debts can be forgiven and have no long lasting impact.

If any of those assumptions aren't true the plan won't work. The trail of debts will continue to grow, and may have additional complications. As debts fall off the radar, they may be replaced even faster by new threats.

Many a person has used a debt consolidation loan, or a home equity loan to pay off all the credit cards; but found themselves back in trouble because they never fixed the underlying problem: they spend more than they make. In the case of a home equity loan they put their house at rick, as a replacement of unsecured loans.

If the gambling continues, the lack of payment of old debts becomes a crutch for the ability to generate new debts.

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"Many a person has used a debt consolidation loan, or a home equity loan to pay off all the credit cards; but found themselves back in trouble because they never fixed the underlying problem: they spend more than they make." - Here, here! It is a simply a matter of dollars in vs dollars out. If you don't tip the scale towards more dollars in vs dollars out, you'll be stuck in this perpetual cycle of debt. –  staticx May 27 at 13:18
    
"assume that the people or companies never figure out that the the relative has a steady source of income" ... I'm pretty sure this won't hold any legal weight, as you can't compel someone to pay a relative's debt unless they agreed to (such as co-signing a loan). –  Michael May 28 at 15:48
    
The relative is the one that has the debt. If they have income to live, they might have enough money for the person they owe to try and get the money. Just ignoring the debt won't make it disappear. –  mhoran_psprep May 28 at 15:51

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