People make mistakes managing their credit obligations. Credit reporting rules, thankfully, can help consumers avoid being haunted by their unpaid debts forever.
A recent study released by the Urban Institute suggests that a little over a third of Americans with a credit file have at least one debt which has been turned over to a debt collection and reported to the credit bureaus as such.
To put it into perspective, that figure represents roughly 77 million Americans. It appears that not only are defaulted debts a fact of life but they are a fairly common one.
The credit reporting clock
Unpaid debts can haunt consumers for years but, thankfully, they cannot remain on credit reports forever. The Fair Credit Reporting Act, or FCRA, places a limit on how long negative information is allowed to remain on a consumer credit report. That time limit is also known as the credit reporting “statute of limitations.”
According to the FCRA, “The 7-year (credit reporting) period shall begin, with respect to any delinquent account that is placed for collection (internally or by referral to a third party, whichever is earlier), charged to profit and loss, or subjected to any similar action, upon the expiration of the 180-day period beginning on the date of the commencement of the delinquency which immediately preceded the collection activity, charge to profit and loss, or similar action.”
To put that paragraph more simply, a collection account is allowed to remain on a consumer’s credit report for seven years from the date of default on the original account. In other words, if you defaulted on a credit card in June 2010, any subsequent collections stemming from that credit card default would have to be removed from a credit report no later than June 2017.
The date of default occurs when the original, unpaid debt becomes six months (180 days) delinquent. What this all means is a collection account cannot remain on your credit file longer than seven years under any circumstance.
If an unpaid debt is sold to a debt buyer/collection agency, which is very common, the sale or transfer of the debt cannot legally impact the date from which the account is to be purged from the consumer’s credit report.
When a collection agency buys a debt the credit reporting clock does not start over. In fact nothing can legally change the “purge from” date on a collection account including the sale of the debt, the settlement of the debt, or a payment being made on the debt. It does not matter if a collection account is sold and then resold to multiple collection agencies. Seven year is it, period.
However, a practice in the debt collection world known as “re-aging” can come into play. Re-aging is the illegal practice of a collection agency reporting an incorrect “purge from” date on an account to the credit bureaus.
Re-aging can occur both accidentally and maliciously. Whether a collection agency mistakenly reports an incorrect or more recent “purge from” date on an account, it is still illegal.
When a debt collector knowingly reports incorrect “purge from” dates to the credit reporting agencies it is a violation of at least two federal statutes. The first is the FCRA.
The second is the Fair Debt Collection Practices Act or “FDCPA.” The FDCPA defines how collection agencies have to operate their debt collection practices. If they use any abusive debt collection tactics, like incorrect credit reporting, then it’s a violation of the act.