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- 1 What happens to unpaid credit card debt after 7 years
- 2 What happens to unpaid credit card debt if you move abroad?
- 3 Do unpaid debts ever disappear?
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A loan or credit agreement is a contract between you and your lender. The lender agrees to give you the money, and you agree to pay it back over a period of time. However, sometimes people cannot pay back their loans, and they default on their credit agreements. Several different things can happen, depending on the type of agreement that was in place.
Unpaid debts can have some negative consequences. For example, if you are unable to pay your mortgage, the result can be foreclosure and the loss of your home. Once the foreclosure proceedings have concluded, the mortgage company still has the right to sue you for breach of contract.
Unpaid loans and credit cards have a negative effect on your credit score. Missed and late payments are noted. If the account is passed to collections and still remains unpaid, it can remain on your credit report for up seven years. This can make obtaining future credit difficult.
Unpaid debt holds consequences for the lender. If the debt is not recovered via collections, lawyers or other methods, then it is listed as bad debt. Most companies have contingency funds for bad debts or questionable accounts.
Although most companies cover their bad debts with these funds, the bad debts still are listed on their annual reports. Companies might tighten credit requirements or raise interest rates to recover the money lost from accumulated bad debts.
If you owe old, unpaid debt, then whether you pay it back is something to consider. Most states have statutes of limitation on debts. Once this period has passed, you cannot be sued in court for non-payment of debt.
You need to be very careful in this situation. Some companies have tried misleading people into paying some of their old debts, by threatening to sue. If you pay even small portion of your old debt, it could reset the statute of limitations and make the old debt new again. Know your state's statue of limitations, and get advice from a consumer attorney, before taking any action.
There are alternatives to sitting with unpaid debt. If you are still within the statute of limitations on your debt but unable to pay the full amount, debt settlement might be an option for you. Calculate how much you can afford to pay in a lump sum and offer it to the creditor. Many times creditors will settle the debt for as little as 60 per cent of what you owe.
Once you have paid the agreed amount you can ask that your credit report reflect that the debt has been settled. It might still remain on the report but will show as having been paid. This will cause far less damage to your credit score than leaving it unpaid.
The effects of unpaid debt generally stay on your credit report for seven years. Once the statute of limitations runs out, there is very little that lenders can do. However, in the meantime your life can become quite difficult. Bad debt lowers your credit score, and this can have several secondary effects. You might have trouble renting a place to live, because many landlords make credit checks before offering a rental contract.
Your insurance rates can also be affected. Insurance companies look at your credit scores to calculate their risk. The lower your score, the higher your rates.
Finally, an unpaid debt can affect your chances of getting a job or promotion. A notation of unpaid debt looks very unfavourable and can make a company decide against hiring you.
What happens to unpaid credit card debt after 7 years
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What happens to unpaid credit card debt if you move abroad?
Leaving the country and your credit card debts behind could come back to haunt you
Thinking of leaving the country -- and your credit card debt -- behind? While you may be able to get away with it for now, you might be setting yourself up for a financial nightmare in the long run.
One of the biggest motivators Americans have for paying their bills on time is to keep their credit scores intact. After all, credit scores impact everything from mortgages to car loans to insurance rates. But if you move overseas, your credit history in the United States typically has no bearing since other countries have their own systems for judging borrowers' creditworthiness.
But while it may be tempting to skip out on your debt, thinking your credit card issuer can't touch you overseas, doing so could create a bigger headache later on, experts warn.
While it's unclear how many people actually do default on their debts by leaving the country, some recent statistics in Dubai suggest that it has become more prevalent since the economic downturn. Last year, bank officials there estimated that as many as 2,500 customers left that country with unpaid credit card bills each month, starting over in a new place with a clean financial slate.
"Most individuals moving to a new country start a credit history through the traditional means," says Norm Magnuson, a spokesman for the Consumer Data Industry Association, an international trade association for credit reporting agencies based in Washington, D.C. "They may get a charge card from a bank or lending institution in that country or apply for a card from a retailer and continue to build their credit there."
While it's not impossible that a foreign lender would request a copy of a U.S.-based credit report, it's unlikely, Magnuson says. "Generally those reports cost quite a bit more because you've got to request them from a specialized bureau overseas that will gather the information. So, from a practical standpoint, you're probably not going to find too many companies willing to do that."
The cost of overseas enforcement is going to be prohibitive to most credit card companies and junk debt buyers.
If you don't pay your credit card debt and a lawsuit is served and filed before you move overseas, it would move forward in your absence. "Typically in the United States, a lawsuit would be filed in the state or county where the debtor lives," says William "Mike" Troglin, a Norcross, Ga.-based bankruptcy attorney. So if you're living in, say, Georgia when the lawsuit is filed, a Georgia court would hear the case even if you moved to a foreign country before the case was resolved.
However, that court would likely not be able to force you to pay the debt once you've relocated to another country, though creditors might be able to go after any loose ends you've left in the United States. "If the person leaves behind any kind of checking or savings accounts, they might be within reach of a civil court action," says Bruce McClary, a spokesman for Richmond, Va.-based ClearPoint Credit Counseling Solutions and a former debt collector. Likewise, if you move overseas but continue working for a U.S.-based company, there's the possibility that your wages could be garnished if that was part of the court ruling, since your employer would be subject to U.S. laws.
If a lawsuit has not been filed before you move overseas, things get a little trickier. "If a company is owed a debt, they have to bring suit in a foreign country's court of law and abide by their rules and procedures," says Rachel Hunter, an attorney in Cary, N.C., who specializes in debt collection. "That means they will have to hire counsel in that area. A person would have whatever rights and defenses he would usually have."
Companies could also file a U.S. suit against a person living abroad, Hunter says, but that company's success would depend on the country's legal system and whether it would cooperate with the United States.
But the odds of a suit being filed internationally over credit card debt are relatively slim, experts say. "The cost of overseas enforcement is going to be prohibitive to most credit card companies and junk debt buyers," says Hunter. "Nobody is going to go to Europe, Asia, Latin America or some other place for a $2,000 or even $20,000 debt. In addition, it may be difficult to locate a person who is living abroad, although there are companies that will provide international skip trace services in certain countries."
So with the odds of credit card issuers recouping their losses relatively slim, why would you want to pay up? First of all, it's the right thing to do.
Secondly, a move to another country would mean you'd be starting your credit history over from scratch, so you may want to continue using your American-based credit cards in the interim.
Having the ability to do that may be reason enough to pay your U.S.-based debts and keep your credit intact.
Finally, there is one more thing you should consider.
Though Claudine Williams, a 39-year-old teacher and travel writer who relocated from Atlanta to Busan, South Korea, in August of 2009, had no immediate plans to return to the United States, she paid off as many bills as possible before leaving and is keeping her remaining bills current. "I don't want to lose my assets or find myself in more of a financial bind if I ever return to the United States," she says.
Candy Wright, group manager with Farmington Hills, Mich.-based GreenPath Debt Solutions, says that's a wise move. If you leave debts behind while living overseas, it may go into collections or eventually be charged off, but both of those actions would have a negative mark on your credit report. "If you move back it would likely haunt you and you'd be in far worse shape," Wright says.
Do unpaid debts ever disappear?
Credit bureaus usually stop keeping track of delinquent amounts after six to seven years. But old debts can suddenly reappear on your credit report.
The belief that your creditors will eventually disappear in a puff of white smoke if you ignore them for long enough is unsurprisingly common in a nation beset by crippling household debt.
But does debt, in fact, ever disappear on its own?
The urban legend that debt expires after a few years is rooted in a kernel of truth. There is such a thing as a statute of limitations on debt, and old debts do generally drop off your credit record.
Still, debt doesn’t actually ever disappear. If you have unpaid liabilities, you’ll continue to owe money for the rest of your life — and sometimes beyond that.
Canadian legislation sets a statute of limitations on unsecured debt. This prevents creditors or a collection agency from taking debtors to court after a certain amount of time has elapsed. The clock starts ticking from the time you last made a payment on the debt, with the number of years varying across provinces and territories as follows:
- British Columbia = 2 years
- Alberta = 2 years
- Saskatchewan = 2 years
- Manitoba = 6 years
- Ontario = 2 years
- Quebec = 3 years
- New Brunswick = 2 years
- Nova Scotia = 6 years
- Prince Edward Island = 6 years
- Newfoundland and Labrador = 6 years
- The territories = 6 years
Not being able to take legal action means your creditors won’t have the means to seize your wages — but not much more, said David Gowling, senior vice-president with MNP Debt, one of Canada’s largest personal insolvency practices.
Debt collections agencies won’t stop harassing you and might even continue to threaten to sue you, confident that most debtors won’t know the law well enough to recognize that the threat is empty, said Gowling.
If you are familiar with statutes of limitations and know your term is up, you could theoretically use that as leverage to reach a debt settlement. In practice, however, that almost never happens.
In over 10 years of practice, Gowling has only seen one such case. It involved an individual with an intimate knowledge of the law who was able to reduce his debt load after two months of research work and haggling, something most distressed borrowers wouldn’t be able to replicate.
Creditors aren’t very likely to take debtors to court, anyways, as that can be a costly and drawn-out process, said Gowling.
And the term limits only apply to unsecured debts like some lines of credit and credit cards. Taxes, student loans, child and spousal support and debt backed by property — such as mortgages and home equity loans — are excluded.
WATCH: How to get out of credit card debt
When your debt disappears from your credit record
Debt does eventually disappear from your credit history, in most cases. Equifax and TransUnion only keep record of delinquent amounts for six to seven years from the last payment or default date, according to CreditCards.com Canada.
However, nothing prevents a collection agency from digging up forgotten debt and reporting them to the credit bureaus again, said Gowling.
Around two years ago, he saw a case in which a company started demanding payment for an Eaton’s card. (Eaton’s, the famous Canadian retailer, went bankrupt in 1999.)
WATCH: 5 things you can do to improve your credit score
What happens to your debt when you die
Debt doesn’t necessarily disappear when you die, either.
The good news is that only you are responsible for unsecured debt in your name: Your spouse and children don’t have to carry your unpaid credit card balance.
Unsecured creditors typically write off that debt as a loss when you die (although you should check on this with your creditors as policies may vary).
However, your partner or spouse will be responsible for picking up the balance left on any joint accounts, according to financial products comparisons site RateSupermarket.ca.
The bad news is that debts to the government — such as taxes — and debt secured by property — such as mortgages, home equity loans and car loans — do not go away.
If you die owing money to the Canada Revenue Agency, it can stake a claim to your estate, which will likely reduce the amount of inheritance available to your survivors.
And if you pass away with an outstanding balance on your mortgage or car loan, the debt remains attached to that property. Your family will likely have to pick up the tab or sell off the assets.
Mortgage insurance and term life insurance, however, will generally cover outstanding liabilities on your home, RateSupermarket.ca notes.
Thankfully, no one can come after your RRSP and TFSA savings, which will go to your designated beneficiaries, with no obligation for them to pay your debts.
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