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Why Discharge a Time-Barred Debt?

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The New York Times‘ coverage last November of Transworld’s “assembly line” of lawsuits against student-loan debtors discussed debt collectors trying to recover debts that had passed their statutes of limitations. This is not a new phenomenon in the world of debt collection, but it raised the question of why a debtor might be interested in discharging an expired debt in New York bankruptcy. The reason it’s interesting is that, as the Transworld lawsuits illustrate, debtor-defendants with old debts have an affirmative defense against any collections actions against them. Before answering the question, I’ll outline the other options debtors have for addressing time-barred debts.

First of all, debtors who are in this situation can always choose to do nothing. This can be the best course of action for debt that’s difficult to discharge in bankruptcy, such as student loans in the Transworld example. The consequences of ignoring an expired debt are that it will remain on a debtor’s credit reports for several years (usually fewer than ten), and the statute of limitations won’t stop debt collectors from pursuing the debt by annoying phone calls, emails, and other contacts. Often this will occur when the collector sells the debt again to another debt collector, which then initiates the debt collection process anew.

Once the debt collector calls, the debtor can simply write the collector, listing all relevant information, and ask that it cease all collection activities. Essentially, debtors using this option are relying on the Fair Debt Collection Practices Act (FDCPA) for protection. Again, though, the collector can simply sell the debt once again.

Third, debtors can try to pay the debt down. It’s a strange option that will probably do more harm than good, but it’s there. The advantage of paying down the debt is that it retires it, ending collection efforts. There are two drawbacks, however. One is that any payment to the debt restarts the clock on the statute of limitations, which takes away the powerful leverage debtors have over creditors. Thus, debtors must be certain they are capable of paying down everything they owe. The second drawback is that debtors may find themselves not simply paying down an expired debt but a zombie debt, which is a debt that’s been paid off or discharged yet is still being pursued by creditors. If the debt is good, debtors should be willing to pay down the whole thing at once, agree to a repayment plan, or settle with the creditor rather than agree to standard payments.

(Click to read about how to deal with zombie debt collectors in New York.)

Finally, a debtor can try to discharge the debt, usually in a chapter 7 bankruptcy. Once the debt is eliminated, it will stop damaging the debtor’s credit scores, and creditors will be more willing to lend the debtor going forward. The bankruptcy flag will appear on debtors’ credit scores, which will undoubtedly rise nonetheless. In a sense bankruptcy is the opposite of doing nothing, but it’s also an option for debtors who want to pay down the debt but can’t afford to.

If your financial situation is deteriorating, then consulting with an experienced New York bankruptcy lawyer can help you assess your options, whether your debts are good or not.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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