I thought I had heard it all.  Well, that was until a listener called the show with a question about a recent offer from a debt collector.

Before I tell you about the offer, let me review a few things about debt collection that is important for you to know.  The key in managing a debt collection process is staying out of legal problems.

If the debt collector or creditor resorts to legal means to collect the debt, you have big problems.   Once a judgment is awarded, then the debt collector and/or creditor have other means to collect that debt.  This is not a good situation for a consumer.

Fortunately, the person who owns the defaulted debt has a specific period of time to take legal action.  This is called the statute of limitations period and is determined by each state.  For the state of Texas, a creditor has 4 years past the first missed payment to take legal action.  After that time period has passed, the consumer can defend themselves with a statute of limitations defense.

The key is surviving the statute of limitations period and escaping the legal trap of debt.  In addition, it is important to know exactly how that period works in your particular state.  In some states, the statute of limitations period can be re-started just by making a payment.

On with the story………

This listener was well beyond the statute of limitations period.  In fact, the debt was so old that all of the information about the debt was about to be removed from his credit report.

The debt collector sent him a letter with a credit card offer.  The offer was to settle the outstanding debt with the debt collector by accepting this pre-approved credit card.  If you just agree to the new credit card, your debt “owned by the debt collector will be considered resolved.”

On the surface it appears that they are giving you a great way to resolve your debt.  Unfortunately, this generous offer by the debt collector is nothing more than a potential trap.

Remember the listener was just about through all reporting of this debt.  It was an old debt.

By accepting this offer, he puts himself in the following trap:

• His debt starts over again on his credit report
• If he defaults, his debt will start over again with a NEW statute of limitations period.
• The debt is about to fall off his credit report.  Now, it gets added back.
• If the debt collector reports any of the debt as “forgiven,” he will owe taxes on that part of the debt that was forgiven.

What is the trap?

By accepting the offer, the old debt becomes reportable again.  The listener is back into a situation where default could occur.  If he were to default, he would have a new negative item placed on his credit report along with a brand new statute of limitations period, which exposes him to a potential lawsuit.

I talked to an agent for the company that is offering this settlement arrangement.  She said that the transferred money would be 0% for the life of the pay-off.  She also said that would never change.  However, that is not the case.  The fine print reads “the bank has the right to change the account (including APRs or interest rates) at any given time.”

The fine print also says that the debt collector “is not affiliated with the bank.”  However, a press release dated September 25, 2006 states that the bank and the debt collector have joined forces.  The bank website states that this debt collector is an affiliated partner.

There are also many reports that this particular debt collector has a history of making these offers to people on debt that is not even valid.  How would you like to assume the debt of someone else?

As I have written extensively in my book, Escape the Debt Trap, you have to be careful about any types of offers from the credit industry. It is well documented that these end up being traps most of the time.

If you are a debt collector, what is the best way to get an old debt back current again?

• Purchase an old debt
• The debt collector partners with a bank
• The bank offers to put that debt on a credit card
• The bank then changes the terms of the credit card and raises the interest rates
• The consumer defaults on the debt
• The bank gives it back to their debt collecting partner
• The debt dramatically increases through penalties and fees due to the default
• The debt collector now has a live debt that is greater than the original debt with legal means to collect which was not available originally

Not a bad racket!

As a consumer, you should always pay off a debt.  In no way, am I advocating anything else.   If you are out of the statute of limitations period, you can always save up your money and pay off a negotiated settlement with the debt collector and you have plenty of time to do so.  By going any other way, you risk putting yourself in a very bad situation.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.