Debt Adviser: What are the time limits on old, bad debt?

Two readers raise questions about whether there’s a time limit on old, bad debt.

Dear Debt Adviser: I have a charge-off account on my credit report. the question I have is that the account has been paid, but the account is still being reported as a charge-off and with a zero balance. the original time frame for the loan has not ended yet. Is this accurate for them to report the account still as a charge-off, even though the debt has been paid? — Steve

Dear Debt Advisers: does the statute of limitations pertain to the original debt, or does it restart every time the debt is sold? my debt is not from credit cards, it is from regular bills such as towing and utilities. — Dianne

Dear Steve and Dianne: Many people confuse the time frames for keeping a debt on a credit report vs. collecting a debt using the courts or the statute of limitations.

Steve, the charge-off will remain on your credit report for seven years. the fair Credit Reporting Act states that negative items will stay there from the first date of delinquency resulting in the charge-off. Typically, a debt is charged off once it is delinquent for 120 to 180 days. the original time frame for a loan — such as five years, in the case of a car loan — has no bearing on the length of time the delinquency will be reported in your credit file.

By paying off the debt, even though very late, potential lenders will be more willing to lend to you in the future than if you still had an unpaid account.

However, for purposes of credit reporting, the fact remains that you allowed the account to reach the point of being charged off. on your credit report, your account will show up as a black mark until the seven-year reporting period has expired. Just so you know, the negative account will have less impact on your credit and score over time and as you continue to pay other bills when they’re due.

Dianne, the statute of limitations clock is completely different from the seven-year rule that credit reporting companies use. the statute determines whether a debt is collectible in a legal proceeding, such as a court suit or garnishment. the clock starts running from the date of the last payment made on the original account.

Statute of limitations laws differ in each state, so you will need to check how those in your state apply to your debt. regardless of how many different collection agencies have purchased your debt, your state law is the sole determinant of when this clock starts or stops. in most states, the statute of limitations clock resets with any payment made on the account. Other actions can affect the clock in some states.

To sum up, credit reporting laws pertain to how long an accurate negative item can be reported on a credit report, and statute of limitation laws apply to how long a debt can be legally collected using the courts. in most states, a negative account can be reported on an account for longer than it can legally be collected in court. But that’s not the case in my home state of Rhode Island, where old debts are collectible for more than a decade.

Steve Bucci, author of “Credit Management Kit for Dummies,” works with the nonprofit InCharge Debt Solutions in Orlando, Fla. Email . see more columns at Bankrate.com.