Paying Off All Bad Debt Might Not Help You Get Into A Home Faster
Many people believe that if they take care of old debt issues, they will have a better chance at getting approved for a mortgage faster. It’s important to be aware that this isn’t always the case. Indiana has a six year statute of limitations on for filing lawsuits for old debt.
Consider this scenario:
You have a phone contract from 2012 and you never ended up paying the $300 early-termination fee. Eventually, they stopped sending you letters and you forgot about it. This six-year old bad debt can’t lead to a lawsuit, thanks to Indiana law. The statute of limitations won’t erase the debt, but they can’t sue you anymore. Instead, they sold the debt for very cheap to a debt collection company. Suddenly, you’re getting collection letters from a collection agency, and you’re hoping to buy a home next year. Your first response may be that you should immediately pay off that bad debt. Right?
If you start paying off the debt to the new company or even pay the debt off in full, it will stay on your credit report for another seven years, starting the clock all over again! So, if you get a collection notice, check the fine print carefully. A time-barred debt will generally have a small paragraph that explains that you can no longer be sued for that debt! Yet, as soon as you pick it back up again it stays on your credit report longer.
This is something to take into consideration. If you have any questions, your lawyer or mortgage broker can certainly figure out your safest option.
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