You've probably heard rumors that if a debt is more than seven years old it is automatically forgiven, but thought it sounded too good to be true. Like many rumors, this one has a kernel of truth. Although the debt is not forgiven, debt collectors must abide by some restrictions while collecting the debt once the statute of limitations has been met. But there are other important considerations when it comes to determining if your debt has been forgiven.

Charge-Offs

Charge-offs are not the same as debt forgiveness. A company or institution may consider your debt a charge-off. What this means is that they recognize that you owe the debt, but they do not expect repayment for the debt. You are still held responsible for the debt, even though the holder of the debt may cease efforts to collect it. Charge-offs may occur for a number of reasons.

• The debt may be so small that the holder would spend more money to collect it than the debt is worth.
• The debt holder may decide that collecting the debt would create a hardship for you.
• The debt holder may not have your correct address or contact information
• The debt holder considers the debt uncollectable because it has been delinquent for a significant amount of time - typically 90 or 180 days.

Statute of Limitations

Each state has a statute of limitations for collecting debts. This means a debt holder can legally take you to court or sue you for failure to pay the debt within this time period. The statute of limitations for debt collecting ranges from 3 to 15 years, depending on the state you live in. After the statute of limitations expires, you are still held liable for the debt, but the debt holder forfeits the right to sue you in court for the debt. He can, however, continue to call your or correspond with you via mail. The notion that your debts are forgiven after seven years likely arose from a misunderstanding of the statute of limitations on debts.

Debt Forgiveness

An official debt forgiveness must be accompanied by a 1099-C from the IRS. This is referred to as a Cancellation of Debt. All debt cancellation over $600 must be reported to the IRS and is counted a personal income and may be subject to income tax. If you receive a debt forgiveness, you are no longer responsible for the debt, even if your financial circumstances change. Some common reasons you may receive a debt cancellation notice are:

• Your debt was discharged by bankruptcy.
• You meet the financial hardship guidelines of the debt holder.
• The debt holder is unable to verify the debt.

So How Do They Affect My Credit Score?

According to Bankrate, both charge-offs and debt cancellations are reported to credit bureaus and can negatively affect your credit. In fact, a charge-off may be worse than delinquent accounts that were eventually paid off. They will remain on your credit report for seven years, another possible reason some believe that your debts are forgiven in seven years.

So, What Do I Do if I Can't Pay My Bills?

If you are having temporary difficulty paying your bills, many creditors will make arrangements for lower payments until you get on your feet, but you need to take the initiative to contact them and explain your circumstances. This option is the best under the following (or similar) circumstances:

• Loss of job
• Temporary decrease in income
• Personal illness or illness of a family member
• Unexpected expenses that were unavoidable

More serious financial difficulties expected to last more than a few weeks or months may be a sign that you should contact a bankruptcy lawyer, such as Wade Bettis, J.D., Ph.D., PC, to explore your options. They can guide you through the steps necessary to get your life back on track and get your finances in order.