Understanding How the Statute of Limitations Impacts the Collection of Debt

All debt arrangements come with a legal statute of limitations, which is the window of time a creditor has the right to sue the borrower in an effort to collect a debt. Debt that has exceeded the time frame the creditor can sue to recover payment is referred to as time barred debt. Laws at both the state and federal level define the statute of limitations and regulate the collection of debt beyond the statute of limitations. These laws protect the borrower from being sued long after information on the debt may be available.

Each state regulates the window of time in which a creditor may sue a debtor to collect a debt. The most common time frames are from 3 to 6 years, but can be as long as 8 in some states like Wyoming.

While there are different types of loans and credit agreements, each with varying periods that define the statute of limitations, we will focus on credit card accounts or open ended accounts for the purpose of this discussion. For credit card debt the state statute of limitations is as follows:

  • 3 Years: AL, AR, AK, AZ, CO, DC, KS, LA, MD, MS, NH, OK, SC, VA, WA
  • 4 Years: CA, DE, FL, GA, ID, NC, NE, NM, NV, RI, TX, UT, VT, WV
  • 5 Years: IA, IL, KY, MO, MT
  • 6 Years: CT, HI, IN, ME, MA, MI, MN, ND, NJ, NY, OH, OR, PA, SD, TN, WI
  • 8 Years: WY

The Statue of Limitation’s Impact on the Collection of Debt

Once the statute of limitations has passed you generally cannot be sued for the debt. However, debt collectors still have the legal right to attempt to collect the debt indefinitely. Moreover, new regulations issued by the Federal Trade Commission and the Consumer Financial Protection Bureau now require debt collectors to inform you if the statute of limitations has passed on the account they are trying to collect and further instruct you that they are not able to bring legal action against you in trying to collect the outstanding balance.

Even if a debt is beyond the statute of limitations to sue for recovery, the debt may remain in collections and legally be reported to credit reporting agencies for up to 7 years. Furthermore, if a creditor obtains a judgment against you prior to the expiration of the statute of limitations, the judgment remains collectable for up to 10 years, depending on your state of residence and activity on the account. Judgments can also be renewed which can impact you even longer.

What Type of Debt is Impacted by the Statute of Limitations?

There are four basic types of debt and each might have a different time period allowed for debt collection through the courts. Since the statute of limitations can vary by the type of debt and the state in which you reside, it is important to seek counsel from an attorney familiar with debt collection laws in your state. The following is a brief description of each type of debt impacted by the statute of limitations.

Oral Contracts are verbal agreements not accompanied by a written contract. They are enforceable in court, but more difficult to prove.

Written contracts are one of the most common forms of legal contracts. You sign an agreement to pay a loan under certain terms.

Promissory Note is a form of a written agreement that has very specific terms with regard to payment and interest rate and often comes with the longest time frames for lawsuits. Home loans are an example of a promissory note.

Open ended Accounts are typically revolving lines of credit like a credit card. Under the Truth-In-Lending Act a credit card is always considered to be an open ended account.

How do you Determine the State of Jurisdiction Relating to the Statute of Limitations

For most borrowers the state you live in or the state where the debt was initiated will be used. The debt collector can choose whichever state is most advantageous for them.

Many credit card contracts state that the collection efforts will be based on their state of incorporation rather than the borrower’s home.

How Do You Determine When the Statute of Limitations Begins?

Depending on the state where you live, the clock will begin at one of these three events occur.

  • When the account becomes delinquent or the date of the last payment
  • 6 months after the last payment
  • When the acceleration clause is acted upon

Bank statements or credit reports can be used to indicate when the last payment was made. The burden of proof is always on the borrower.

Activity That Might Re-Age the Account or Restart the Clock

If the debt is re-aged the statute of limitations will begin again. Activities that could potentially restart the clock include the following:

• Making a payment.
• Acknowledging the debt.
• Any new account activity initiated by you such as requesting an increase in the credit limit, abatement of fees or interest or re-aging the account to reduce a delinquency.

The rules of your state will determine if the statute of limitations is restarted with a payment or activity. Some states indicated that only a new written agreement will restart the clock.

States that require a new written agreement include: Arizona, California, Florida, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New York, Texas, Virginia, West Virginia and Wisconsin.

What You Should Do If Contacted Regarding Old Debt

According to the FTC, steps you can take that will protect your rights include the following:

1) Ask if the debt is beyond the statute of limitations. If you believe the debt is too old for the creditor to take legal action, ask them directly. According to the Fair Collection Practices Act they must answer truthfully, although they may decline to answer.

2) Ask the date of the last payment or activity on the account. This will enable you to establish when the statute of limitations began.

3) Ask for written notice and to verify the debt without acknowledging the debt is yours. When you ask for written documentation they have 5 days to mail the information. You can then establish if the debt is yours and if the statute of limitations has passed.

4) Get a copy of your credit report and see what is reported as far as activity.

5) Respond to ANY lawsuits or court documents. A debt collection company can still sue. As long as you have records that show the statute of limitations is passed you will be able to get the lawsuit dismissed. Ignoring the letter or failing to appear in court could result in a default judgment, which will make you legally liable for the debt.

Based on the Fair Debt Collection Practices Act it is illegal to sue or threaten to sue for time barred debt. However, it is your responsibility to prove the debt is beyond the statute of limitations. Retaining information on the account is the best way to protect your legal rights.

Options If Your Debt Has Reached the Statute of Limitations

Don’t pay the debt. If you choose not to pay the debt it will still remain on your credit report for 7 years from the last delinquency. If you choose this route, each time a debt collector contacts you, send them a letter stating you do not want to be contacted. They can continue to sell the debt to new companies so this process will likely be repeated many times.

Partial Payment. Making a partial payment could restart the clock on the statute of limitations, making you vulnerable to a lawsuit. Check the rules in your state before acknowledging or paying any old debts.

Pay off the debt. Once the time for a lawsuit has passed, the collection company might be motivated to settle the account opening the door for negotiation of the debt. Debt collection companies pay pennies on the dollar, meaning a settlement will result in a profit for them. This helps clear up your credit file faster and end collection calls. Under new regulations implemented, a paid collection account will no longer be factored into your credit score, so paying in full or settling an account for less than the full amount owed will remove the account from your credit score calculation going forward. This change is now being implemented in credit reporting systems beginning with FICO 9.0.

If you choose to pay off the debt, get everything in writing before you make a payment. Keep receipts and correspondence forever. If you are ever contacted about the debt you will be able to show the matter was resolved.

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