First things first, what is a statute of limitations on debt?
A statute of limitations is the duration of time which debt collectors have to file a lawsuit to recover a debt. It is a rule restricting how long a creditor can sue you for the payment on that debt. All consumer debts, from credit card balances to medical bills, have limitations on the time or rather a specific number of years for which the creditors have a legal right to sue you for payment.
The statute of limitations doesn’t apply to certain kinds of debts, but on those that it does apply to, you can accidentally restart the clock by taking certain actions.
You ought to be very careful if the debt collectors are hounding you because even one payment on an expired debt can result in a reset of the statute on that debt.
This of course opens you up to potential lawsuits and further collection action. In addition, the statute of limitations resets. When we first discussed this topic, most of us were unaware of it ourselves. Making it feel even more important to write about. Collectors use this to their advantage, knowing one small payment can reopen that debt for legal collection actions.
The statute of limitations protects from lawsuits brought to settle old debts.
What if you don’t pay back the money you owe? Creditors may report the delinquent debt to the credit bureaus, namely TransUnion, Experian, and Equifax. This can show up on your credit reports and your credit score may be damaged as a result.
Your debts may also be sent to collections in dire consequences, where debt collectors may also file a lawsuit and get a judgment against you. But thanks to the limitations on debt, there is a window collectors must work within to accomplish their jobs. On the expiry of the statute of limitations, the debt collector cannot sue you for collection of the debt as their case would be “time-barred.”
For a debt collector, it becomes paramount to collect a debt before the statue has taken effect. Without the ammunition of a lawsuit, collecting an expired debt can be extremely challenging.
How does the statute of limitations on debt work?
Each state sets its own statutes for the collection of debt. Usually, the state law where a person lives determines the statute of limitations on specific debts, even if he/she incurred the debt somewhere else. In a few states, the statute of limitations for credit card debt is 3 years, while it’s up to 10 in other states. So, the rules can vary significantly from state to state.
The time clock for the statute of limitations starts ticking on the date of the first missed payment. In some states, the clock restarts if you make a new payment. Even a partial payment on debt could restart the clock on the statute of limitations and give debt collectors more time to pursue legal action.
If the statute of limitations is expired but the debt collector keeps harassing you, you can send a letter to the collector requesting that they stop communicating with you.
Statute of limitations and the credit-reporting time period.
If the statute of limitations passes and claims become time-barred, it doesn’t mean you’re rid of that debt. A reminder of the unpaid credit stays on your credit reports despite the statute of limitation.
The reason is that a credit-reporting time period is entirely different from the statute of limitations. Derogatory marks — details about late payments and the debt you never repaid — typically highlight on the credit reports for seven years or longer.
It’s important to understand a debt outside its statute of limitations is not a forgiven debt. You still owe it, collection attempts can continue, and it will continue to show on your credit report.
Statute of Limitation on Secured and Unsecured Debts.
- A debtor cannot chase to take advantage of a limitation period for
- Secured debts like mortgages.
- Unsecured debts owed to the government (this includes student loans)
- Debt that cannot be discharged (child support payments, fines, and civil judgments that involve fraud.)
- The bait and switch by collectors.
If a collector sees a debt approaching its statute, they may pull out some less than scrupulous tactics to renew that debt. Remember, ANY payment made towards this debt resets the statute of limitations. Collectors may call and offer a seemingly “too good to be true” offer. Well, it is.
They may say, to avoid legal action, you just need to make a single small payment. Even if this debt is just days away from expiring, that small payment starts the whole time frame over, whatever it may be.
This may be one of the least understood factors related to debt and collections. The majority of Americans do not know there’s a statute of limitations for most types of debt. More importantly, they don’t know that even a partial payment of this debt resets the statute clock.