8/20/2012 2:15 PM ET|
A statute of limitations on debt?
There are 2 main time limits: How long debt stays in your credit reports and how long you can be sued for it. If you're struggling, here's what you need to know.
Credit scores have plunged. With hiring nearly at a standstill, unemployment benefits are routinely running out. Foreclosures remain high. In the last two years, untold Americans have, for the first time in their lives, faced bills they can't pay.
If you're among them, you need to keep in mind that little in life, including debt, is truly permanent. Knowing something about the legal limitations on collecting and reporting debt can help you through your crisis and allow you to get back on your feet.
There are two major types of limitations on debt that you need to know -- and that many people confuse.
The first has to do with how long debt problems can show up in your credit reports. Federal law typically requires credit bureaus to drop negative information after seven years. The clock usually starts ticking 180 days after the account first goes delinquent (in other words, when you miss your first payment). There are exceptions: Bankruptcies can remain on your credit reports for up to 10 years, and some debts, such as unpaid tax liens, can stay on your reports indefinitely.
The other curb on debt collection is the statute of limitations, which gives creditors a certain time period -- in most states, three to six years -- in which to sue you over a debt.
In either case, you'll still owe the money, unless the debt has been forgiven or discharged in bankruptcy court. Lenders can try to collect it forever -- and probably will -- but they can't sue once the statute of limitations period has passed.
How long? It depends
Statutes of limitations vary widely by state and by the type of debt. States often have different rules for oral and written contracts, as well as for so-called closed-end contracts, such as installment loans, and open-ended contracts, which typically (but not always) include credit card accounts.
California, for example, has fairly short statutes of limitations on most debts: two years for oral contracts and four years for written contracts, promissory notes and credit card debts. Kentucky, by contrast, says creditors can sue over written contracts for 15 years after the last payment was made and for five years on most other debts, including credit cards.
You can start your research at websites such as the Credit Infocenter, which has a chart that includes links to relevant state laws.
Some other key points:
- The devil's in the details. Not only do states have different statutes of limitations for different debts, but two states may treat the same debts differently. A credit card debt might be considered an open-ended account in one state and a written contract in another. The only way to know for sure is to check your state laws or consult an attorney.
- You can inadvertently restart the clock. Generally, the statute of limitations starts ticking from the "date of last activity" on the accounts, said Los Angeles bankruptcy attorney Scott Bovitz. (If the account is still listed in your credit reports, the date of last activity should be noted there.) On a credit card debt, that could be the last payment you made or the last purchase you charged. But in some states, making a payment on an old debt, agreeing to an extended repayment plan or even acknowledging that the debt is yours can extend the statute of limitations or restart the clock.
- A creditor may still sue you after the statute of limitations has run out. Suing or threatening to sue you after the statute of limitations has run out violates the Fair Debt Collection Practices Act, but that doesn't mean it doesn't happen. To prevent the creditor from winning a judgment against you, you'll need to show up in court and point out that the statute has expired.
- The creditor may try to pick a better venue. If you sign a credit contract and move to a state with different limits, the creditor may try to sue you in the state that has the longer statute. If that's not the state in which you now live, you should protest, because generally the state where you reside is the one whose statutes should apply
- Debts can still exist even if the creditor can't sue. Some people erroneously believe that debts are erased after the statute of limitations has run out. Although the creditor's ability to sue you has been curtailed, it can still try other methods to persuade you to pay, including calls and letters. The debt can also be sold to another collector that can renew efforts to get you to pay. A legitimate debt is truly gone only when it's paid or erased in bankruptcy court.
- Collectors can't legally restart the seven-year clock by "re-aging" the debt (giving it a new delinquency date) orby selling it to another agency. The Federal Trade Commission shut down one large collection agency, Capital Acquisitions and Management, after charging the company repeatedly had re-aged debts in its attempts to collect.
Watch your step
If you can't pay a debt, you'll want to avoid saying anything that could restart the statute of limitations, including acknowledging the bill is yours or promising to make payments.
If you're sure the debt is too old for a lawsuit, you could send the collector a letter via certified mail, return receipt requested. The letter should state that the statute of limitations has expired and that you want all collection efforts stopped.
Still have questions? Check out the advice on Debt Collection Answers, a website of consumer advocate Gerri Detweiler, and the guide "Solve Your Money Troubles: Debt, Credit & Bankruptcy" by Robin Leonard and Margaret Reiter.
If a debt collector is particularly abusive or you get sued, you may want a lawyer's help. The National Association of Consumer Advocates can provide referrals to attorneys familiar with fair credit laws.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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