Often during bankruptcy consultations, I hear stories of collection agencies attempting to collect really old debt. Generally, people have a vague notion that there is a time limit within which a creditor can collect a debt, but often they are told by collectors that their particular account is still collectible. This time limit, known as the “statute of limitations,” prevents a creditor from suing a debtor after the expiration of the allowed time. However, a debtor can take certain actions which can actually restart the limitation period, so get educated before you deal with old debt.
In her article for MSN Money, Liz Pulliam Weston discusses the two major types of time limitations on debt that you need to know.
Reporting debt on the borrower’s credit report: Federal law typically requires credit bureaus to drop negative information after seven years from the date an account first becomes delinquent. An account “becomes delinquent” when the first scheduled payment is missed. Exceptions to the rule include a Chapter 7 bankruptcy, which can remain on your credit reports for up to 10 years (Chapter 13 bankruptcy stays on a credit report 7 years), and special debts, such as unpaid tax liens, that can stay on your reports indefinitely. Collectors can’t legally restart the seven-year clock by “re-aging” the debt (giving it a new delinquency date) or by selling it to another agency.
Suing the borrower to collect debt: The Statute of Limitations is the legal time limit a creditor has to file a lawsuit against the debtor for failing to pay a debt, and the time limit depends upon a few factors: the state in which the debtor lives, whether the debt is oral or written, and whether the account is “open-ended” (eg. credit card account) or close ended (eg. installment sales contract). To find these limitations for your state, . Suing or threatening to sue after a statute of limitations has run out violates the Fair Debt Collection Practices Act, and if a debtor believes a lawsuit was filed after the time period expired, a lawyer should be contacted immediately to defend the case. If true, the lawyer’s fee will most likely be paid by the creditor.
Be careful when dealing with collectors because a debtor can inadvertently restart the limitations clock. Remember, it starts from the date of “last activity” on the account. This could mean that if a debtor makes a payment on an old debt (or even agrees to an extended repayment plan) or even acknowledges the legitimacy of the debt, the statute of limitations could be extended or restarted altogether. Although a creditor cannot sue after the expiration of the statute of limitations has expired, it can still try to persuade you to pay, including calls and letters. Remember that a legitimate debt is truly erased only when it’s paid in full or erased in bankruptcy.
See also this article by Brett Weiss on the Statute of Limitations.
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Last modified: October 22, 2012