Technically speaking, your debt can expire and become uncollectible—meaning no one can take you to court over it.
This is not a good financial strategy.
However, if you have past-due debt, knowing its expiration date (also known as its statute of limitations) can help protect you from time in court.
Basically, the second you make your last payment toward a debt, the clock starts ticking. Once the statute of limitations on credit card or other kinds of debts expires, the group you owe can’t take you to court to collect the money anymore.
But there is more to consider.
The negative impact to your credit report and score will likely outlast the statute of limitations. Those long-term repercussions can be devastating when you need to rent an apartment, buy a home, or buy or lease a car, just to name a few examples.
Here’s what to know about different types of debt, their statutes of limitations, and your rights.
What Is a Statute of Limitations on Debt?
A statute of limitations is the prescribed period during which a party can initiate legal proceedings. Once this deadline has passed, a lawsuit cannot take place.
Once the statute of limitations has passed on your debt, it becomes time-barred. This means the amount owed is not collectible through court proceedings.
“When a borrower stops paying a credit card bill, a creditor can’t immediately garnish a borrower’s wages, levy against a bank account, or seize property. The creditor must first sue the borrower and receive a money judgment from the court,” says Cara O’Neill, Esq., legal editor at Nolo.com, one of the largest online libraries of consumer-friendly legal information, and owner of a bankruptcy law firm in California. “A statute of limitations law tells the creditor how much time the creditor has to file the suit to prevent it from being time-barred,” she continues.
The statute of limitations timeline will depend on the type of debt and the state where you reside. For example, the statute of limitations on credit card debts might differ from the statute on a mortgage in your state.
Keep in mind just because the statute of limitations has expired doesn’t mean your debt vanishes. “It doesn’t mean that you don’t owe the money anymore. You still legally owe the money — but [your creditor] cannot seek to recover that money through the courts,” explains Todd Christensen, financial counselor and education manager with the nonprofit debt relief agency Money Fit by DRS.
There are different types of debt, each with its own statute of limitations.
An oral agreement, also called a verbal contract, is a spoken agreement between the debtor and creditor. In most cases, this type of debt is handled by friends or family. Say your grandparent agreed to lend you money to help with your down payment. If you agreed to pay it back at a certain point, but it was not put into writing, it’s an oral agreement.
A promissory note outlines the loan details, including the amortization schedule (the schedule for paying the debt back), the payment amounts, and the interest rate. In most cases, it only requires the signature of the debtor, although the creditor might sign it, too. Some promissory note examples include mortgages, student loans, and personal loans.
Written contracts include the terms of the loan and the signatures of both the creditor and the debtor. Generally, written contracts include more detail than promissory notes. Medical debt is a type of written contract.
With an open-ended account, you get an ongoing line of credit with a specified interest rate and an agreement to make minimum payments toward your balance on a regular basis. Your credit cards are all open-ended accounts, for example.
How Debt Statute of Limitations Varies by State
This chart represents the statute of limitations in years with the type of debts and by state.
|State||Oral Agreements||Written Contracts||Promissory Notes||Open-Ended Accounts|
Credit Reporting Versus Statute of Limitations
There is an important distinction between the statute of limitations for debt and how unpaid debt affects your credit report. These are two separate conversations.
Even if the statute of limitations has passed on your debt, outstanding debt can still have a negative impact on your credit score. “Just because a debt becomes time-barred doesn’t mean it’s no longer affecting you,” says David Tuyo, president and CEO of LA-based University Credit Union and co-founder of the Advanced Learning Institute.
Generally, unpaid debts will negatively impact your score for about seven years. Say you have outstanding credit card debt in California, where the statute of limitations for open-ended accounts is four years. After the four-year mark, when the statute of limitations has passed, you may not have to worry about being taken to court, but the owed money may still result in a lower credit score for another three years.
How to Handle Time-Barred Debt
Once your debt becomes time-barred, you have options. Keep in mind regulations vary by state and type of debt. Therefore, it can be helpful to consult with an attorney who specializes in debt settlement. They can navigate your options with you and help guide you to the best path with the least risk.
Run out the clock and don’t pay the debt. This is not the recommended strategy by debt experts. Yet, after seven years, the debt will fall off your credit report. Don’t expect everything to be peachy, though. Your phone will probably keep ringing with calls from the collections agency.
After the statute of limitations has passed, “they can’t do anything but call over and over again. You can send them a letter instructing them not to contact you anymore. The Fair Debt Collection Practices Act (FDCPA) stipulates if they receive such a letter, they must cease all contact,” says Christensen.
Knowing the statute of limitations that applies to your debt — based on your type of debt and your state — can protect you against a court case. But your unpaid debt may continue to affect your credit report well after the statute of limitations expires.
However, what can happen is they’ll sell it to another collection agency, who can keep calling until you send a new cease contact letter, Christensen continues.
And remember, time-barred debt is technically still owed and will continue to negatively affect your credit score for roughly seven years after your last missed payment.
Partial payment. Making payment toward your debt can help you get peace of mind, knowing you’re working to fulfill your agreement with your creditor. But be advised once you make a payment, the statute of limitations resets.
“You can negotiate with the creditor.,” says Christensen. Ask for a payment arrangement and also ask if they remove it from your credit report. “Some collection agencies still do it,” says Christensen. It’s called a pay-for-delete. Having an attorney in your corner can make a huge difference.
Pay-off the debt. If you’re in a position to pay the debt off in full, consider doing so — but contact your creditor first. They may be willing to take less than the full amount owed to settle the debt. If you go this route, though, make sure everything is captured in writing. (For more info on debt settlement strategies, see this NextAdvisor article.)
Know Your Rights If You Are Sued
Now, what if the statute of limitations has passed and your creditor is trying to take you to court?
“Here’s the surprising part: a creditor can file an action on a time-barred debt,” O’Neill says.
“It’s not something the clerk checks at the window when the creditor files the case, in part because it isn’t always easy to determine when the statute of limitations begins running.”
She goes on to explain that it’s up to you to object. “Immediately doing so is the best bet. While many courts will hear a statute of limitations argument at any point during the case, it might not be the rule in every state. A local lawyer will know whether the jurisdiction requires the debtor to respond by demurrer, motion to dismiss, asserting a defense in the answer, or another procedure,” says O’Neill.
In other words, you’ll need to prove the statute of limitations has passed, and there’s a specific way you need to do that by state.
In short, having a legal professional can protect you against missteps while ensuring your rights are properly defended. The Consumer Financial Protection Bureau (CFPB) has a resource you can use to find the right legal help.
“Do your homework and do your due diligence. Even if you’re going to end up with an attorney anyway, doing some research will help you know which questions to ask. That will save you money by saving you time.”
“The CFPB also provides helpful information. It’s also a good idea to become familiar with the federal FDCPA and similar state protections,” O’Neill advises.
Tuyo offers similar advice about doing your due diligence. “The very first place I would start is to look at your agreement,” he says. “Review it to see your options, the terms, and conditions, and from there, you’re best prepared to take the next step in the process.”
If all else fails and the creditor brings you to court for a time-barred debt, don’t panic. As long as you can prove your last payment and the statute of limitations has passed, the judge will dismiss your case.
And if you’re threatened by a lawsuit on a debt you know it time-barred, you have recourse. The Federal Trade Commission (FTC) has an online complaint assistant to file a complaint.