Statute of Limitations: What Is It And How Does It Work
Written by Ben Tejes
Updated Nov 13th, 2023
The information provided in this article does not, and is not intended to, constitute legal or financial advice; instead, all information, content, and materials available in this article are for general informational purposes only.
Many people think about personal injury claims when they hear the term “statute of limitations. However, statutes of limitations apply to all types of criminal offenses and civil disputes, including unpaid debts and defaulted loans.
Let’s learn more about a statute of limitations and how it could apply to your debts.
What Is the Statute of Limitations?
A statute of limitation is a deadline for filing a claim. It is a law that bars a party from filing a legal action against another party. The length of time a statute provides for filing a lawsuit depends on several factors, including state laws and the nature of the legal matter.
The purposes of setting deadlines for filing claims include:
Prompt Resolution of Disputes - Encourages parties to deal with legal matters promptly. The law expects parties to act diligently to investigate claims so they can resolve those claims promptly.
Protect Evidence - Preserve evidence that can be used by both parties to prove their allegations. The longer a party waits to file a lawsuit, the greater chance the evidence that applies to the case can disappear or be destroyed.
Witnesses - The facts surrounding the case could become unclear. Eyewitnesses may forget critical facts or be unable to testify for many reasons. For example, witnesses may experience memory loss, become incapacitated, or pass away. Sometimes, locating witnesses who moved away or changed their names could be difficult or impossible.
Revenge or Harassment - Setting deadlines for filing lawsuits reduce the number of malicious lawsuits. For example, a party becomes angry about another matter years later. Therefore, they decided to file a lawsuit about an old debt that was “forgiven and settled” between the parties. The lawsuit is filed merely to harass the person and seek revenge for a current dispute that has nothing to do with the prior matter.
When calculating the deadline for filing a debt collection lawsuit, you first need to determine the category of debt. States may have different statutes of limitations for each category of deft.
What Are the Categories of Debts?
There are four categories of debt that are common for consumer debt:
Open-ended accounts are the most common type of debt people owe. You can borrow money, pay it back, and borrow it again. The account has a revolving balance. Open-ended accounts include major credit cards, lines of credit, and in-store credit cards.
A promissory note “promises” to pay a specific amount of debt at a specific interest rate by a deadline. Generally, a promissory note sets a periodic payment. House loans, car loans, and student loans all use promissory notes.
A written contract must be signed by both parties and include the terms and conditions of the agreement. For example, the contract must clearly define the loan amount, payment terms, interest rates, and other conditions. A written contract may include collateral that secures a promissory note, such as a mortgage contract.
An oral contract is a verbal agreement between two parties. Think of it as a “promise to pay” without written evidence of the debt. Unfortunately, state laws vary regarding creating and enforcing oral contracts. As a result, these types of loan agreements can be very difficult to enforce.
It is possible to have a loan without a statute of limitations. The second step after determining the type of debt you owe would be to find the specific law that governs deadlines for filing that specific type of debt.
How Do the Dates Work With a Statute of Limitations?
Contracts, promissory notes, and revolving credit accounts are based on due dates for payments. Payments could include periodic payments (i.e., monthly, weekly, quarterly, etc.) or a lump sum payment. The payment due date is significant because it triggers the “default” date.” The default date triggers the beginning of the statute of limitations.
A ”default date” is the first date you miss a scheduled payment. For example, if your credit card payment is due on the 15th of the month, you are in “default” on the 16th day of the month. Default means that you failed to make a scheduled payment according to the agreed-upon terms. It is a common misconception that a person is not in default until after a grace period. A grace period is the number of days you have before a late fee is added to the payment. Grace periods vary, depending on the terms in the written agreement.
The important thing to know is that you default on your loan agreement or credit account if you do not make the payment on the date it is due. The grace period only applies to the late fee. The lender agrees not to charge you a fee until you are a specific number of days past your due date. Therefore, if your mortgage payment is due on the 1st and the grace period is 15 days, you default on the 2nd of the month.
Most statutes of limitations begin with the “date of harm” to the other party. For loan and credit accounts, the “date of harm” is typically the default date.
You Can Restart the Statute of Limitations for a Debt
If you do not take any further action on the account after failing to make a payment, the statute of limitations should begin with your default. However, any activity on the account can restart the clock for the statute of limitations.
Therefore, if you make another payment, enter a payment arrangement, or otherwise acknowledge liability for the debt, it could restart the time for the statute of limitations. In other words, the deadline could begin from that date instead of the date of your original default.
Because many factors could affect the calculation of the statute limitations for debts, it is best to ask a bankruptcy attorney in a free bankruptcy consultation or debt collection lawyer. Lawyers understand the statutes in their state, the various types of debt, and how your actions impact the clock for the statute of limitations. If you decide on bankruptcy, you may consider researching the bankruptcy attorney reviews (example: Upright Law reviews).
What Happens When Your Beyond Statutes of Limitations?
Even though debt collectors and creditors have a limited time to sue you for bad debts, it does not mean your debts go away. When the statute of limitations expires, you have an affirmative defense if a creditor or debt collector sues you for a debt. To use the defense, you must respond to the lawsuit and tell the judge that the statute of limitations to collect the debt expired. Unless there is an exception to the rule, the judge should dismiss the lawsuit.
However, it is always best to seek legal advice immediately upon receiving a debt collection lawsuit or another lawsuit. A lawyer understands the law and the steps necessary to prevent a creditor from trying to collect an old debt.
Some state law prohibits debt collectors from contacting a person about time-barred debt (debts that the statute of limitations expired. However, if you live in a state that does not prevent creditors from contacting you about an old or time-barred debt, a creditor or debt collector can contact you unless you send them a written request to stop contacting you.
What Can I Do About Old Debts?
There are several options for dealing with old debts:
Don’t Pay It – If you have confirmed the statute of limitations bars legal action to collect the debt, you can tell the creditor in writing not to contact you and pay nothing.
Making a Partial Payment – Before agreeing to make a partial payment or enter a payment agreement, talk with a lawyer. Some states consider these actions as “reviving” the debt. In other words, it starts the clock from the beginning for the statute of limitations, so the creditor has an additional few years to sue you for the debt.
Pay Off the Debt – Some individuals pay off the debt to remove it from their credit report. If you need to improve your credit score, this option might help. However, before paying any money, demand a written statement from the creditor providing the balance owed on the account and specifically stating that payment of that amount satisfies the debt in full.
File Bankruptcy – You might be able to get rid of the debt by filing a bankruptcy. Chapter 7 bankruptcy eliminates most unsecured debts, including medical bills, deficiencies, personal judgments, and credit cards. Try our Chapter 7 calculator or Chapter 13 calculator to determine if filing bankruptcy is right for you.
Settling a Debt – Settling a debt generally means paying a lump sum that is less than the amount owed to satisfy the debt in full. Debt settlement has advantages, but it also has some disadvantages.
Key Takeaway: Never ignore a debt collection lawsuit or any lawsuit. First, ignoring the lawsuit can result in a default judgment, which could lead to wage garnishment. Therefore, never ignore a lawsuit for a bad debt.
Instead, learn about your options for eliminating debts you cannot pay. Ascend helps individuals explore their debt-relief options free of charge. Contact us now to learn about ways to deal with debt you cannot afford to pay.
Are the Deadlines for Filing Lawsuits the Same for All Types of Lawsuits?
No, the deadlines for filing lawsuits are not the same for all types of lawsuits. For example, the deadline for filing a debt collection lawsuit may be different from the deadline for filing a car accident or medical malpractice lawsuit. Therefore, you must use the statute that specifically sets the filing deadline for your specific type of legal matter to calculate the deadline.
Are the Deadlines the Same in All States?
Each state has the authority to enact statutes of limitations for legal actions in their state. For example, the deadline for filing lawsuits for most credit card accounts (opened-ended accounts) in Rhode Island is 10 years. However, a creditor has just three years in South Carolina to file a debt collection lawsuit for a credit card.
How Long Does a Creditor Have to File a Lawsuit Against Me in My State?
Many states have statutes of limitations for debt collection lawsuits for credit cards that range from three to five years, but a few states fall outside of that range. Furthermore, the type of account could impact the filing deadline. For example, the deadline for filing lawsuits for defaulting on a promissory note could be much longer than the deadline for filing a lawsuit for an unpaid credit card.
Below is the statute of limitations guide for your state: