It sounds so intimidating said like that but it really just means how long you have before you no longer have to pay on a debt, unless you are sued by the creditor. Amazingly it varies, based on state laws and when the last activity occurred on the account. Confused? So was I. I’ll break it down for you in a minute.
The first thing you should know is there are different types of contracts and each has their own set of rules. An oral agreement (or contract), written contract, open-ended accounts, and a promissory note.
Oral Contract: You verbally agree to pay money loaned to you by someone. There is no written contract. Commonly referred to as a “handshake agreement”.
Written Contract: A signed agreement between you and the creditor that you agree to pay on a loan, under the terms of the contract.
Promissory Note: A written contract that the scheduled payments and interest on the loan are described in the promissory note. An example would be a mortgage.
Open-ended Accounts: These are revolving lines of credit with varying balances. The best example is a credit card account. Please note: a credit card is ALWAYS an open account. This is established under the Truth-in-Lending Act:
(Below is a table showing the SOL for each state)
|State||Oral||Written||Promissory||Open-ended Accounts||State Statute: Open Accounts|
|IL||5||10||10||5||735 ILCS 5/13-205|
** Georgia Court of Appeals came out with a decision on January 24, 2008 in Hill v. American Express that in Georgia the statute of limitations on a credit card is six years after the amount becomes due and payable
This table is provided for informational purposes only and should not be taken for legal advice.
What Does This Mean for You?
This information can be a powerful weapon in relieving yourself of old debts, as creditors have a limited time in which to sue you. Remember: the SoL time clock starts from the day the debt – or payment on an open-ended account – was due. But, this has nothing to do with how long a negative credit remains on your credit report.
Ooopsie Alert: Consumers also pay off accounts when they are not on their credit reports. Even though the account was removed from their credit file, a collector watched their credit report for any activity. When the collector spots the activity, the consumer receives a call asking for payment. All the consumer has to say is “I have an absolute defense–the Statute of Limitations has expired.”
Do not make the mistake of thinking the SoL causes your debt to go away after it expires! If the creditor files suit, the consumer has an absolute defense. But you must offer evidence (papers the consumer files to prove his claim) to avoid a judgement. If the creditor sues you, and there is no proof to show the court that the Statute of Limitations expired, you will lose the lawsuit and a judgment against you.
When Does the SoL Start?
There are various opinions on when the SOL starts
- The first time you fail to make a payment on your account.
- The credit card company sends you a demand letter for the full amount.
Either of these can be true, depending on the credit card agreement. Here’s why:
The length of the statute of limitations, or limitations of action statute, varies from state to state and the type of agreement (i.e. oral, written, etc.) The one aspect of a statute of limitations that is pretty constant throughout all of US states’ laws is when it begins to run.
The statute begins to run when you have done “something” that goes against the terms of your agreement. Most of the time, that something is failure to pay your bill. When you don’t make your payment on time, you violate the terms of your agreement and causes the creditor to take action.
Some credit agreements include an Acceleration Clause which must be invoked before a creditor has a cause of action. The acceleration clause could be activated by a demand for payment in full by a certain date from the creditor. In this case, you must fail to pay, after the credit has enforced the acceleration clause before the creditor has a cause of action, and the SoL starts to run. Become familiar with the specific terms and conditions of your agreement to know for sure which event triggers a cause of action and causes the running of the statute of limitations.
If the creditor fails to sue you in the time allowed by the applicable SoL (oral, written, etc), you have an affirmative defense against the creditor’s claim which can halt the recovery of the delinquent debt.
When is the SoL Over?
- Take the date cause of action begins (date of last payment or demand letter) and
- Add the number of years of the statute of limitations in your state.
You last stopped paying on a credit card on June 15, 2010. The company sent you a demand letter for the full amount on Dec 15, 2010. The SoL for credit cards (usually regarded as open accounts) in your state is three years.
The date at which you are “safe” from having a creditor sue you over this debt is:
No Acceleration clause: June 15, 2010 + 3 years = June 15, 2013
Acceleration clause: Dec 15, 2010 + 3 years = Dec 15, 2013.
What Does a Partial Payment Do?
Depending on what state you live in, if you make a partial payment, you could postpone the SoLs’ taking effect on your collection account or charge-off. A collector might call you one day and say you waived your rights when you made a deal with the collection agency. Do not take anything a collector tells you for granted, they are just trying to collect a debt. Make them prove it to you.
Some states have laws which specify that a partial payment does not restart the SoL clock, unless there is a new written promise to pay. Meaning that you have to actually write a new agreement with the original creditor.
If you live in one of these states, simply sending in a check doesn’t restart the clock. The statute of limitations is only extended by new written promise to pay in these states:
Arizona, California, Florida, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New York, Texas, Virginia, West Virgina, Wisconsin.
You may also wish to read the FTC’s publication on Time Barred Debts for further information.