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Statute of Limitations

Contract

Highlights

  • Analyzing which statute of limitations applies is more difficult than it first appears.
  • Look to the contract you signed to see if it has a choice of laws clause.
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How to Tell Which Statute of Limitations Applies to Your Situation

This article helps Bills.com readers analyze their statute of limitations questions. Statutes of limitations seem straight forward at first glance, but can become tricky because each state legislature created their own rules for handling time limits on actions.

What Is a Statute of Limitation?

All jurisdictions have a body of statutes in their codes of law called limitations of actions, periods of prescription, and prescriptive periods, commonly referred to as the statutes of limitations. The idea behind these laws is we as a society decided we do not want old debts hanging around forever — we want people and businesses to move on with their lives without worrying about being sued. States and the federal government set statutes of limitations for civil and criminal actions. Each state legislature wrote dozens of statutes of limitation.

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The length of time an original creditor or collection agent have to file a lawsuit depends on the:

  • Consumer’s state of residence
  • Type of debt
  • Contract with the lender (more about contracts below)

For example, many states allow more time for original creditors and collection agents to file suit to collect on closed-ended consumer loans, such as vehicle loans, than on credit card debts or spoken contracts. Most states give credit card issuers 3 to 4 years to file suit after default, but some states allow as many as 10 years. See the Bills.com page collection laws for every state in the US.

Here’s a page containing a list of statute of limitations by state. If an original creditor or collection agent files a lawsuit after the allowed time, the court will usually throw the case out and not allow the creditor to file suit again (called dismissed with prejudice) if the consumer/defendant raises the statute of limitations defense.

The defendant must raise the issue of expired statute of limitations in a written response to the lawsuit, or else the court will not know that the statute of limitations has expired. Courts will not raise the statute of limitations defense on behalf of the consumer. Therefore, you must raise the statute of defense if it is available to you. Although the periods vary from state to state, there is only one (Ohio) that is longer than 10 years.

Wisconsin and Mississippi outlaw lawsuits against consumers in cases where those state statutes of limitation have passed. Wisconsin and Mississippi are the only exceptions to the “lawsuits are allowed for original creditors even if the statute of limitations expired” rule.

What a Statute of Limitation is Not

The passing of the statute of limitation does not mean an original creditor cannot file a lawsuit against a consumer in most states. The passing does not mean the debt is canceled or extinguished, or must be removed from a consumer’s credit report. It does not prevent an original creditor or collection agent from contacting the consumer to collect the debt.

A statute of limitations, in most states, is just a tool for lawyers to use as a defense in a lawsuit. It is an affirmative defense the defendant must raise in a timely manner before the conclusion of the trial.

Most courts find it is a violation of the FDCPA for a collection agent to pursue a debt collection lawsuit against a consumer after the statute of limitation expired (Kimber v. Federal Financial Corp. 668 F.Supp. 1480 (1987)). Some collection agents still sue in hopes the consumer will not know this rule.

Choice of Laws and Tolling

The statute of limitations for a debt can be set in a contract with a choice of laws clause. A credit card issuer can write a clause that says something to the effect of, “Our headquarters may be in New York, and you may reside in Ohio, but if a dispute arises from this contract, we agree to use the laws of Delaware.” Most judges despise choice of laws clauses, and will make efforts to find reasons to ignore them in favor of their own state laws. However, the US Supreme Court ruled that choice of laws clauses in consumer contracts conform to the Constitution. Therefore, any statute of limitations analysis should include a review of the contract the consumer signed.

Tolling can also affect a debt’s statute of limitations. Tolling refers to a time-out on the running clock of the statute of limitations. In some jurisdictions, a debtor can take an action that is viewed as preventing reasonable efforts by the creditor to collect on the debt. For example, if a debtor leaves the country for a few years, the court may decide that because the creditor did not have a fair chance to collect, the statute of limitations was not running during the time the debtor was abroad. Tolling rules vary from state to state.

Resetting a Statute of Limitations

For debt, the statute of limitations starts either when the debtor last made a payment, or when the payment was due. Once the statute of limitations on a debt is reached, the creditor may use the court system to collect the debt. However, if the debtor/defendant raises the affirmative defense of statute of limitations in a timely manner, the court must dismiss the case. A court will not raise the statute of limitations defense on its own — the court is a neutral referee — the defendant must raise this defense.

A defendant can reset a statute of limitations clock back to zero two ways:

  1. Make a voluntary payment
  2. Acknowledge the debt

Under common law, the acknowledgment must be in writing and convey the idea the consumer promises to pay the debt. Not surprisingly, many state legislatures wrote their own version of this rule. Arizona, Florida, New York, and Oregon are four such states one can find with acknowledgment of barred action rules.

Statute of Limitations on Credit Card Debt

States wrote statutes of limitations laws before the invention of credit cards. Some state courts throw credit card debt in the written contracts bin. Others consider credit cards open accounts, which were written with bar tabs and feed store accounts in mind that are customarily settled at the end of the month. Other state courts lump credit cards with spoken/verbal contracts. Each of these often have different statutes of limitation.

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Charge Off and Statute of Limitations

Some consumers confuse charge-off and statutes of limitations. The two concepts have no relationship to each other. Charge off is an accounting term used by creditors when they move a delinquent account from its accounts receivable ledger to the bad-debt line on the general ledger. This usually occurs between 180 and 240 days from the date of the last payment. The fact an account is charged-off does not mean the debt may not be collected later. The charge-off date does not correspond to the statute of limitations on collecting a debt.

Analyzing a Statute of Limitations Issue

There are at least five key issues to a statute of limitations question:

  1. Did the parties agree to a choice of laws in their contract? Review the contract, and look for a “choice of laws” clause in the contract. If the contract states which state laws the parties agree to use if a dispute arises from the contract, then there is the answer to your question. However, although choice of laws clauses are well litigated, some judges take pains to find reasons to ignore a choice of laws clause.
  2. What are the statutes of limitations for the plaintiff’s state? The defendant’s? Assuming the litigants reside in different states, the statutes of limitations for each state may be different.
  3. How does each state’s supreme court look at statutes of limitations conflicts with sister states? Consult with a lawyer in your state who has consumer law experience to learn how your state resolves conflicts-of-laws issues.
  4. Is the plaintiff filing the case in its home state, or in the defendant’s state of residence? And if it is filing the case in the defendant’s state, is it asking the court to use a different state’s statute of limitations?
  5. Who is the plaintiff? If the party filing the lawsuit is the original creditor, then the court will give a great deal of weight to the choice-of-laws clause in the contract. If the plaintiff is a collection agent, under the FDCPA, collection agents for a credit card or similar debt must file a lawsuit either in a court where the consumer lives, or the judicial district where the consumer signed the contract (15 USC § 1692i). Judges like to use familiar laws and will bend over backwards to use their state’s statute of limitations. However, if the plaintiff’s lawyer creates a convincing argument that another state’s statute of limitations is more appropriate, the judge may agree.

Statute of limitations questions seem straight forward: “Which statute of limitations applies to me?” However, answering this question is tricky because a small change in facts can have a huge impact on finding the correct answer. If the facts are simple — for example, both parties reside in the same state and agree to use that state’s rules — the answer is simple. However, you need a deeper analysis if your facts are complex. Consult with a lawyer in your state who has consumer law or civil litigation experience if your facts are complicated.

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  • AN
    Jun, 2014
    Amanda
    Thank you for so much information! (Sorry for my wordy question below) From 2008-current, my private Sallie Mae loans went up $50,000. I am in deep with several private loans through Sallie Mae. I haven't paid a dime towards these. I just can't. They are all in default and have gone to collections. It looks like this month will be the SOL for Massachusetts - 6 years - for a couple of them. Another one has passed the 6 year mark, for sure. Do I wait to be sued to file a defense using the SOL? Or can I file a dispute using the SOL because the debt collectors are still harassing me for payments and it's still on my credit report? What would your advice be? I also wanted to request validation of these debts from the collection agency. My signed contract, perhaps. These loans were from 2006-2008. I wasn't sure if I should do so. I wasn't sure if it would trigger them to finally sue me since I was finally "fighting back". Or would it benefit me to do this before filing a SOL dispute? Another piece of info on these loans- my credit report: One account says: "charged off. $7,000 written off. $10,000 past due as of May 2014". (I haven't paid a dime since the first payment was due in 2008) Another says "transferred, closed". In 2014 Another says "claim filed with government in 2009" no idea where this one is now?? Can I get these removed from my report if it fits within my states SOL? Thank you SO much!
    0 Votes

    • BA
      Jun, 2014
      Bill
      I can't give you legal advice, but will share my thoughts about what I would do were I in your situation.

      I would not contact any collection agent when the SOL is close to being reached. That doesn't guarantee not being sued, but shining a light on oneself is likelier to draw attention to the matter and increases, in my view, the chances of being sued before the SOL passes. I would sit tight and see if the SOL passes. If it does, then you don't raise any SOL issue unless you are sued, in which case, you raise the SOL defense in court.

      The accounts will be eligible to fall off of your credit report 7 years after the date of first delinquency. That is a separate date from your state's SOL for the debt.
      0 Votes

  • NM
    May, 2014
    Nancy
    I received a notice of collection for a credit card debt that is 20 yrs old. The debt was made in California. I now reside in Iowa. Is this valid? Can I use the state statute of limitations as a defense?
    0 Votes

    • BA
      May, 2014
      Bill
      I can't give you legal advice, but will share my opinion with you. From what you described, you can use the SOL as a defense, if the collection agent sues you. My guess is the collection agent is unlikely to sue you, but sent the notice in a fishing attempt to see if you would bite, and offer to pay or settle the debt.

      Validate the debt. Don't pay a penny or you could bring an expired debt back to life.

      Read the Bills.com article Iowa Collection Laws to learn more about your rights and liabilities under Iowa law.
      0 Votes

  • PW
    May, 2014
    Paul
    I took a Key Alternative private student loan to attend a university in Florida. On the promissory note i gave my parents address in Ohio as my permanent residence because I had just graduated high school in OH and had not started university in Florida yet. The account is currently in collections. I'm curious if Florida or Ohio SOL apply if I am still a resident of Florida?
    0 Votes

    • BA
      May, 2014
      Bill
      Residency is tricky for college students. In common law, residency is a two-part test:
      • Intention to make a certain state your permanent residence, and
      • Presence in that state

      Most out-of-state college students are not considered residents because they have no intention of residing permanently in the state where they attend school.

      Here, you do not mention your intention for permanent residency. Did you intend to make Florida your long-term home? Or was this always a fluid situation for you? In which state were you a resident when you signed the loan contract?

      You asked if Ohio or Florida's statute of limitations applies. Reread the original article above and step through the analysis outlined to answer this question. Does the contract contain a choice of laws laws? If so, which state's laws did you agree to when you signed the contract?

      0 Votes

  • DQ
    Apr, 2014
    Daniel
    I have a 2nd mortgage that was with GMAC and was charged off and reported to credit bureaus as such for a couple of years. When GMAC went under, Ocwen, who is now servicing my loans, started reporting as 180 days past due. I wondered why my credit score tanked 50 points recently and I believe this is why. Can they change the reporting of my charged off 2nd?? Thanks
    0 Votes

    • BA
      Apr, 2014
      Bill
      Under the Fair Credit Reporting Act, original creditors, collection agents, and others reporting information to the credit bureaus are obligated to make accurate reports. Consumers like you and me have the right to dispute inaccuracies in our credit reports.

      What is the date of first delinquency (DOFD)? Did Ocwen change the DOFD from the date GMAC reported? If so, then you have a strong reason to file a dispute with each of the big-three consumer credit reporting agencies reporting the incorrect date.

      The 180-day late status is also an error because it is a misleading status. Your strongest argument is a reset DOFD. Lead with that argument if those facts apply.

      A point of clarification: The rules for credit reports are mostly federal, and as mentioned are found in the FCRA. Statute of limitations rules are state-specific, and are independent from the rules for credit reports.
      0 Votes

  • KJ
    Apr, 2014
    Kim
    My ex-husband took out a car loan in 2010 when we lived in Hawaii. We moved back to California that same year (he was discharged from the military). After living in California for a few months the car was repossessed. I keep receiving letters stating we owe x amount of money. I asked for a letter of validation because I do not remember signing the contract. If it turns out the debt is valid, can they still sue me even though I no longer live in Hawaii? The debt is still with the original creditor, not a collection agency.
    0 Votes

    • BA
      Apr, 2014
      Bill
      Your changing your state of residence will not prevent a lawsuit. You need other defenses to a possible lawsuit. Your never signing the contract is an excellent defense. Just because the lender or its collection agent says you signed is not proof you did.

      Continue to insist on seeing proof you're a party to the loan. Debt validation is a start. Consult with a lawyer to learn more about your rights and potential liabilities.
      0 Votes