Statute of Limitations

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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.

isconsin 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.

ost 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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349 Comments

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  • CS
    Mar, 2013
    Corey
    What will reset the statute of limitations on credit card debt in Colorado?
    0 Votes

    • BA
      Mar, 2013
      Bill
      Making a payment on the debt will reset the statute of limitations, unless it is part of a settlement agreement between you and the creditor. Also, signing a reinstatement contract will reset the statute of limitations.
      0 Votes

  • TM
    Oct, 2012
    Tim
    Hello, I received a letter from an attorney to collect a credit card debt. I sent back a response telling them that I did not have the funds to pay the card. I also wrote..."I was wondering if there is a way to make payments on the debt." However, I don't have the funds to pay the debt and after reading recent things I find that the debt is past the statute of limitations. I am wondering if I "reset the clock" by making that statement according to common law or would I still have the right to use the defense.
    0 Votes

    • BA
      Oct, 2012
      Bill
      You indicated you reside in California. For California residents, an acknowledgment must be in writing. See California Code of Civil Procedure § 360 to read the statute.

      You mentioned you wrote a letter to the collection agent, a lawyer, about the debt in which you wrote "...I was wondering if there is a way to make payments on the debt." I think you stepped into a gray area, which I am certain is not the answer you wanted to hear. One way to view your statement is you imply the debt is yours because you call it a debt. On the other hand, you did not call it "my debt," which would edge the statement closer to an acknowledgement. To me, this reads more like a negotiation than an acknowledgement.

      The general rule in California is that negotiations to resolve a debt are not viewed as acknowledgments. If courts viewed negotiations as acknowledgements, there would be an enormous disincentive to settle matters out of court. Courts want to give parties every incentive to settle matters on their own.

      In future correspondence, make it clear you are not acknowledging the debt, but are negotiating to resolve a dispute. The collection agent may argue your earlier letter was an acknowledgement, but I think that stretches the facts too far. Consult with a California lawyer who has consumer law experience if negotiations get hung up on this point.
      0 Votes

  • JS
    Sep, 2012
    Jake
    In 2002, I attended a local community college here in NJ and I believed I paid all of my bills. Two years later i moved out of my parents house. The other day my mother gave me a bill from the college for around $500 that came to her house. The college claims that its from my last semester in 2002. I know its not much but I have no way to prove that i paid. I keep most of my records for 7 years so I no longer have any proof. If left unpaid will this hurt my credit (as of now it is not on my credit report). What would my course of action be to get this situation rectified?
    0 Votes

    • BA
      Sep, 2012
      Bill
      I will assume the $500 mystery fee is not related to a federal loan. Most derogatories may appear for 7½ years from the date of first delinquency. Assuming the fee was incurred in 2002 or before, it will not appear on your credit report because the time limit ran out some time in 2009 or 2010. Therefore, if all you are worried about is your credit report and score, the $500 fee is not an issue.

      The problem with the unpaid mystery fee is many schools will hold a delinquent alumnus's transcript as long as the fee is unpaid. This means if you ever want to enroll in another school, or if an employer wants to inspect your transcript, the school will refuse to cough-up a copy of your transcript.

      I do not have advice you want to hear. Your choices are to ignore the bill and hope you never need a transcript, or hold your nose and pay it.
      0 Votes

  • JC
    Aug, 2012
    Jennie
    A collection company allegedly bought a debt from a department store I owed. My last payment to the store was either April or October of 2007. I never acknowledged the debt with the collection company, nor did I pay them. I disputed the collection company's claim in court and their attorney filed for a dismissal without prejudice, which was granted in the Superior Court of California in November 2010. They are now attempting to collect the debt again. Can they do this? Do I have to go to court all over again about this? Can I counter-sue for attorney fees, time away from work, etc. because I have already spent a lot of money (I don't really have) defending myself on a debt they could not prove I owe. I believe the SOL is past, although I understand it's only good in court. How do I get them to stop coming after me every couple of years?
    0 Votes

    • BA
      Aug, 2012
      Bill
      I think a good first step is to speak with a lawyer that specializes in violations of the Fair Debt Collections Practices Act (FDCPA). He or she will be able to tell you if you have any cause of action. These kinds of lawyers do not charge an advance fee. They only take your case if they feel it is strong and then they collect fees from the party you sue, after winning the case.
      0 Votes

  • KE
    Jul, 2012
    Kelly
    I purchased a car back in July of 2004, and the car was totaled after a year. The company insisted that I continue to pay for the car even though I no longer owned it, and I had for about 3 more months. Then I was hit with child support payments and could no longer afford to pay for the car. In 2010 I received a letter that basically stated that the debt was still valid. Today, July 2012, I find that it has been charged off on my credit. I realize this is a bad sign, but the debt is way beyond its statutes of limitations in the state of Utah where I live. I am currently working towards fixing issues with my credit and I fear that I may soon be feeling the effects of this outdated auto load. Is the SOL on my side in this matter? And what kind of action can they take against me if they so choose to?
    1 Votes

    • BA
      Jul, 2012
      Bill
      Let me change the facts of your comment a bit to illustrate a point. Let us say you buy a car using a loan secured by the car. After a month or two, in the middle of the night, a meteor falls from the sky, lands on your new car, and destroys it. You may ask, “Do I still need to pay-off the loan when my car was destroyed though no fault of my own?” The answer is obvious — yes! You may say, “The car was the security for the loan. The finance company is welcome to repossess the melted metal filling the smoldering crater in front of my house.” That may be true, but the loan agreement you signed also contained language giving you personal liability for repaying the loan balance even if the lender repossesses what’s left of the car.

      In other words, when a person buys a car using a loan, it does not matter if the car is perfectly reliable and never suffers a scratch, or is totaled after a month or two, the borrower must repay the loan as promised in the contract. On to your other questions.

      Charge-off, which is sometimes called write-off, is when the lender moves an account from its accounts receivable ledger up to the bad-debt line on its general ledger. Charge off is not the same as forgiveness or cancelling a debt. Charge off does not change the lender’s or borrower’s legal rights. Typically, charge off appears on a credit report 120-180 days from the first date of delinquency.

      You mentioned Utah and statute of limitations. In all but two states, creditors may continue to attempt to collect a debt after the statute of limitations has passed. Creditors can, again with two exceptions, even file a lawsuit after the statute of limitations has passed. In cases where the statute of limitations has passed, the defendant may offer a statute of limitations defense. If the court accepts the defense’s argument that the statute of limitations applies, the court will dismiss the case. Unfortunately, some Internet commentators will condense what I just wrote here into, “The creditor cannot collect the debt if the statute of limitations has passed,” which is dead wrong in all but Wisconsin or North Carolina.

      As I understand Utah law, the statute of limitations for a written contract is 6 years. If you stopped making payments in sometime 2005, the statute of limitations passed sometime in 2011. Therefore, the original creditor (the finance company, bank, or credit union) or a collection agent that purchased the collection account may contact you to attempt to collect the debt. It can even file an action (a lawsuit) against you. If it does, consult with a lawyer to help you file a motion to dismiss based on the passing of Utah’s statute of limitations for a written contract.

      If the creditor’s collections calls and letters become bothersome, send the creditor a cease communications notice.
      0 Votes