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Collections Agencies, Laws & State Statute of Limitations

Collections Agencies, Laws & State Statute of Limitations

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Mark Cappel
UpdatedMay 22, 2024
Key Takeaways:
  • Understand the collections process.
  • Validate old debts.
  • Know which statute of limitations applies to you.

What is my liability in a debt being bought by collection agency?

What is my liability when a collection agent buys my debt?

First, learn about the collections process. Next, you need to learn if you have any legal means to disclaim responsibility for the debt. Third, you need to determine if the statute of limitations on collecting the debt has passed. Finally, if you are responsible for the debt, you need to consider your options for resolving the debt. Let us look at each of these issues separately.

Collections Process

To the debtor, the debt they owe is a liability. However, to the creditor, the debt is an asset. Think like an accountant. If a debt account is an asset, an asset can be bought or sold. When a debtor is making regular complete payments, the value of the account is its face value. However, when a debtor starts to slip behind in their payments, the value drops.

When a debtor stops paying on a debt, and the number of days since the most recent payment reaches 120 days, the account is no longer considered current, and the creditor is required to "write-off" the debt. Writing-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease, or that the debt is forgiven. The write-off date has no legal significance, and almost nothing to do with the statute of limitations for debts, which we will discuss later.

At the write-off point, the creditor will transfer the debt to a late-accounts department, or has the option to either assign or sell the debt to a collection agent. If the debt is assigned to a collection agent the collection agent will attempt to receive payment on the creditor’s behalf. If the collection agent buys the debt, it will do so at a discount from the face value. Typically, collection agents buy debt for 5 to 50 cents on the dollar. However, the collection agent has the right to collect the entire balance due plus interest.

Collection agents can buy a fully documented account, which includes all of the invoices and records of the original creditor’s collection efforts. Or, the collection agent can buy a bare account with little documentation. A fully documented account is worth a lot more than a bare account, as we will see later.

A collection agent may use aggressive tactics to when contacting the debtor. The collection agent may threaten to call the debtor’s employer, file charges with the local sheriff, or say they will park a truck in front of the debtor’s house with a sign that reads "Bad Debt" on it. All of these tactics are illegal under the Fair Debt Collection Practices Act. Start here to learn the rights consumers have in collections under the Fair Debt Collection Practices Act.

A creditor — a debt collector that owns a debt account is a creditor — has several legal means of collecting a debt. But before the creditor can start, the creditor must go to court to receive a judgment. A court (or in some states, a law firm for the plaintiff) is required to notify the debtor of the time and place of the hearing. This notice is called a "summons to appear." If you ever receive a summons you should do as it instructs! In the hearing, the judge will decide if the creditor should be allowed to collect the debt, and if the debtor fails to appear, the judge has no choice but to decide on behalf of the creditor.

A judgment is a declaration by a court that the creditor has the right to ask for a wage garnishment, a levy on the debtor’s bank accounts, and a lien on the debtor’s property. Which of these tools the creditor will use depends on the circumstances. See Attorney Collections and Garnishing Wages to learn more background information on wage garnishment.

Struggling with debt questions? Let the Debt Coach review your debts and give you your options to resolving these debts.

Disclaiming Responsibility for the Debt

If a collector demands payment of a debt an individual does not owe, or more than they owe, they can dispute the debt in writing. The formal terms are "debt verification" or "debt validation." Within five days of first contacting the consumer, debt collectors are required to notify the individual of his or her right to validate the debt. Consumers are required to write to request verification within 30 days of when they are first informed of the debt.

Is it worth your time to validate a debt? Yes! Collection agents cannot validate 41% of the accounts less than 3 years old. Collection agents cannot validate 64% of the accounts 6 years of age or older. Overall, the debt industry can validate about half of all accounts (The Structure and Practices of the Debt Buying Industry (PDF)). The least likely accounts to be validat-ed are med-ical, tele-com-munica-tions, and utility debts.

Here is where the question about a fully documented or bare account comes into play. If the debt collector has a bare account, then the collector has no means to validate the debt. Without validation, the account is noncollectable if the debtor asks for the validation and does not receive it. That is why is is wise for a debtor to ask for a debt validation when a debt collector attempt to collect on an old debt — the chances on the debt account still containing the full documentation diminishes with each passing day and with each debt collector who handles the file.

To see a sample debt validation letter, go to the debt self-help center.

Statutes of Limitations

A statute of limitations (SOL) is the time period during which a creditor can take legal action (i.e., sue the debtor) to enforce a debt. Each state defines its own statutes of limitations, and they vary significantly.

For example, in California and Texas, creditors have 4 years to sue a debtor to enforce a debt, while in Rhode Island they have 10 years. To learn more about statutes of limitations for the collection of debts, see the resources Statute of Limitations Laws by State and How to Tell Which Statute of Limitations Applies to Your Situation to learn basic information about the rights in each state. Debtors should consult with an attorney licensed to practice in their state to discuss the specifics of each situation and determine if the SOL for the creditor to sue has expired.

If a state’s SOL for the collection of debts has expired, the likelihood of the creditor attempting to sue the debtor to enforce the debt is much less. While the passing of the SOL does not mean that a creditor cannot file a lawsuit, if one is filed the debtor has an absolute defense against the lawsuit. If the debtor responds to the suit stating that the SOL has expired, the judge should dismiss the case. In addition, if the court believes that the creditor filed suit despite knowing that the SOL had expired, the court may sanction the creditor for its actions. Consult with a lawyer who has consumer law or civil litigation experience to learn how to respond to a lawsuit properly and in accordance with your state’s laws.

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.

In most states, the SOL begins running from the date of last payment on the account. This means that if the debtor paid just a few dollars to a collector a couple of years ago, the running SOL for that debt could have been reset. Also, keep in mind that the passage of the SOL does not forbid a creditor from calling to collect on the debt — it simply provides an absolute defense in court if the creditor files suit.

Options for Resolving a Debt

Assuming the debt is validated and the statute of limitations has not passed, there are five options for resolving a debt:

  1. Pay the debt outright
  2. Debt negotiation and settlement
  3. Debt consolidation
  4. Bankruptcy
  5. Default

Debt negotiation and settlement is the process of negotiating with creditors to either establish a new payment schedule at a reduced interest rate, or a lump sum payment that is significantly lower than the total balance. If the only other option is bankruptcy, creditors are willing to negotiate to ensure that they get something rather than nothing.

Debt consolidation, by contrast, is consolidating debts to reduce high interest rates and pay off delinquent payments with a loan or low-interest credit card. There is no debt balance reduction. The debt is simply rolled into a loan or credit card that has a lower interest rate. It will ultimately save money in the long run but in the beginning, the debtor is still stuck with the same balance.

Bankruptcy is an option for some debtors, but going this route should be taken only with great care and deliberation, and after consulting an attorney in the state where the debtor’s reside.

Finally, a debtor can default — in other words, do nothing. This is the worst option, and makes the debtor a passive observer rather than the person in charge. As discussed above, doing nothing may lead to wage garnishment, additional charges added to your debt, and a reduction in the debtor’s income the debtor cannot control.

To see additional discussion of debt resolution, read What Are My Debt Consolidation Options?

I hope this information helps you Find. Learn & Save.



Dealing with debt

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Auto loan debt was $1.607 trillion and credit card was $1.129 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

The amount of debt and debt in collections vary by state. For example, in Rhode Island, 21% have any kind of debt in collections and the median debt in collections is $1575. Medical debt is common and 5% have that in collections. The median medical debt in collections is $526.

While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.



WWanda, May, 2020

My credit score is 388 and I am trying to clean up my credit and increase my credit score, I have 5 unpaid hospital bills, a loan that I did not finish paying, my mortgage payment, credit card loan, car insurance, utility bill and other misc. bills. Do I need to pay the unpaid bills?

DDaniel Cohen, Jul, 2020

Wanda, ideally you would pay your unpaid bills, but I don't know what you can afford to pay. Paying your mortgage is the most important. Not letting accounts go 30 days late, even if you can't pay them when due, which should be your aim. Some bills don't affect your credit score because they are not reported on a monhtly basis. However, if they go to collections that will hurt your credit score.

You might benefit from speaking in person with a credit counseling agency, to get advice on budgeting, general finance, and to discuss your credit report.

SSharon, Jun, 2014
Hi, I just received a debt collection letter on an old college tuition bill from 2008. I honestly forgot about it. Do I have to pay this? Has the statue of limitations run out on this? Please let me know thanks.
BBill, Jun, 2014
A student loan may or may not have a statute of limitations, depending on if it is a federal or private student loan. See the article Statute of Limitations for Federal & Private Student Loans to learn more about the distinction between private and federal loans.

The SOL may have run out, depending on your date of default and the SOL that applies. Check the SOL for the state in which you live. If the college is in a different state than it would be good to review the language of the tuition agreement, to see if there is anything in it that governs what SOL applies. Do not pay a penny on this debt without more information, as making a payment would start the SOL anew. Send the collection agent a debt validation letter.
JJackie, Jun, 2014
I have 3 medical collections in which the statute of limitations is over in Sept/Oct of this year. The CA is unwilling to settle for less for a deletion. What process can I take after the SOL expires to get them to remove the collections from my report? They will still be on my report for 1 more year. I have read that they are not REQUIRED to report the debt, so why wont they just settle for the amount I'm offering instead of nothing?
BBill, Jun, 2014
If you reach a settlement, you will need to wait for the 7 years to pass, from the date of first delinquency, before the account will fall off your report.

I can't speak to the mind of the collection agent as to why it won't settle or meet your terms. I wonder why you think that they will end up with nothing. Are you sure that they won't sue you before the SOL passes?
PPam, May, 2014
I just learned of a hospital debt from 2008 that has been recently added to my credit report (says on 9/2013). That's a gap of 4 years, is this allowed?
BBill, May, 2014
The Fair Credit Reporting Act does not prohibit delayed first-time reporting of a delinquency. The FCRA requires the reports to be accurate. If the information is accurate, then the creditor reporting the information complied with the law.
DDavid, Apr, 2014
I have a returned check that is reported on my consumer credit report. The date reported for collection is 8/18/2009. A collection agency is reporting the debt. I disputed it through the CRA and it was verified as accurate. I have several questions: 1. Do I request a method of verification? 2. Does the CRA have to provide me any copies of the original document (such as the original copy of the check)? 3. Demand letter providing proof that such a letter exists and that it was sent certified mail. 4. Proof that the collection agency is the owner or the assignee. 5. Does the collection agency have to be in the same state and county of the original debt? 6. Is my dispute with the CRA, the collection agency or both? 7. The account type is open account. How long does it remain on my report and what determines the start date? Is it the time it was placed in collections? Or the time that the item was returned?
BBill, Apr, 2014
1. Requesting the method of verification is your next step. See the article 5 Steps to Take to Remove False Information From Your Credit Report 2. No. However, if this dispute becomes a lawsuit, then both sides will request copies of what the other side has in discovery. At that point, if someone on the collections side does not produce the original documents or believable copies, then the case will be over quickly. 3. I'm not sure what your question is here. 4. Not necessary for debt validation purposes, but necessary if the case becomes a lawsuit. 5. If your state of residence requires it, the collection agent must be licensed in your state. What you suggested is not a legal requirement in any state I know of. 6. Both. 7. Read the Fair Credit Reporting Act for answers to these types of questions. The date of first delinquency is the relevant date that starts the FCRA clock running for a derogatory.

Some consumers confuse their state statute of limitations with the federal FCRA clock for credit reports. The two are separate and independent from each other.