Said in the simplest terms, creditors have a limited amount of time in which they can collect a debt before it’s considered too old to bring to court to force you to pay. Debts falling into this category are considered “time barred.”
Experiencing this revelation, your next thought is likely to be, “So, what is the statute of limitation on debt?”
It varies from state to state, as well as by type of debt.
Here’s a brief overview.
Debt Types
Oral Agreements: As the term implies, these debts are secured by nothing more than a spoken promise to pay. No written contract exists.
Written Contracts: Any piece of paper you signed, outlining the amount loaned and the time period in which you would repay it is considered a contract — even if it’s on bathroom tissue. Personal loans and medical debt generally fall under this heading.
Promissory Notes: A variation of the written contract, promissory notes go into more detail about the terms and conditions of the loan. In addition to the amount and the time period in which repayment will occur, the promissory note contains information about the interest rate charged on the loan, the number of payments you’ll make and the date by which you’ll be expected to have paid in full. Mortgages, auto loans and student loans fall into this category.
Open-Ended or Revolving Accounts: Any ongoing contract, such as a credit card agreement or a department store charge agreement, fits into this category. In other words, rather than having a finite term, these contracts remain in place as long as charges and payments are continually made.
State Laws Governing Debt Collection
In most cases, the grace period begins when the first payment is missed. The duration depends upon the type of debt and the state in which you live — or the one identified as being the governing state in the agreement.
The maximum is 10 years, which Rhode Island affords creditors, regardless of the type of debt. The minimum is three years, which Alaska and South Carolina grant lenders across the board. Meanwhile, Missouri limits them to five years on oral agreements and open-ended accounts, but gives them 10 years on written contracts and promissory notes. It’s important to note laws are fluid and these time periods are subject to change. The key is what was in force at the time you agreed to take the loan.
What All of This Means
If the statute of limitations kicks in, the lender no longer has the ability to enforce the contract by taking you to court. However, the debt is still owed and you’re still liable for it. As people have noted in numerous Freedom Debt Relief reviews, it can be submitted to credit reporting agencies as bad debt and impact your credit score negatively.
What’s more, debt collectors can still try to collect on the debt. They can phone you, send you letters and use every other legal means available to draw your attention to the debt. The only thing they cannot do is take you to court — unless they can get you to send them a payment, or record you admitting to owing the debt. The clock gets reset in that instance and the creditor can then avail themselves of the legal system once again.
If a creditor sues you while the debt is still time barred, you can defend yourself against the process by proving to the judge the debt is too old to be actionable. You do have to make the appearance though, otherwise the court could find against you and order garnishments from your pay, bank accounts or tax refund.
