Commercial Collections Blog

Statute of Limitations on Debt Collection

Diamonds are forever, but debt is not.

We recently looked at the ways that debt can affect the credit of a business. What happens when a company or an individual stops caring about that and gives up on making their payments for an extended period? It is important to be familiar with what happens when debt payments can no longer be legally sued for, even if the debt still exists. This refers to the legal statute of limitations on debt collection.

Statute of Limitation on Debt Collection

What Does “Statute of Limitations” Mean in the Context of Debt Collection?
According to online legal authority nolo.com,

“The statute of limitations is the time period set by law in which someone can sue you. In the debt collection context, a creditor or bill collector cannot sue you for payment of a debt after the applicable statute of limitations period has run.”

The Statute of Limitations & Debt Collection | Nolo.com, http://www.nolo.com/legal-encyclopedia/the-statute-limitations-debt-collection (accessed April 13, 2017)

Lawsuits are one of the resources that creditors may resort to recover delinquent accounts, but legally speaking, it’s a resource that must be used within a certain time limit.

That amount of time varies from state to state, because although there are some federal laws concerning credit reporting and the collection of personal debt, there is no national statute of limitations on debt collection, and there are no federal laws regarding commercial debt.
We compiled a list of the current state statutes regarding the practices surrounding the collection of commercial debt here. Nola has also compiled a state-by-state list of all the different statutes of limitation in place as of September 2015. That list can be accessed here.

It is worth noting that all states have minimum statutes of limitations of at least two years for any legal contract. The majority of states have a maximum limit of between three and six years. A minority extend the statute of limitations up to 10 years, especially for written contracts, and Kentucky has a provision for some contracts to be enforceable by a lawsuit for as long as 15 years.

Does the Statute of Limitations Apply in all Circumstances?

The statute of limitations represents less a form of complete relief than the courts simply choosing to ignore the debt after a certain arbitrary length of time, even though it still exists. This is an issue that has some potentially thorny legal implications.

When the relationship between a creditor and a delinquent debtor has endured beyond the statute of limitations, there are still several things that can happen. The creditor can legally continue to ask the debtor to pay the debt. If the debtor ignores this or otherwise refuses to acknowledge the validity of the debt, the status quo remains unchanged.

In that circumstance, beyond the statute of limitations, the creditor cannot even threaten to sue the debtor, but both the creditor and any debt collection agencies in their employ may continue to contact the debtor regarding payment. They cannot threaten a lawsuit, lest they run afoul of the federal Fair Debt Collection Practices Act (FDCPA). That law specifically applies to collection agencies, not to the creditors themselves, but many state laws specifically restrict the legal latitude afforded to creditors, as well.

Since creditors and collections agencies can still ask for payment, there still exists the possibility of collection, and even legal recourse. If the debtor acknowledges, even verbally, the validity of the debt in question, they may no longer be protected by the statute of limitations. From a debtor’s perspective, nolo.com explains further:

“If a debt collector contacts you about an old, time-barred debt, be very careful in what you say to the bill collector. If you say or sign anything that might be considered an acknowledgment of the validity of the debt (meaning, you agree that you owe that debt even if the statute of limitations to sue has expired), then you may have revived, waived, or extended the statute of limitations. Or, if you make an agreement with that bill collector to pay the old debt, then you also may revive, waive or extend the statute of limitations.”

Lane, Stephanie. “The statute of limitations ran out on my credit debt. Can the collection agency still contact me?” www.nolo.com. Accessed April 13, 2017. http://www.nolo.com/legal-encyclopedia/the-statute-limitations-ran-credit-debt-can-the-collection-agency-still-contact-me.html.

Waiving the statute of limitations is difficult to do legally, especially if by accident. Waivers of this sort are rarely upheld or enforced. Extending the statute is more common, and basically “pauses the clock” after a debt renegotiation. Reviving the statute of limitations essentially means that any time a debt payment is made, whether before or after the statute of limitations time has passed, it resets the clock to zero, and puts the debtor well within the statute’s time frame for legal liability.

What Does the Statute of Limitations Mean for My Business?

The key issue for creditor businesses is the timing of lawsuits. If a company finds it necessary to sue a debtor to attempt to recover a debt, it must do so before the statute of limitations has been reached. In other words, the delinquent debt must be younger than that specific time limit based on the state the debtor resides in, and the type of contract, or else lawsuits are off the table.

The FDCPA and state laws require debt collections agents to walk a very fine line and answer debtors’ questions completely truthfully. For this reason among others, it’s always a good idea to work with a trustworthy group of experts on the subject, like Burt and Associates.

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