What happens if you stop paying a debt? There are a variety of unpleasant things that could happen, including regular contact from bill collectors, a ruined credit rating and potential legal action from your creditor. However, that creditor has a certain amount of time to take action against you. Beyond that point (known as the statute of limitations), the creditor may no longer sue you – thanks to the protections of the Fair Credit Reporting Act (FCRA).
The proper statute of limitations varies by state and type of debt, and the rules can be unclear on occasion based on conflicts, court interpretations or jurisdictional arguments. Let's start by considering the four types of debt that are often subject to statute of limitations.
Oral Contracts – An agreement on debt that is either partially written or not written at all. Oral contracts do not have fully written terms and are harder to prove in court, but they still represent valid debts.
Written Contracts – A traditional signed contract on a debt with fully written terms that is agreed to by all parties involved.
Promissory Notes – Another type of written and signed agreement where the debtor is expected to pay a specific amount of money on demand, at a particular time.
Open Accounts – This includes credit-card accounts and other revolving forms of credit with changeable outstanding balances and fluctuating repayment amounts.
There are a number of online sources that can give you the statute of limitations for your state, including some with interactive maps, but it's not always obvious when the information was last updated. Others do not distinguish between the types of debt. The list at CreditInfoCenter.com was last verified in March 2015 and contains the limitations for all four types of debt, as well as links to the underlying state statutes. By the time you read this, however, more recently updated sources may be available.
No state has a statute of limitations less than three years on any type of debt. The vast majority of limits are between three and eight years, but a few state and debt combinations can reach ten and even fifteen years.
When does the clock begin? The clock always starts from a "cause of action" invoked when you do something that violates your terms of agreement (generally, that means not paying your bill). Specific credit agreements may define the cause of action differently, requiring a "demand letter" asking for full payment by a particular date.
You are protected from lawsuits after the statute of limitations, but you are not barred from being contacted – because your debt hasn’t really gone away. The creditor cannot harass you about the debt and you can request that they verify the last date of payment (in essence, when the clock started). If you send a letter to the creditor disputing the debt, they must stop contacting you and verify whether the debt is still payable, and within the statute of limitations.
You must also realize that a creditor may still try to sue you for a judgment in defiance of the FCRA. The burden is on you to use the statute of limitations as a defense and stop the creditor from proceeding. Otherwise, you may have a judgment levied against you.
Beware of making a partial payment or acknowledging that the debt may still be valid. In some states and situations, you can open the door to restarting the clock on the debt. If you do choose to pay the debt, make sure you can pay it in full and get a signed agreement before repayment starts. Otherwise, you have given leverage back to the creditor.
Why would you ever repay an expired debt? One reason is to remove it from your credit score. Even if the debt has expired, it may still last on your credit score for a longer period of time – often for seven years.
If you live in a different state than the one in which you acquired the debt or defaulted on a payment, the law is not clear. The issue may end up in the courts to decide which statute of limitations applies. In that case, it's wise to find legal counsel.
Finally, if you are not sure about a debt and the statute of limitations that applies, look for a local attorney with experience in the debt-collection field. You can find options at the National Association of Consumer Advocates.
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