Understanding how the statute of limitations on debts works can be one of the most useful tools in helping you get out of debt.
For starters let’s make sure everyone understands that a statute of limitations is a time limit within which your creditors sue you to collect on your past due accounts.
A few words of caution before you proceed. The statute of limitations will vary on the type of debt in question, as well as the state where you live. So this article should act as a reference point, not specific legal advice. For that, you will need to consult with an attorney. (In fact, our attorney made us say that. So you know that we consulted one too before writing this article!)
Generally speaking the statute of limitations varies by state and ranges from three years to 10 years. But it’s not so easy as just waiting until the statute of limitations runs out in your state (or moving to a state with a shorter statute of limitations) and then enjoying a debt-free life.
Just because your past due account may now be “time-barred” (debts that exceed the statute of limitations), and cannot be collected in court, that doesn’t stop debt collectors from attempting to contact you or even sue you. And, if they sue you, you may still have to appear in court and show the judge that the debt has passed the statute of limitations.
Be Careful of Re-Setting the Statute of Limitations
If you make a payment on an old debt which is nearing its statute of limitations date, or even past it in some states, you could re-set the clock. This is one reason debt collectors may get more persistent the longer you’ve had the debt. They want to buy more time to collect that money.
So our advice is to be careful not to pay old debts before (1) verifying that the statute of limitations has not expired (or is not about to) and (2) paying these debts are a priority as opposed to paying other, more current obligations.
You should know that if you ask the debt collector if your debt is time-barred, the Fair Debt Collections Practices Act (FDCPA) requires that the collector tell the truth. And the FDCPA also bars debt collectors from threatening legal action on time barred debts.
Living in Fear of Debt Collectors is No Way to Live
This does not mean we counsel avoiding payments and waiting out the clock on the statute of limitations to expire. This will still have a negative impact on your credit report and score. In turn, you will pay more for future credit, insurance, and other services.
Living in fear of collection agencies catching up with you is no way to live. Consider other, more practical solutions to paying down your debt, or talk to a personal finance lawyer about bankruptcy if you don’t see another way out.
Also, you may find it useful to pay time-barred accounts in some instances to get them removed from your credit report before the expiration of the applicable reporting period. More on this below, but suffice it to say that expiration of the statute of limitations does not make all the consequences of past due debt go away.
Removing Time Barred Debts from Your Credit Report
You should know that credit reporting agencies can continue to report time-barred debts even though the statute of limitations expired. There is, however, a time limit after which reported negative information on your credit report must be removed.
The Fair Credit Reporting Act requires that most negative information be removed from your credit report after 7 years.
But just because the reporting time limit expired, do not assume the applicable statute of limitations did. And do not assume creditors and debt collectors are barred from pursuing payment.