When it comes to unpaid, old debts, people often get confused around the term “statute of limitations”. Everything comes with an expiry date and the same is the case with debts. Statute of limitations on a debt dictates whether or not your creditor can sue you over your unpaid debt. After a certain while, when your debt is old and the statute of limitations has run out, your creditor can’t take any legal action against you over the unpaid balance. It’s a complicated process to understand and often consumers are unaware about their rights and obligations. To understand how long do creditors have to initiate any legal action against, it’s important that you learn about both debt settlement and statute of limitations when it comes to old debts.
What Is Debt Settlement?
Debt settlement is a financial strategy where the borrower negotiates a lower settlement with the creditor. In simpler words, you ask the creditor to reduce your debt and in exchange, you’ll pay a lump sum of the total amount due. Debt settlement is specifically for those who are facing financial hardship and they can’t see themselves paying off their debt anytime soon. For example, if you are going through a medical emergency, a divorce or loss of income then you can definitely opt for debt settlement and clear the outstanding payment.
This strategy can work wonders for you but it does come with some consequences like it’ll have a negative impact on your credit score and it’ll stay on your credit report for 7 years. A poor credit score and a “Settled” account can limit your access to future financial benefits like more loans with lower interests etc. Considering the damage debt settlement does to your credit, it’s important that you only opt for it if it’s the last resort left and the only alternative you have is bankruptcy.
What Is The Statute Of Limitations On Debt?
In simpler words, the statute of limitations defines the time a creditor has to take legal action against a borrower over the unpaid debt. Once the period expires, the creditor can’t sue the borrower and the debt would become “time-barred”. People often get confused with this situation and they think that they don’t have to worry about the debt anymore. Well, that’s not the case here. Even if your lender can’t file a lawsuit against you, he still can make any attempt to recover the amount for you. In short, you’d still owe the outstanding amount.
Different Statutes Of Limitation For Different Types Of Debt
There are multiple types of debt and each type comes with a different contract. For example, the statute of limitation will be different for a credit card debt and it’ll be different for a personal loan. Debts are broken into four categories;
1-Written
The type of debt where the amount is fixed and so are the repayment terms. Most of the loans fall into the written category for example mortgages, car loans, medical debt and even personal loans.
2-Open Ended
Almost all the types with revolving credit fall into the open ended category. Credit card debt is one of the best examples here where you keep on borrowing and keep on repaying the amount up to a certain limit.
3-Oral
Even if there is no written agreement and the debt was given based on verbal interaction or just a handshake, it still comes with a statute of limitation.
4-Promissory Note
It’s more like a written contract between two individuals or parties that aren’t a bank.
Key Points About The Statute Of Limitations On Debt
Time Limit For Legal Action
Statute of limitation defines the maximum time limit given to a creditor or lender to sue the borrower over unpaid debt.
Time Barred Debt
Once the statute of limitation expires, the debt then becomes “time barred” which means that the creditor cannot force a lawsuit or take any other legal action for the outstanding balance.
The Debt Still Exists
Even if the debt is time barred, creditors and collectors can still contact you to recover their amount voluntarily. In simpler words, you still owe the unpaid debt.
The Time Varies Depending On The State And Type
Different types of debt come with different SOLs. It also depends on the state you are in. For example, in some states the range falls between 3 to 6 years and some may go up to 10 to 15 years.
Starts From The Last Activity
The date of statute of limitation starts from the last day of your payment or the written acknowledgment of the debt.
No Lawsuit On Time-Barred Debt
Your creditor cannot sue you if the statute of limitation has expired. This violates the FDCPA and if someone sues you over time barred debt then you can take a legal action against him too.
Get Legal Advice If Not Sure
If your creditor is contacting you about your old debt, it’s important that you first learn about the SOL of your state. Getting legal help and consulting an attorney in this case would be the best thing to do.
Debt Settlement And Time Barred Debts
Yes, it’s possible to negotiate a debt settlement with your creditor even when it’s a time barred debt. Here are the pros and cons you should first consider;
Pros
- It’ll help you settle your debt for less than the original amount
- It’ll help you put an end to collection calls and it’ll close your account
- After the debt is marked as “Settled”, you can then work on improving your credit score.
Cons
- If you are settling a time barred debt, it’ll revive your obligation to pay the debt in full.
- You might have to pay tax on the forgiven amount. If your creditor has forgiven more than $600, the IRS considers it as taxable income.
- Even if they are beyond the SOL, your settled debt will be reported and it’ll stay on your credit for 7 years.
Can Old Debts Still Be Collected?
It’s completely normal for you to worry about your old debt and the fact that whether your creditor can still collect it or not. Well, yes your creditor can collect the debt informally even if the SOL has expired. The creditor can contact you through phone calls and emails but he cannot threaten you with a lawsuit or take any legal action against you to recover time barred debt.
If the lender still files a lawsuit against you, you can use the SOL in your defense and the court will then dismiss the case. It’s of utmost importance that you show up in court if your lender has taken any legal action. Not showing up and failing to assert the SOL in your defense means that you might lose the case and you might even be forced to pay in full.
What To Do If You Are Contacted About An Old Debt?
If your lender contacts you again and inquires about your old debt, it’s important that you know how to respond;
- Avoid saying yes and admitting that you do owe the debt. Don’t make any payments without confirming the status of the debt.
- Within 30 days of the contact, you must ask the collector to provide evidence that the debt belongs to you and it’s within the SOL.
- Check the status of your debt online or get in touch with an attorney to know whether the statute of limitations on the debt has expired or not.
- Never ignore a lawsuit. If your lender takes legal action against you, show up in the court and raise the SOL in your defense.
- Consider legal advice if you aren’t sure about your rights.
Final Thought
Managing old debt can be very overwhelming especially if your financial condition isn’t up to the mark and you can’t afford to pay off the debt. In such cases, understanding the SOL is quite important and you have to ensure that the SOL has expired or not. If yes, and if your debt is time barred then requesting a debt settlement is the wiser solution. Time barred debt just means that your lender can’t sue you but it doesn’t mean that you don’t owe the debt anymore. You still have to take measures to pay off your outstanding balance.
FAQs
Q1. Can A Debt Collector Still Approach Me If The SOL Has Expired?
Yes, your creditor or collector can contact you again about the debt even if the statute of limitations has expired. He just can’t threaten you with any legal action.
Q2. What Happens If You Make Payment On An Old Debt?
Making any payment or acknowledging the debt can revive the SOL in many states. The creditor can then take legal action against you if you fail to repay the loan in full.
Q3. Can Time Barred Debt Appear On Your Credit Report?
Yes, time barred debt can stay on your credit report for 7 years even if the SOL has expired.
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