Is there a statute of limitations on debt?

Is there a statute of limitations on debt?

Yes, the clock ticks on credit-report scars and on the debts themselves. But that doesn’t necessarily get you off the hook.

By Liz Pulliam Weston

Not too long ago, the only people who had to worry about legal limitations on old debt collections were folks who didn’t pay their bills.

Today, however, increasingly aggressive collectors are going after people for debts they’ve already paid or that aren’t even theirs. Knowing something about so-called "statutes of limitations" on debts can help you deal with misdirected or belligerent collection attempts.

Here are just a few examples from my mailbag:

Suzy from New York City was fielding calls from a so-called "debt repurchaser," a company that buys old debts from other collection agencies. The repurchaser demanded payment for a credit card bill that Suzy paid through a credit counselor, but she’d long since lost all her records regarding the account.

Jerri’s credit card number was stolen and used to call a 900 number, a premium call that cost more than $200. Her credit card issuer removed the charge and reissued new cards. Apparently the 900-number service provider turned the debt over to a collection agency, because three years later she started getting calls demanding payment.

Brian in West Hollywood messed up his credit big-time in his early 20s, but his father stepped in, paid off his bills and closed all his accounts. Nearly 15 years later, Brian had rebuilt his credit and was looking forward to buying his first home when he got a disturbing call from a collection agency. "They claim I have an outstanding debt of $387.30 from the early 1990s," Brian wrote. The debt was supposedly from a credit card that Brian doesn’t remember ever having. "They have threatened that if I do not pay this, it will damage my credit report. . . . I feel like this is a scam, but I don’t know. . . . I am nervous about any negative marks on my credit report."

The Federal Trade Commission and state regulators around the country have taken action against collectors that have tried to resuscitate old, paid-off debts or that hounded people about debts that weren’t theirs. But you can’t always count on regulators intervening in your case, so knowing something about debt limitations can help you defend yourself against the worst practices.

How old is too old to collect?
There are two major types of limitations on debt that you need to know — and that many people confuse.

The first has to do with how long debt problems can show up on your credit reports. Federal law typically requires credit bureaus to drop negative information after seven years. The clock usually starts ticking 180 days after the account first goes delinquent (in other words, when you miss your first payment on the account). There are exceptions: Bankruptcies can remain on your credit reports for up to 10 years, and some debts, such as unpaid tax liens, can stay on your reports indefinitely.

Collectors can’t legally restart the seven-year clock by "re-aging" the debt (giving it a new delinquency date) or by selling it to another agency. (The FTC shut down one large collection agency, CAMCO, after charging the company repeatedly re-aged debts in its attempts to collect.)

The other curb on debt collection is the statute of limitations, which gives creditors a certain time period — in most states, three to six years — in which to sue you over a debt.

Statutes of limitations vary widely by state, and by the type of debt, according to attorney John Lamb, co-author of "Solve Your Money Troubles: Get Debt Collectors off Your Back & Regain Financial Freedom." States often have different rules for oral and written contracts, as well as for "closed-end" contracts such as installment loans and "open-ended" contracts, which typically (but not always) include credit card accounts.

California, for example, has fairly short statutes of limitations on most debts: two years for oral contracts and four years for written contracts, promissory notes and credit card debts. Kentucky, by contrast, says creditors can sue over written contracts for 15 years after the last payment was made, and for five years on most other debts, including credit cards.

Some other key points about statutes of limitations:

The devil’s in the details. Not only do states have different statutes of limitations for different debts, but two states may treat the same debt differently. A credit card debt might be considered an open-ended account in one state and a written contract in another. The only way to know for sure is to check your state laws or consult an attorney.

You can inadvertently restart the clock. Generally, the statute of limitations starts ticking from "date of last activity" on the accounts, said Los Angeles bankruptcy attorney Scott Bovitz. (If the account is still listed on your credit reports, the date of last activity should be noted there.) On a credit card debt, that could be the last payment you made or the last purchase you charged. But in some states, Lamb said, making a payment on an old debt, agreeing to an extended repayment plan or even acknowledging that the debt is yours can extend the statute of limitations or restart the clock altogether.

A creditor may still sue you after the SOL has run out. Suing or threatening to sue you after a statute of limitations has run out violates the Fair Debt Collection Practices Act, Lamb said, but that doesn’t mean it doesn’t happen. To prevent the creditor from winning a judgment against you, you’ll need to show up in court and point out that the statute of limitations has expired.

The creditor may try to pick a better venue. If you sign a credit contract and move to another state with different limits, the creditor may try to sue you in the state that has the longer statute. If that’s not the state in which you currently live, Lamb said, you should protest: "The general rule is that the state you live in" is the one whose statutes should apply.

Debts can still exist even if the creditor can’t sue. Some people erroneously believe that debts are erased after the statute of limitations has run out. Although the creditor’s ability to sue you has been curtailed, it can still try other methods to persuade you to pay, including calls and letters. The debt can also be sold to another collector that can renew efforts to get you to pay. A legitimate debt is truly erased only when it’s paid or erased in bankruptcy court.

First, make sure you’re covered

So how should you handle attempts to collect an out-of-statute debt? Sometimes the best recourse is to simply "hang up the phone and walk away," Lamb said.

"You want to be very careful," Lamb said, "not to say anything that could be used to restart the statute of limitations."

If you want to fight back, you should first make "absolutely sure" the statute of limitations has indeed expired, Lamb said. Otherwise, contacting the collector may goad it into more action.

In Jerri’s case, for example, the statute of limitations in her home state of Wisconsin had three more years to run. Since the bogus debt didn’t turn up on her credit reports and the collection agency didn’t threaten to sue, she opted to just ignore the calls, which eventually stopped.

You can start your research at one of a number of Web sites that post information on statutes of limitations, such as, whose chart includes links to relevant state laws.

If you’re sure the debt is too old for a lawsuit, you could send the collector a letter via certified mail, return receipt requested. The letter should include the fact that the debt isn’t yours (if that’s true), that the statute of limitations has expired and that you want all collection efforts stopped.

You may be able to handle this yourself, or you may want a lawyer’s help. The National Association of Consumer Advocates can provide referrals to attorneys familiar with fair credit laws.

Columns by Liz Pulliam Weston, the Web’s most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published May 31, 2007

8 signs you’re headed for financial disaster

8 signs you’re headed for financial disaster

Long before the bill collectors start to call, the signs are everywhere. Are you paying attention?

By Liz Pulliam Weston

Financial crises don’t typically happen overnight.

The seeds are usually planted at least months and often years before bankruptcy, eviction, repossession, foreclosure or other disasters ruin people’s financial lives. Recognizing — and correcting — risky money behaviors is key if you want to avoid derailing your finances.

Here are some of the biggest red flags to watch out for:

You’re surprised by your bank balance or credit card statements. In today’s financial world, you can’t be caught napping. "Float" — the time it takes a transaction to clear your account — has all but disappeared, and financial services are eager to penalize any lapses, such as a bounced check or an over-limit transaction, with hefty fees. At the very least, you need online access to your financial accounts, and you need to check them often — at least once a week, more often if you’ve bounced a check or incurred any other fine in the past six months. Personal finance software like Money or Quicken can help you keep track of pending transactions and forecast your cash flow.

You have no savings. You don’t necessarily have to keep thousands of dollars stuffed away somewhere, but you do need some kind of financial cushion to cover unpredictable expenses. For details, read "Why you need $500 in the bank."

You’re carrying credit card debt. Don’t fall for the myth that credit card debt is normal or that the average American carries huge balances. In reality, the most U.S. households have no credit card debt, according the Federal Reserve. Only one household in 14 carry more than $10,000 in credit card debt.

Credit card debt not only costs you ridiculous amounts of interest, but it drastically reduces your financial flexibility, since any balance you’ve charged is credit you can’t access in an emergency. If you’ve got balances on your plastic, making paying them off a priority.

Take a hard look at the real choices

You have no discretionary income. If every paycheck is spent before you get it, or your fixed expenses eat up most or all of your income, you need to fix the problem, now. You may have convinced yourself that you have no choices, but chances are good that you do; you just haven’t been willing to really consider them yet. If you need suggestions on how to trim your spending, consult MSN Money’s Manage Your Debt decision center. Braver souls can post their incomes and expenses on the Your Money message board and ask for specific advice about where to cut.

You don’t know what kind of mortgage you have or when the payment resets. One out of three homeowners, when asked what kind of mortgage they had, confessed to pollster GfK Roper that they had no idea. (Read "Many borrowers find mortgages a mystery" for details.) Unless you have a traditional mortgage — with a fixed rate for the life of the loan — your ignorance could be expensive. The payment that’s currently affordable could skyrocket, leaving you among the rising numbers of homeowners losing their homes to foreclosure.

Call your lender now to find out whether and when your payment can change, and get an estimate of how high it can go; then consider your options. You may be able to cut other costs to compensate for the bigger payment, or you may want to explore refinancing or even moving.

You’re underinsured. If your job doesn’t provide adequate health insurance, you need to look for another job. In the meantime, read "A survival guide for the uninsured." Also check the liability limits on your auto, home and/or renters policies. Liability coverage protects you if you get sued; if your policy limits aren’t high enough, you risk losing much of what you own plus big chunks of your future income. Make sure the limits are at least equal to your net worth (what you own, minus what you owe). Finally, if you’re a homeowner, read "Is your home underinsured? 8 key tests" and adjust your coverage limits if necessary.

Your business (or rental property) is losing money. As a fellow business owner, I understand how much you want your venture to succeed. But too many months of red ink will sink not only your business but your personal finances, especially if you’re using your personal credit or savings to stay afloat. Come up with a plan to fix the problem and set a (relatively short) deadline; if your business or real estate isn’t generating positive cash flow by that deadline, then pull the plug.

Face the facts

You’re ignoring an elephant. This catch-all refers to any big, ongoing money problem you’re consciously avoiding or pretending doesn’t exist. Maybe you’ve got a car payment you’re struggling to pay. Or you’ve got adult kids (or parents) constantly turning to you for financial help. Or you’re retired and your nest egg is shrinking faster than you’d planned.

Whatever the problem, you need to assess the toll it’s taking and find a solution before you’re backed into a financial corner.

Speaking of corners, any of the following are good indications you’re already in one:

You’re borrowing from one lender to pay another. This includes using cash from one credit card to pay another, but it also includes tapping your home equity to pay off credit card debts if you don’t have a plan for avoiding credit card debt in the future.

You’ve missed a payment on any loan. Skipping a payment, or failing to pay the minimum specified, is a very big deal. Missing even a single payment can knock 100 points off your credit scores and trigger higher interest payments on your credit cards. Fall much further behind and you could face collection actions, lawsuits, repossession (if you’re late on a car) and foreclosure. Don’t wait until things get awful; fix them while they’re still just bad.

You’ve taken out a payday loan. The payday loan industry would love you to believe that borrowing money at triple-digit interest rates is a normal and reasonable thing to do. It’s neither. If you’re borrowing from payday lenders, your financial house is on fire and you need emergency help. A legitimate credit counseling agency (one associated with the National Foundation for Credit Counseling, for example) can provide budgeting help as well as debt repayment plans.

Columns by Liz Pulliam Weston, the Web’s most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published June 21, 2007