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The statute of limitations for debt collection determines how long creditors can legally sue you for unpaid debts. After this period, the debt becomes "time-barred", meaning lawsuits are no longer allowed, though the debt itself still exists. Here's what you need to know:
Quick Tip: A debt might no longer be legally enforceable but can still appear on your credit report for up to 7 years. Always check your state’s specific rules and consult legal advice if unsure.
For debt buyers, understanding these rules is vital to avoid overpaying for unenforceable debts or facing legal issues. Time-barred debts are often sold at steep discounts, reflecting their reduced recovery potential.
The statute of limitations sets a legal deadline for creditors or debt collectors to file a lawsuit to recover unpaid debts. Think of it as an expiration date for taking legal action.
"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."
– Nolo
Once this period passes, the debt becomes "time-barred", meaning creditors can no longer sue you. However, this doesn’t mean the debt disappears. Collectors may still contact you to request payment through phone calls or letters unless state laws specifically prohibit it. For instance, in Mississippi, North Carolina, and Wisconsin, collection activities must stop entirely once the statute expires.
For debt buyers, the statute of limitations plays a key role in determining the value of a debt. Debts still within the timeframe are enforceable and more valuable, while time-barred debts often sell for very little due to the legal risks involved.
"The idea behind these laws is we as a society decided we do not want old debts hanging around forever - we want people and businesses to move on with their lives without worrying about being sued."
– Daniel Cohen, Bills.com
The statute of limitations varies widely depending on the state and the type of debt. It can range from as little as two years to as long as 20 years. The type of debt also makes a difference - written contracts often have longer timeframes compared to credit card debt or oral agreements. Here’s a breakdown of typical timeframes:
| Debt Type | Description | Typical SOL Range |
|---|---|---|
| Open-Ended Accounts | Credit cards and revolving lines of credit | 3–6 years (state-dependent) |
| Written Contracts | Loans with signed agreements, like medical debt or private student loans | 3–10 years |
| Oral Agreements | Verbal promises without written documentation | Often the shortest (e.g., 2 years in California) |
| Promissory Notes | Formal written promises, such as mortgages | Up to 20 years in some states |
Federal debts, like federal student loans or tax debts, don’t follow the same rules. These debts often have no statute of limitations, meaning they can be pursued indefinitely.
Some credit card agreements include "choice of law" clauses, which specify which state’s laws apply to the debt. For example, a credit card issued under Delaware law may follow Delaware’s statute of limitations, even if you live elsewhere. While some judges might apply local laws, the U.S. Supreme Court has generally upheld these clauses.
Additionally, the statute of limitations can be "tolled", or paused, under certain circumstances. For instance, if a debtor leaves the state or country, the clock may stop until they return. This means a 4-year statute could effectively stretch over a longer period.
It’s important to understand that the statute of limitations and credit reporting timelines are two different things. The statute of limitations determines how long a creditor can sue you, while credit reporting timelines dictate how long a debt can appear on your credit report. These timelines are governed by separate laws - state laws for the statute of limitations and federal laws under the Fair Credit Reporting Act (FCRA) for credit reporting.
| Feature | Statute of Limitations | Credit Reporting Timeline |
|---|---|---|
| Purpose | Sets the deadline for filing lawsuits | Determines how long a debt appears on credit reports |
| Duration | Varies by state and debt type (3–10 years) | Generally 7 years from the date of delinquency |
| Impact of Expiration | Debt becomes time-barred; lawsuits are prohibited | Debt is removed from credit reports, no longer affecting credit scores |
| Debt Status | Still exists and may be pursued via calls/mail | Still exists but isn’t visible to most lenders |
"A debt doesn't generally expire or disappear until it's paid, but in many states, there may be a time limit on how long creditors or debt collectors can use legal action to collect a debt."
– Consumer Financial Protection Bureau
This creates unique situations. For example, a debt might no longer appear on your credit report but still be legally collectible, or it might be time-barred from lawsuits but remain visible on your credit report. For debt buyers, understanding both the legal enforceability and credit reporting status of a debt is crucial for evaluating risk. Importantly, attempting to sue or threatening legal action on a time-barred debt violates the Fair Debt Collection Practices Act (FDCPA) and can lead to serious consequences.
The statute of limitations typically starts ticking at the point of breach - most often the first missed payment or the final payment made. However, some states might use other triggers, such as the official due date or events like lapsed collateral insurance. Mark Cappel from Bills.com provides clarity on this:
"The statute of limitations clock usually starts at the moment of breach. This means most courts start the statute of limitations clock when you miss your payment."
– Mark Cappel, Bills.com
To determine whether a debt is time-barred, it’s crucial to obtain detailed records from the collection agency. These records help pinpoint the last recorded activity, which is key to understanding how actions taken afterward might extend the legal timeframe for debt collection.
Once the clock is running, certain actions can reset it, effectively giving creditors a new window - often spanning three to ten years - to initiate a lawsuit. For instance, even a small voluntary payment can restart the clock. As Mark Cappel explains:
"Making a voluntary payment, even a couple of dollars, restarts the statute of limitations clock."
– Mark Cappel, Bills.com
Other triggers include written acknowledgments, such as signing a letter or providing a written promise to pay. In some states, even verbal confirmations can restart the clock. Agreeing to a new payment plan, accepting a settlement, or making a new charge on a revolving credit account can also reset the timeframe.
In certain situations, the clock can be "tolled" or paused. For example, if you move out of state or become unavailable for legal service, the limitations period may temporarily stop until the situation changes. Understanding these triggers is critical for evaluating the legal risks and recovery options tied to a debt.
Statute of Limitations by State and Debt Type Comparison Chart
The type of debt agreement you sign directly impacts how long creditors or collectors have to pursue repayment. These timeframes, known as statutes of limitations, vary not only by debt type but also by state, which can make things tricky for debt buyers and sellers. Misclassifying a debt can lead to compliance issues or mistakes in valuation, so it's crucial to understand these differences.
Matt Schulz from LendingTree highlights an important point about statutes of limitations:
"The debt could be old enough to have passed the statute of limitations for collections. If you're unaware of that and you make a payment or agree in writing to make a payment, it could 'restart the clock' on you, making that debt collectable again."
Written contracts typically cover loans like personal loans, medical payment plans, and private student loans. For these agreements, the statute of limitations can range from four to 15 years, depending on the state. Promissory notes, which are formal written promises to repay a loan, often have longer limitation periods.
Here are some examples:
Credit cards fall under the category of open-ended accounts, allowing borrowers to access and repay credit repeatedly up to a set limit. States generally apply statutes of limitations ranging from three to six years for these accounts. For example:
Credit card agreements often include "choice of law" clauses, which specify which state's laws will apply. For instance, Chase and Discover frequently use Delaware's three-year statute, while American Express relies on Utah's laws. However, court rulings can sometimes override these clauses. A notable example is the 2008 Georgia Court of Appeals decision in Hill v. American Express, which applied Georgia's six-year written contract standard instead of the four-year open account limit. Meanwhile, Illinois courts have ruled differently. In Portfolio Acquisitions LLC v. Feltman (2009), the court determined that credit card debts fall under a five-year statute of limitations instead of the 10-year period for written contracts.
Here's a quick look at how statutes of limitations vary by state and debt type:
| State | Oral Agreements | Written Contracts | Promissory Notes | Open-Ended Accounts |
|---|---|---|---|---|
| Alabama | 6 years | 6 years | 20 years | 3 years |
| California | 2 years | 4 years | 4 years | 4 years |
| Florida | 4 years | 5 years | 5 years | 4 years |
| Illinois | 5 years | 10 years | 10 years | 5 years |
| Kentucky | 5 years | 10–15 years | 15 years | 5 years |
| Maine | 6 years | 6 years | 20 years | 6 years |
| New York | 6 years | 6 years | 6 years | 6 years |
| Texas | 4 years | 4 years | 4 years | 4 years |
| Virginia | 3 years | 5 years | 6 years | 3 years |
When determining whether a debt is time-barred, it's essential to identify the correct debt category and review the cardholder agreement for any choice-of-law provisions. For example, a 2011 Illinois appeals court ruling in Gemini v. New clarified that if a collector cannot produce the original signed credit card agreement and only provides a generic version, the five-year statute for non-written contracts applies, not the 10-year period for written contracts.
When debt crosses state lines, figuring out which statute of limitations applies can get tricky. A mistake here can disrupt collection efforts or lead to compliance problems.
Borrowing statutes are designed to prevent "forum shopping", where parties try to file lawsuits in states with longer statutes of limitations. These statutes require courts to apply the limitation period from the state where the debt originated - if that state's timeframe is shorter than the one where the lawsuit is filed. The National Consumer Law Center describes it this way:
"Borrowing statutes... require, when an action arose elsewhere than the forum state, that the action can only be brought if within the limitations period that applies under the law of the state where the action arose."
For example, if a credit card debt originated in California (with a four-year statute of limitations) but the lawsuit is filed in Illinois (which has a five-year limit), borrowing statutes would enforce California's four-year limit. This ensures that creditors can't extend collection windows by choosing a more favorable state for filing. Cases like this show how borrowing statutes help align legal processes across states.
The Fair Debt Collection Practices Act (FDCPA) also limits where collectors can file lawsuits - usually to the consumer's state of residence or the state where the contract was signed. Additionally, credit agreements often include choice-of-law clauses, which specify which state's laws apply to the debt, further complementing these state-specific rules.
For debt buyers, understanding borrowing statutes is essential for evaluating portfolio risks and accurately determining the value of purchased debt.
State-specific statutes of limitations add another layer of complexity to debt recovery. For instance, Mississippi and Wisconsin completely bar lawsuits once the statute of limitations expires, enforcing stricter rules than many other states.
When it comes to written contracts, New York has one of the shortest limitation periods at three years, while Ohio and Kentucky allow up to 15 years. For credit card debt, the range varies widely - from three years in 13 states to 10 years in Rhode Island. California sets the shortest limit for oral contracts at two years, while Rhode Island allows up to 15 years for such agreements.
Some states, like Virginia, may apply another state's statute of limitations if the contract breach occurred there and that state's limit is shorter. Meanwhile, Maryland and North Carolina have "under seal" provisions that can significantly extend the statute of limitations for written contracts - from three years to up to 12 years in Maryland and 10 years in North Carolina, depending on how the document was executed.
These differences are crucial for debt buyers handling portfolios with debts of varying ages. A debt that might still be collectible under one state's laws could be time-barred in another. Understanding these state-specific rules is key to accurately assessing both risk and recovery potential in debt portfolios.
When a debt's statute of limitations runs out, it becomes time-barred. While this doesn’t erase the debt itself - it can still appear on your credit report for up to seven years - the creditor loses the legal right to sue you for repayment.
Even though creditors can’t take legal action on time-barred debts, they’re often still allowed to contact you and request payment in most states. This might include sending letters, making phone calls, or other forms of outreach. However, they must steer clear of using deceptive tactics or illegal threats. If you’re sued over a time-barred debt, you can defend yourself by citing the expired statute of limitations to avoid a default judgment.
The Fair Debt Collection Practices Act (FDCPA), along with Regulation F, explicitly forbids debt collectors from suing or even threatening to sue over time-barred debts. According to 12 C.F.R. § 1006.26(b):
"The federal FDCPA prohibits a debt collector from bringing or threatening to bring a legal action against a consumer to collect a time-barred debt."
What’s critical here is that collectors are held accountable even if they claim ignorance of the debt’s expired status. Violations can result in penalties, including actual and statutory damages, as well as covering the consumer's attorney fees.
For example, in October 2020, the Consumer Financial Protection Bureau (CFPB) secured a final judgment against Encore Capital Group, Inc. in the Southern District of California. This ruling required the company to provide consumers with clear disclosures when attempting to collect on time-barred debts. Similarly, in January 2012, the Federal Trade Commission (FTC) reached a consent decree with Asset Acceptance, L.L.C. in the Middle District of Florida, mandating that they inform consumers when a debt was time-barred and warn that partial payments could restart the statute of limitations.
These regulations highlight the complexity of navigating time-barred debt collection under federal and state laws.
State laws can further complicate how time-barred debts are handled. While most states allow collectors to request voluntary payments on these debts, three states - Mississippi, North Carolina, and Wisconsin - go even further. In these states, once the statute of limitations expires, the debt is legally extinguished. This means collectors are barred from any form of collection activity, not just lawsuits. For debt buyers and collectors, these states present unique challenges when managing older debt portfolios.
The statute of limitations plays a critical role in determining the value of a debt portfolio. For buyers assessing portfolios for acquisition, understanding how the remaining legal life of each account influences recovery potential and profitability is essential.
Debts that remain within the statute of limitations hold greater enforceability, which directly impacts their value. The ability to pursue litigation gives collectors significant leverage, enabling actions like securing judgments, garnishing wages, or levying bank accounts. However, once a debt becomes time-barred, that leverage vanishes entirely. At that point, collectors must depend on voluntary repayment, which typically leads to lower recovery rates.
"Statute status influences recovery expectations, pricing, and prioritization decisions." - Tratta
This dynamic is reflected in market pricing. Portfolios containing time-barred debts often sell for just pennies on the dollar - sometimes as low as 2 cents per dollar of face value. On the other hand, debts with several years remaining before the statute expires command much higher prices.
Before purchasing a portfolio, buyers need to verify the dates of first delinquency and last payment for each account. These dates determine when the statute of limitations began and how much legal time remains. Missing or incorrect documentation can render accounts unenforceable, transforming what appeared to be a promising portfolio into a financial liability. Additionally, pursuing debts without properly tracking the statute timeline can expose collection agencies to legal risks.
Given these factors, managing portfolios with debts at different stages of enforceability requires a tailored approach.
When dealing with portfolios that include debts at varying stages of the limitations period, segmentation becomes a key strategy. Most portfolios are a mix of fresh debts with years of enforceability left and older accounts nearing or past the statute of limitations. Applying a uniform strategy across such portfolios can lead to regulatory missteps and financial losses.
Segmenting accounts early by their statute status allows for more strategic recovery efforts. For example, debts still within the enforceability period may warrant litigation or other aggressive collection methods, while time-barred debts require compliant, voluntary resolution strategies. This segmentation not only ensures appropriate recovery tactics but also mitigates compliance risks, such as violating the Fair Debt Collection Practices Act (FDCPA) by threatening legal action on expired debts.
State-specific laws add another layer of complexity. A single portfolio might include debts from multiple states, each with its own statute of limitations. For instance, a credit card debt might have three years of enforceability left in one state but already be time-barred in another. Buyers must adopt state-specific workflows to ensure compliance and accurately value the portfolio.
The quality of documentation is another critical factor. Portfolios with original contracts, detailed payment histories, and clear delinquency records are more valuable because they make legal recovery more viable. In contrast, portfolios with incomplete or missing documentation - even if the debts are within the statute - carry higher risks and lower market value. Combining these documentation insights with an understanding of state-specific laws is essential for effective portfolio management.
Federal debts operate under a distinct set of rules that set them apart from private debts, particularly when it comes to collection timelines and methods. These differences give the government far-reaching powers to recover debts, often without the constraints faced by private creditors.
Federal student loans, for example, have no statute of limitations. This means the government can pursue collection indefinitely, no matter how much time has passed since the borrower defaulted. As the Consumer Financial Protection Bureau explains, "Some debts, though, such as federal student loans don't have a statute of limitations". Whether a borrower has been in default for 2 years or 20, the government retains the ability to collect. Tools like administrative offsets allow the government to intercept tax refunds, garnish Social Security benefits, and withhold other federal payments - all without needing to file a lawsuit.
Federal tax debts, on the other hand, follow a different framework. The IRS operates under a 10-year Collection Statute Expiration Date (CSED), which begins from the date the tax is assessed. However, this 10-year period isn’t set in stone - it can be paused or extended under certain conditions. For instance, bankruptcy proceedings, installment agreements, or Offers in Compromise can suspend or lengthen the collection window. Other situations, like military service in a combat zone or living abroad for six continuous months, also stop the clock. In the case of military service, the suspension lasts for the duration of service plus an additional 180 days.
The government’s collection methods are equally distinctive. It doesn’t need a court judgment to garnish wages or seize assets. Using administrative tools, such as tax refund offsets or federal salary garnishments, the government can directly deduct amounts from federal payments or paychecks. Taxpayers can determine their specific CSED by requesting an "account transcript" from the IRS, either online or by calling 800-908-9946. If a tax debt is paid after the CSED has expired, taxpayers may even qualify for a refund of the overpaid amount.
These exceptions illustrate just how different federal debts are from private consumer debts. Unlike private debts, which often lose value over time due to state-specific statutes of limitations, federal debts maintain their enforceability for much longer - or even indefinitely. For debt buyers, understanding these distinctions is crucial, as federal debts require a different approach to risk assessment and collection strategies. However, most debt portfolios on the market still focus on private consumer debts, where state laws around limitations remain the central concern.
Purchasing debt portfolios without a clear understanding of statute of limitations rules can open the door to legal trouble. The Fair Debt Collection Practices Act (FDCPA) enforces strict guidelines on how time-barred debts can be handled. As the Consumer Financial Protection Bureau (CFPB) explains:
"A debt collector who brings or threatens to bring a State court foreclosure action with respect to a time-barred mortgage debt may violate the FDCPA and Regulation F. This is true even if the debt collector neither knew nor should have known that the debt was time barred."
Simply put, claiming ignorance of a debt's time-barred status won't protect you from liability. Below are steps to help debt buyers verify statutes and steer clear of potential violations when assessing a portfolio.
Before buying a portfolio, it’s essential to classify every account into one of four categories - oral agreements, written contracts, promissory notes, or open-ended accounts like credit cards - because each type has a different statute of limitations. For instance, oral agreements in California expire after 2 years, while promissory notes in Illinois can be enforced for up to 10 years.
The next step is pinpointing the date of the last activity. Generally, the statute of limitations begins ticking from the last payment or acknowledgment by the debtor. In some states, the clock starts when a payment is missed, while in others, any partial payment during collection can restart it. It’s also critical to review the original credit agreement for any "choice of law" clauses, which might dictate that another state’s laws apply. If the debtor has moved between states, both the previous and current state laws may be relevant.
Be cautious with dormant accounts, sometimes called "zombie" accounts, such as long-inactive second mortgages or accounts with no recent communication. These are particularly risky because they are more likely to be time-barred. Since state laws can change, consult the state’s Attorney General office or legal counsel to confirm the current statutes before finalizing a purchase. Also, verify whether any actions - like a partial payment or written acknowledgment - have restarted the statute of limitations. Once everything checks out, ensure your collection practices comply with FDCPA rules, as outlined below.
To minimize legal risks, strictly follow FDCPA guidelines when handling accounts. Regulation F (12 C.F.R. § 1006.26(b)) explicitly prohibits debt collectors from initiating or threatening legal action, including foreclosures, on time-barred debts. Even vague or implied threats can lead to violations. Additionally, offering to "settle" a time-barred debt may be considered misleading, as it suggests a legal right to sue that no longer exists.
In states like Mississippi, North Carolina, and Wisconsin, time-barred debts are extinguished entirely, meaning they can no longer be collected under any circumstances. Other states, such as California, Connecticut, Texas, West Virginia, and New York, require specific disclosures about the time-barred status of debts in validation notices.
Before purchasing a portfolio, check for accounts discharged in bankruptcy, as attempting to collect on these can also violate the FDCPA. Avoid threatening to report time-barred debts to credit bureaus, especially if the debts are near or past the seven-year reporting limit. Federal law prohibits reporting "obsolete" debts, and their impact on credit scores is negligible. Lastly, verify the chain of title and payment history accuracy, as older debts are more likely to have errors in ownership or records.
Understanding the statute of limitations (SOL) is a critical aspect for debt buyers and managers. The SOL defines whether a debt can still be legally enforced. Once that period expires, the debt becomes time-barred, meaning the right to sue is lost, and the account's market value drops significantly. Debt buyers often acquire these older accounts for as little as 2 cents on the dollar. However, failing to conduct proper due diligence can lead to overpaying for unenforceable claims or, worse, facing liability under the Fair Debt Collection Practices Act (FDCPA). Mishandling such accounts can invite serious regulatory scrutiny.
The stakes are high when dealing with time-barred debt. According to the Consumer Financial Protection Bureau (CFPB), "A lawsuit filed after the statute of limitations expires is a violation of the Fair Debt Collection Practices Act". This remains true even if the debt buyer is unaware that the debt is time-barred. Past enforcement actions, such as Asset Acceptance's 2012 consent decree and Encore Capital's 2020 CFPB order, highlight that pursuing these debts - whether intentionally or due to ignorance - violates the FDCPA.
To figure out the statute of limitations for your debt, you'll need to refer to your state's laws. This timeframe typically begins from the date of your last activity on the debt, such as making a payment. The duration can vary depending on the type of debt. You can consult resources like your state attorney general's office or legal guides to pinpoint the timeframe that applies to your specific situation and location.
The statute of limitations for debt collection can reset under certain circumstances. If you make a partial payment, acknowledge the debt in writing, or agree to a new payment plan, the clock starts over. This essentially extends the period during which creditors can legally pursue the debt.
If a debt is time-barred, collectors are still allowed to contact you, but they cannot sue you or threaten legal action to collect the debt. It's important to understand your rights and check the statute of limitations for the debt in question. This can help you avoid falling victim to improper collection practices. Always verify the details before taking any action.
More than a decade of Ivan's career has been dedicated to Finance, Banking and Digital Solutions. From these three areas, the idea of a fintech solution called Debepxert was born. He started his career in Big Four consulting and continued in the industry, working as a CFO for publicly traded and digital companies. Ivan came into the debt industry in 2019, when company Debexpert started its first operations. Over the past few years the company, following his lead, has become a technological leader in the US, opened its offices in 10 countries and achieved a record level of sales - 700 debt portfolios per year.
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