What Is the Statute of Limitations on Debt?

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Debt can very much feel like a “forever” thing. In the beginning of my debt journey (which is still going on, thanks to student loans), I struggled to imagine a time when I’d be debt free. But one thing I didn’t know was that debt can have an expiration date.

The name of this expiration date is a statute of limitations. The statute of limitations dictates a time frame in which a creditor can sue you for the repayment of unpaid debt. This time frame varies per state and per debt category.

While the idea of a statute of limitations sounds straightforward, the reality of enforcing it is anything but. Every point in the process carries the potential for confusion: from when the clock starts ticking to how your state categorizes your debt to which state you can get sued in. Below is a guide to what you need to know about the statute of limitations so you can break through the confusion.

Defining “Statute of Limitations”

The statute of limitations is a rule that sets a time limit within which someone can file suit against another party. This was created to protect people from being sued after an unreasonable amount of time. For debt, once it reaches the statutory limit, the debt becomes what is called time-barred debt.

So far, pretty straightforward, right? Unfortunately, the water gets a lot murkier from here on. Here are some factors to think about in relation to the statute of limitations on debt:

  • When the clock starts ticking for the statute of limitations
  • How your state categorizes your debt type
  • Which state you can be sued in

When does the clock start ticking?

The short answer to this is: as soon as you stop paying on your debt. The long answer is…it depends. Almost anything you do after you stop paying on your debt can inadvertently restart the clock. For example:

  • Acknowledging to a debt collector that the debt is in fact yours
  • Promising a debt collector that you’ll pay the debt back
  • Making a payment on the debt

Whether these actions will stop the clock on your debt will vary on a case-by-case basis. There’s also one more thing to be wary of: tolling the statute of limitations.

Tolling the statute of limitations is the action of suspending the statute of limitations. This often happens when someone interferes with the collector’s ability to collect on the debt. For example, tolling the statute of limitations on debt could be the act of leaving the country to avoid repayment.

How Each State Categorizes Your Debt Type

The statute of limitations wasn’t designed for debt, which is why the laws surrounding it are a bit unclear. At this point, there are four different categories your debt could fall under. It’s important to note that each state may categorize your debt differently.

The four categories of debt are: oral contracts, written contracts, promissory notes, and open-ended accounts. Use this map by Bankrate to find out how long it will take your debt to reach the statute of limitations.

Which State You Can Be Sued In

If you are being sued for repayment of your debt, it may not necessarily occur in the state in which you live. It could end up being the state you opened the debt account in or the state in which the creditor is based. Needless to say, the creditor or collector will likely attempt to sue you in the state that has the most favorable laws to their case. Be aware of where you stand on each state’s provisions.

Determining Where Your Debt Falls in the Statute of Limitations

Now that you know all the considerations that can go into a lawsuit against you, be aware of what that means for your debt. If you have debt that has gone to collections, write down the following:

  • which states you could be sued in
  • how those states categorize the debt
  • the time frame for each state’s statute of limitations for that debt

Then think back. Have you been in contact with the collectors or creditors? Did you agree to settle the debt or restart repayment? Did you acknowledge that the debt is yours? These factors could have restarted the clock on your debt’s statute of limitations without you realizing it.

A Special Note on Student Loans and the Statute of Limitations

As many now know, student loan debt is almost impossible to discharge by bankruptcy. Given that, one might consider the statute of limitations to be a loophole for discharging student loan debt. It’s not.

Federal student loans do not have a statute of limitations. What’s worse, going into default on federal student loans could lead to a garnishment of your wages. That means the government can start taking money out of your paycheck to apply to your defaulted loans. For federal student loans, the government can take up to 15% of your pay.

Don’t let this happen to you. The government has many programs to help, including forbearance and deferment and income-based repayment. These are better options than ignoring your debt and hoping the government doesn’t take action.

Private student loans do have a statute of limitations. For private student loans, consider the same factors mentioned above:

  • which states you could be sued in
  • how those states categorize the debt
  • the time frame for each state’s statute of limitations for that debt

The Relationship Between Your Credit Score and the Statute of Limitations

For anyone truly struggling with debt, the statute of limitations can seem like a welcome relief. Keep in mind though, that just because a collector or creditor can’t sue you doesn’t mean your unpaid debt can’t hurt you in other ways. The most immediate effect is on your credit score.

Unpaid debt can hit your credit report as soon as 30 days after the first missed payment – and it can stay on your credit report for seven years. While this may not seem like a big deal at first, it will impact your financial future in a big way. Defaulted debt will instantly drag your credit score down. Consequently, you could be denied loans in the future or only receive loans with exorbitant interest rates.

Hoping for a new home in your near future? Think you may need to purchase a car? A lowered credit score from default can stand in the way of those goals.

If you defaulted on your debt and absolutely don’t see how you can pay it back, you may want to consult a bankruptcy attorney to explore your options. This too will impact your credit score, but not for more than 7-10 years. After that you’ll have the ability to rebuild on a clean slate – something you can’t do if your defaulted debt stays on your credit report indefinitely.

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Recovering Your Debt So You Can Get Back on Track

Defaulting on debt is a scary thing, but it’s not something you can’t recover from. Yes, the statute of limitations is there as a protection if you need it. But it’s a lot better to take the bull by the horns to ensure that you never do need it. If you’re in deep with debt and don’t see a way out, follow some of these steps to get back on track:

  • Contact your creditors to work out a settlement or repayment plan
  • Consider consolidating your debt to lower your monthly payments and interest rates
  • Contact a bankruptcy lawyer if you can’t refinance your debt or make your payments

No matter how challenging the financial situation, you can make it better if you take full control every step of the way. Debt can cause debilitating stress and set families back for years to come – but you do have the power to overcome it. Just take one step, then another, then another, and you’ll find yourself on the path to financial success.

Image Credit: Adam DeClercq

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  • Ruben Omega

    Great points…the last section clarified something that was confusing for me in the past because I previously thought that when statute of limitations is exceeded then the item disappears from your credit report. But as you pointed out, those are 2 different things and it can still show on the report even after the statute has expired.

    • Shannon_ReadyForZero

      I’m so glad that this helped, Ruben!

  • Barry

    What about state-backed student aid loans? I only see references to Federal or private.

  • ef

    I wonder, if you live outside of the country legitimately — not to avoid repayment — does it still suspend the clock on the statute of limitations?

    • Shannon_ReadyForZero

      While a lender can’t technically sue you out of state from where you reside (and therefore country), your debt could be tolled if you leave the country. That means the clock on the statute of limitations can stop clicking and restart when you get back. As with all debt, the best advice is to maintain payments (even if you’re living out of the country) so you never have to face a situation in which your debt goes into collections at all.

  • Bunna K

    Sorry to revive an old post, but I had a question regarding private student loans. If I’m in school and the loans are in deferment, does that count towards the statute of limitations?

    And what is normally considered “acknowledgement of debt”? If you’re planning on trying to get the loans discharged due to the statute of limitations, is it best to avoid all contact?

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Hi Bunna, to answer your first question, the statute of limitations does not start during deferment – it only starts once you have missed a payment or stopped paying on the debt. As for what constitutes acknowledgement of debt, that is a more detailed question that I’m not sure I can answer. However, one thing to remember is that the statute of limitations simply refers to the time after which a creditor can no longer sue you for the debt. That doesn’t exactly mean the debt is discharged. And any effect on your credit score is separate from the statute of limitations. Just wanted to make that clear. Let us know if you have further questions.

  • Alisha

    I have been paying on a private student loan for seven years. It went to a collection agency and I set up a payment plan with them which I have followed through with and paid them monthly $200 with a automatic payment plan. I knew nothing of these laws and statutes at the time I was very young. So if I stop paying them now what happens?