If you get into a jam and don’t have enough money to pay off your credit card debt, the creditor can sue you for the balance. But, under state law, the creditor has only a certain amount of time to bring a lawsuit. We call that the statute of limitations. A creditor that doesn’t sue you within that time can’t force you to pay what you owe.
How Long Does the Creditor Have to File the Suit?
Every state has passed laws that limit the time a creditor has to file a lawsuit on its debt. The limitations period varies from state to state. For a written contract (which would apply to most debts), it can run as few as three years or as long as ten years. (The statute of limitations for a foreclosure deficiency balance—the amount still owing after a lender sells a home at auction—can be even shorter.)
Knowing the length of the limitations period, however, answers only part of the question. To determine the deadline (the end of the limitations period), you have to know when to start counting.
When Does the Statute of Limitations Start Running?
In general, the statute of limitations will run from the date of the last activity on your account. Determining the last activity can be tricky because some significant events in the life of a loan will qualify. By contrast, others won’t affect the statute of limitations.
Important events that can trigger the running of the limitations period include:
- your last payment
- your last purchase on a charge account
- when you acknowledge your liability (responsibility) on the account, and
- when you enter into a repayment agreement with the lender.
Events that aren’t considered activity for statute of limitations purposes include when the creditor:
- charges off the account and assigns it to a collection agency
- sells the account to another company
- reports the status of the account to a credit bureau, and
- attempts to collect with phone calls, emails and demand letters.
When the debt is an installment loan (a loan with a set number of payments), some courts have concluded that the limitations period has to be calculated separately for each installment, and the period does not begin to run until that installment is due.
Today, most creditors will avoid this result by including an acceleration clause in the contract. If you miss your payment, the acceleration clause allows the creditor to declare all payments due at the same time. The statute of limitations will run concurrently (at the same time) for all payments.
You Can Agree to Waive the Statute of Limitations
If you work with your lender to change your repayment schedule, reduce your payments, lower your interest rate or put in place other accommodations, your lender might try to use the statute of limitations as a bargaining chip. You can agree to waive the statute for a particular period or waive it altogether; however, you’ll want to be sure to consider the fact that you’ll be giving the lender additional time to bring a lawsuit against you.
Tolling the Statute of Limitations
The limitations period can be tolled or suspended (temporarily stopped), too. Tolling usually occurs when the creditor can’t serve you with the suit. Once the condition resolves itself, the limitations period will resume. Here are some examples:
- You’re incarcerated.
- You’re out of state.
- You file a bankruptcy case.
- You become mentally incapacitated.
For instance, suppose that the statute of limitations is four years and you stop making your payment on January 1, 2015. If you left the state for a year, the creditor would have a total of five years to file an action against you. The year that you were gone would get added to the limitations period.
When the Creditor Files After the Limitations Period
Sometimes, a creditor will file suit knowing that the statute has run. You can successfully defend the lawsuit by arguing that the statute of limitations has passed. But, if you ignore the suit, and the court enters a judgment against you, the statute of limitations no longer matters.
Talk With an Attorney
Understand that figuring out when the period expires can be tricky. An attorney familiar with litigation can help you determine the correct limitations period for your situation, the date of the last activity on your account, and the deadline for the creditor to file suit.
Questions for Your Attorney
- Does the statute of limitations matter if I file a bankruptcy case?
- Can the creditor continue to call and send demand letters after the limitations period has run?
- If I agree to waive the statute of limitations, can I change my mind later?