One powerful defense to a credit debt lawsuit is the statute of limitations. A statute of limitations is simply a law (state or federal) that limits the amount of time a creditor has to sue on a debt. Without a statute of limitations, a creditor could lie in wait for decades accruing interest, and then spring the long-forgotten claim.
A statute of limitations discourages unreasonable delay in resolving credit issues and directs the creditor to file a lawsuit within a number of years or be forever legally barred.
When is a debt barred by a statute of limitations?
A debt that is outside a statute of limitations cannot be legally enforced by the creditor or a subsequent collector. Whether an old debt is “time-barred” depends on a number of factors.
First, different time limitation statutes apply to written contracts, oral contracts, or even to credit card debt.
Second, the time when the limitation clock starts, or tolls (temporarily stops), can sometimes be difficult to ascertain.
Generally, the statute of limitations clock starts on the day the last payment is made on the debt. For instance, if the statute of limitations is five years, a debt is time-barred if the creditor does not file its lawsuit within five years after the last payment.
Certain acts defined within the statute of limitations can toll the clock and extend the time to collect, such as if the debtor files bankruptcy, is imprisoned, leaves the state, or is sent into military combat.
Reviving a time-barred debt
Many consumers are surprised to learn that when a payment is made to a creditor, it resets or “revives” the statute of limitations. Even a nominal payment on the day before the statute of limitations period expires will restart another five year period.
Also, a debt that is legally time-barred due to the expiration of the statute of limitations may be revived in some states when the debtor reaffirms the debt, either by agreeing to set up payments, making a token payment, or otherwise acknowledging the debt.
In other cases a payment on a time-barred debt may form the basis of an argument that the debtor has waived, extended, or revived the statute of limitations.
Collection of time-barred debts
The statute of limitations is a legal defense to be used by a defendant in a lawsuit. A debt collector (whether the original creditor or a third party collector) is allowed to contact a debtor concerning a time-barred debt.
A third party collector, such as a collection agency or attorney, does not have to volunteer that the debt is time-barred, but is required by law to answer truthfully if asked if the debt is beyond the statute of limitations (but may refuse to answer the question).
Stopping collection calls of time barred debts
A person may dispute a debt as time-barred by sending the collector a letter within 30 days of receiving a written notice of the debt. This letter should inform the creditor that the debt is disputed, that it is time-barred, and request verification of the debt.
Under the Fair Debt Collection Practices Act (“FDCPA”), a third collector must stop trying to collect until it provides verification of the debt.
The FDCPA directs that a third party collector must cease communication with the consumer when directed to do so.
The consumer must send written notice that either requests the collector cease further communication or state that the consumer refuses to pay the alleged debt. See 15 USC § 1692c(c).
Be sure to send this notice via certified mail because the notice is only complete upon receipt by the collector.
Statute of limitation defense in bankruptcy
A statute of limitations defense may be asserted in a bankruptcy case, especially in a Chapter 11 or 13 repayment case. See In re Hess, 404 B.R. 747 (Bankr. S.D.N.Y., 2009).
Debts that are outside the statute of limitations should be discovered by the bankruptcy trustee and objected to under Section 1302(b)(3), but sometimes these claims go unnoticed.
If not challenged by the trustee, the debtor should motion the bankruptcy court to disallow the debt as time-barred under Section 502(b)(1).
Disallowed debts are not paid during the bankruptcy case which may lower the monthly payment to creditors, or could reduce the Chapter 13 debtor’s time in bankruptcy.