Buried in Debt? You May Not Have to Pay It
If you’re facing mountains of old debt, some of those past-due balances may have reached an expiration date. That’s because certain types of debt may qualify as “time-barred debt,” which are old, unpaid debts that have exceeded the number of years for creditors to sue you to collect. This could include credit card debt, medical bills, private student loans and auto loans.
With time-barred debt, you technically still owe the money, but creditors or third-party collectors can no longer take legal action against you because the statute of limitations to reclaim some or all of the outstanding balance has run out.
Time-barred debt: 4 things you need to know
While time-barred debt may sound like a way to release a pressure valve on past-due debts, consumers need to pay careful attention. The rules that govern time-barred debt can vary by location, type of debt and your specific loan terms.
Also, while federal and state laws prohibit creditors from suing you for time-barred debt, they are still allowed to contact you about your unpaid bills and attempt to recoup funds they’re owed. In fact, they don’t even have to offer up information that the debt has exceeded the statute of limitations.
1. When debt is considered-time barred
Since the statute of limitations on debt collection varies widely by state and by type of debt, to determine eligibility, financial advisors recommend researching local statutes and contacting an attorney with experience in debt resolution.
LendingTree offers a tool to research statute of limitations by state and breaks down the different types of debt, including automotive, credit cards, medical bills and mortgages.
In South Carolina, for instance, credit card, medical and private student loan debt is time-barred after just three years, while auto loan and retain installment loans have a six-year statute of limitations and mortgage notes are 20 years. Meanwhile, in Texas, almost all categories of debt become time-barred after four years.
In some instances, there could be provisions in your loan agreements that supersede any local statutes of limitations, noted Lilit Gasparyan, a CPA and real estate broker with Boston-based Capital Gains Consulting. “It depends on the language,” she explained. For example, she said, a mortgage lender may require a longer period for repayment than state laws mandate, overruling your local statute of limitations.
Time-barred debt is often an unusual situation, said Len Hayduchok, a CFP and president of Dedicated Financial Services, because creditors and collections agencies work hard to reclaim balances or reach a settlement with debtors. When time-barred debt occurs, it can often result from a creditor or third-party agency mishandling the account and fails to pursue payment, he said. In some situations, a person might have a long-forgotten debt or something they weren’t aware of that’s borrowed in their name.
2. You can’t be sued for time-barred debt
Once your unpaid debt has reached the statute of limitations under state regulations, creditors are prohibited from taking legal action. The federal Fair Debt Collection Practices Act (FDCPA) goes a step further and makes it is illegal for a collector or creditor to sue you or threaten to sue you for time-barred debt. To determine the statute of limitations on different kinds of debts under each state’s law, check with a legal aid lawyer, another attorney or your state attorney general’s office.
And just because collectors aren’t supposed to bring legal action against you over time-barred debt doesn’t mean they won’t try. If you do receive notification of a lawsuit, the FTC says consumers should consider contacting a local attorney.
On your own, you should get your paperwork organized, including information on your last payment on a debt and collect any correspondence from creditors you’ve had with the creditor or a third-party debt collector. If the debt is too old, that is your defense against a lawsuit.
Whatever you do, don’t ignore the lawsuit. If you don’t respond or appear in court, the judge could rule in the creditor’s favor, the FTC cautions. If there’s a court judgment against you, they could take your tax refund.
If you feel you’re being harassed by collectors, there are laws, including the FDCPA, that offer protections against collectors and you can file complaints with the FTC or local state’s attorney.
3. How you can be forced into repayment
While creditors can’t legally compel you to repay time-barred debt, consumers need to stay on their toes. Collectors will likely continue their pursuit of funds, including contacting you and possibly other contacts that you’ve given as references on loan or credit applications. They may call, email and send mail seeking to reclaim funds.
In many states, the statute of limitations typically begins when you miss your first payment. However, there are loopholes that can reset the clock. In some instances, if you make any payment on a debt, even just a few dollars, then the statute could restart. Also, if you acknowledge the debt, such as sending a written notice attesting to the debt, it could also reset the statute of limitations.
If the debt clock restarts, the collector can sue you for the full amount of money owed, plus any interest and fees that have accumulated during the period since your last payment.
To help determine if a collector is contacting you about time-barred debt, consumers should do the following:
- Find out if the debt has exceeded the statute of limitations
- Ask when the last payment was made, as that can determine when the statute of limitations was initiated
- Request a debt verification letter to establish the accuracy of the claim. Creditors have 30 days to reply in writing. During that time, collectors must stop contacting you.
Each time you have contact with a collector, write down as much detail on the interactions as possible, in case you need to access the information down the line.
If you are contacted, the best thing is to say very little and ask for correspondence in writing, suggested Hayduchok. If you do make a payment, even just $10, on a time-barred debt, it can restart the clock and all that debt becomes eligible for collections.
“In an attempt to be cooperative, you might put yourself into a financial hardship you might have been freed from,” he said.
4. Time-barred debt hurts your credit
While negative information typically remains on a credit report for seven years, time-barred debt could appear on a report for much longer. The FTC notes that not paying debt makes it more difficult and more expensive to get credit, insurance and other services with a lower credit rating.
When checking credit reports for real estate transactions, Gasparyan says she has seen time-barred debt from as much as 20 years ago show up. Such information could make it difficult for you to secure future loans or qualify to rent or buy a future home. “A bad credit report can hurt you in so many ways,” Gasparyan said.
For instance, when she is representing a landlord or a seller in a real estate transaction, if a credit report shows time-barred debt, that could be a red flag. “It hurts. I might advise avoiding renting or selling to someone like that,” Gasparyan said.
There are steps that a debtor can take to improve their credit history. Gasparyan notes that consumers can contact credit cleaning agencies. You could also work with a credit counselor to organize your debts and pay down old balances, consolidate debt or negotiate settlements.
LendingTree offers information on credit clearing agencies, as well as advice on how to select a credit counselor. Once old debts are settled and you’ve improved your financial profile, your credit score should improve over time, Gasparyan said.
How to juggle your time-barred debt and normal debt
Since making payments on time-barred debt can possibly put you in a renewed financial predicament, Gasparyan recommends consumers focus on paying current debts and leave time-barred debt in the past.
Rather than trying to service debt that has exceeded statute of limitations, consumers should develop a solid financial plan for future loans and expenses.
Gasparyan suggests borrowing responsibly and trying to stick to a budget. If possible, set aside some savings for future expenses. For example, only apply for a second mortgage if you know you can make payments on your original loan and the new one.
Of course, if unexpected circumstances crop up, such as job loss and illness, that can make it hard to stay on schedule with bills and your balances can accumulate. If you’ve been able to sock away some savings, that can help smooth things out.
“Healthy financial practices and paying bills on time will help to make sure you’re on the right track,” Gasparyan said.
If your old debt has reached the statute of limitations, it can protect you in court against creditors and third-party agencies trying to collect on that money. To protect yourself, make sure you understand the rules that pertain to your state and your specific type of debt. Also, make sure you have your paperwork organized in the event you’ll need to prove the debt is indeed time-barred. If you are contacted regarding time-barred debt, consider speaking to a local attorney to review your options and protections.