Time-Barred Debts: A Consequence of Statute of Limitations

Once the Statute of Limitation takes effect, a debtor only has a moral rather than a legal obligation to settle the debt. It necessarily follows that if the Statute of Limitation has expired, a person cannot be sued for any debt owed within the stipulated period. However, a debtor whose debt is time-barred must exercise extreme caution so as not to engage in any activities that may re-activate the limitation period by either waiving, extending or reviving the term of limitation. The consequence of any of these acts would be to enable creditors to sue afresh on the debt.

Various factors come into play in the determination of the applicable statutory limitation period for debt. Suffice to note that the different states have varying limitation periods regarding various types of debts. Therefore, the operation of the Statute of Limitation is primarily dependent on the provisions of the law in the specific state that enforcement is sought, the type of debt that is of concern, as well as the kind of legal agreement, whether oral or written, between the debtor and the creditor. One must also take cognizance of the date on which satisfaction of the debt was due because the countdown of the statutory limitation period begins. A survey of debt related statutory limitation provisions across various states reveals that the length of a limitation period can vary from three to fifteen years depending on the relevant factors at play.

The lapse of a debt collection limitation period does not automatically do away with the debt. An old debt, although time-barred, continues to reflect on the debtor’s credit report for up to seven years. Therefore, seven years is the limitation period for derogatory items in a credit report. Derogatory items are reflections of a bad credit status and are factors that adversely impact a person’s creditworthiness or general reputation in the eyes of creditors and other relevant entities such as employers. Derogatory items indicate that a person poses a credit risk to lenders and may comprise of acts such as default on or late payment, bankruptcy records, records of a judgment or a tax lien against the debtor. To eliminate derogatory items on the credit report, a debtor must actively pursue credit repair measures. To efficiently conduct credit repair, a debtor must be aware of statutory limitation provisions concerning the reporting of derogatory items. The lapse of the reporting period on a derogatory item should automatically result in the expunging of that negative item from a credit report.

In the event a debtor moves from one state to another without paying off an existing debt, an action to recover the outstanding amount can either be brought in the state where the loan was acquired or in the state that the debtor currently resides. In other instances, the recovery can be commenced in the state that has been stipulated in the contract between the debtor and the creditor. In instances where it is not certain in which state recovery can occur, the matter is often for the courts to decide. The decision on the appropriate state for recovery is often based on pragmatic considerations that are relevant to the transaction such as the debtor’s intentions and financial capacity as well as any existing contractual stipulations between the borrower and the lender.