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Debt Collections: Do You Have To Pay?

This article was written by in Debt Reduction. 11 comments.

People who borrow money generally understand that they will eventually need to pay borrowed money back to the lender. This understanding, whether codified in a contract or not in any particular case, makes lending and borrowing money work as an economic mechanism. It’s interesting that regardless of what’s written in a contract, most debt can be legally ignored. Borrowers may feel bound by their pride to honor commitments, but every state in the country has laws that prevent lenders from chasing after deadbeat borrowers after a certain amount of time.

Time-barred debts are subject to a statute of limitations. After a certain amount of time passes with a borrower unable or unwilling to pay back a loan, the lender will no longer be able to sue the borrower for uncollected debt. The lender can still contact the borrower and try to convince him or her to pay back the loan, but the lender’s legal rights to the funds are limited.

This doesn’t mean that it’s a good idea to wait for the statute of limitations to pass on all your debt in order to avoid your obligations. There are consequences if you don’t pay back debt. Most importantly, the three credit reporting bureaus will significantly decrease your credit score, and it could take a long time for that number to return to normal. This will affect your ability to qualify for more loans, mortgages, and credit cards in the future.

This is a dilemma many homeowners have considered recently; with the market value of houses sharply decreasing in the last few years, and the resulting financial reality of owing the bank more on the mortgage than the house is worth, some in this situation have considered walking away from the house and mortgage. In some cases, this could be a tactic that is more financially responsible than continuing to sink money every month into a depreciating asset. Families considering this option have to weigh the consequences, including not being able to qualify for a mortgage again for many years, against the emotion-based drive to honor financial commitments.

Although lenders are legally barred from suing borrowers after the statute of limitations for a particular debt has passed, they might still try. If you’re able to show a judge that the debt is time-barred and no longer legally collectible, you have nothing to worry about other than the consequences.

Credit cards and other open accounts like home equity lines of credit, written contracts, oral agreements, and promissory notes may have different statutes of limitations, and each differs by state, as well. Here’s a list by state of time-barred debts.

The clock starts ticking on the statute of limitations from the day you miss your first payment. The moment you send a payment to the lender, no matter how small, the clock resets. For example, if the statute of limitations on credit card debt in your state is seven years, and it’s been six years since you’ve made a payment, you may determine that it makes more financial sense to refuse to make a payment for one more year rather than negotiate with the lender. If you are in financial difficulty and don’t expect to ever be able to pay off the debt, paying even a small amount means you’ll need to wait another seven years after making the small payment before you’ll be legally protected from paying back the debt.

Not all debt is time-barred; student loans backed or issued by the government have no statute of limitations. Anything you borrow under any of the loan programs that qualify in this category can never be ignored. The lenders are often willing to negotiate the terms in order to help you make payments you can afford, but these students loans are, for the most part, legally stuck with borrowers until the lenders are satisfied.

A few questions for discussion:

  • Do you think it’s right that borrowers can avoid agreements by patiently waiting for the statute of limitations to pass?
  • Have you ever been sued for debt you didn’t need to legally pay back?
  • Have you inadvertently restarted the clock by paying a small amount to a lender when it might have been better to wait?
  • Are you dealing with the credit consequences of letting a debt expire?

Note: I am not a lawyer, and nothing written on Consumerism Commentary constitutes legal advice. Always check with an attorney before making any decisions regarding the law.

Photo: Dave Stokes
Federal Trade Commission

Updated June 23, 2016 and originally published February 7, 2012.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 11 comments… read them below or add one }

avatar 1 Anonymous

First, as a practical matter and for your own protection, you should note that you’re not an attorney or offering legal advice–you can get in a lot of trouble if people rely on what you’ve provided here as legal advice, and you should be explicit if that’s not what you’re doing..

Second, please bear in mind that the Statute of Limitations isn’t as cut and dry as the date of the last payment + x number of years. There are any number of provisions that could result in tolling the SOL or equitable and legal defenses that mitigate the date. You often get into questions of what state applies, because what if the credit card company is in Delaware and you live in Ohio?

Also, know that a lot of lenders/creditors will often sue but not prosecute the suit in advance of the SOL date just to avoid this trap.

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avatar 2 Luke Landes

Hi Ken,

Great points. Thanks!

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avatar 3 Ceecee

I believe in the karma theory when it comes to paying debts. You should pay if you possibly can. Sooner or later, it comes back to haunt you.

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avatar 4 Donna Freedman

I believe in the honor theory of paying debts: You borrowed the money, so you should return it.

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avatar 5 lynn

I have always believed in the honor system. Hopefully I won’t ever have to be tested in this area.

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avatar 6 Anonymous

I’ll take a shot at the issue of, “avoiding agreements by patiently waiting for the statute of limitations to pass.”

I’ve been a consumer protection lawyer since 1995, and can count on my fingers the number of people who are patiently waiting (I’d have a few fingers left over). People who are past due on their obligations are FREAKING OUT that the next day will bring a lawsuit, bank account freeze, income execution or other financially disastrous action by the creditor.

Sure, people hope they can ride out the wave. But to say there’s a level of patience involved is completely untrue.

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avatar 7 Anonymous

I’m with the school of thought of returning anything you borrow. Something given without reciprocation sounds a lot more like a gift to me. It’s good to know that peoples’ moral/ethical compasses are in check though (at least from what some of the commenters are saying)!

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avatar 8 qixx

You only have to follow up on your obligations if your word is worth anything or you want your word to be worth anything. Otherwise paying back debts is for fools. But I bet almost everyone on here cares about their word.

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avatar 9 Anonymous

Debt collectors and debt buyers are regulated by the Fair Debt Collection Practices Act (FDCPA). Some states, like California, have also enacted their own version of the FDCPA. Generally, a debt collector can only bring suit where t(a) he credit card contract was entered into or (b) where the debtor resides.

There are also states that will apply their rules as the forum for jurisdiction irrespective of whether the credit card was entered into another state and the debtor moved to the state where the action is pending. In otherwords, if a debtor entered into an agreement in state “A” that has a statute of limitations (SOL) of five years and moves to state “B” with a SOL of 4 years, state B would control, and the suit would be time barred if the “last payment” on the credit card was made 4 years from the SOL elapsed.

Most debt buyers cannot prove they own the debt, since the original credit card companies usually sell debt on an “as is” basis with no guarantee that their records are accurate or that they even posses the original credit card agreement between the original creditor and debtor. Often the debt buyer will present an affidavit refertencing the debt assembled by one of its employees. However, it usually based on hearsay and can be trown out in a court of law.

It is important that debtors show up in court and make the debt buyer prove they actually own the contract referencing the account. Only a real party of interest can bring suit on a debt, which is why creditors should be compelled to prove the debt up. If they can’t produce the original contract referencing the terms and conditions of the credit card agreement or prove they are the owner of the debt, they have no case and it will be dismissed. It is important to remember that with all of the banking and credit card mergers, most deals were put together quickly and many records were lost or misplaced following the merger. This is why debt is sold with no guarantee of its accuracy.

Given the acts of fraud perpetrated by the banking and credit card industry that contributed to the economic collapse, it may be not be a good idea to pay a debt buyer who has purchased old debt for pennies on a dollar. Many of these collectors operate on the fringe of the law and may themselves be abscounding from creditors or worse, may not really own the debt they are suing you on.

Not only should a debtor who has been sued by such a debt buyer assert a SOL defense, when applicable, but should contact a consumer attorney to see if the debt buyer has violated the debtor’s rights under the FDCPA. If they have, the attorney can usually bring suit against the debt buyer, especially when they have sued a debtor on a time barred debt. Generally, the attorney can recover attorney fees, costs and damages for the consumer who has been harmed by an aggressive debt buyer and collector.

Even if you owe the debt, it is wise to contact a credit card defense attorney, as you may have defenses that will defeat the debt buyer’s claim. Should you feel bad about owing money to a debt buyer who has purchased your debt for next to nothing? It depends, and one should not be too hasty to cast judgment on themselves. The SOL was created for a good reason, so that claims don’t go on indefinately.

If all elese fails, a good consumer lawyer will be able to negotiate a favorable settlement that may be pennies on the dollar, which is what the debt buyer paid for the debt.

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avatar 10 Anonymous

Just found your web site, and I hope you are willing to correspond with me regarding FDCPA and collection agencies. Can a debt collector lie about who he/she is when calling an employer to obtain info abput an employee? Can/do Federal Student Loans fall under what’s called time-barred limitations? I know that each state has different time limitations, just don’t know if they’re considered. Where can you go to get easy to understand information about what a person’s rights are when dealing with collection agencies.

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avatar 11 Anonymous

Unfortunately, many debt collectors use deceptive tactics and will call employers or a debtor’s relatives, in order to humiliate the debtor.

Realistically, the collection industry often attracts a shady bunch of characters, many of whom may owe money themselves or are fringe criminals. If you believe you have been victimized by a collection agent, contact the Attorney General in the state where the collector is based and try and file a complaint. Or, contact the Federal Trade Commission and file a complaint with them.

For information about debt, visit websites of “consumer attorneys” in your region, as many of them post articles and consumer information on their websites. Some of them also offer a free consultation and will take FDCPA violation type cases on a contingency basis, wherein they will be entitled to attorney fees and costs if they win the case in Federal court.

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