Just Under the Wire

Published: June 26, 2007

Collectors need to understand statutes of limitations.

Because debt collection is generally based on contract law, collectors need to understand the state law principal of statutes of limitation. The concept is derived from English common law, and is widely used throughout the U.S. legal system and the Western legal world. A statute of limitations is commonly defined as a statute that establishes a time limit for bringing a civil suit based on the date when the claim accrued (either when the injury occurred or was discovered). The general purpose of a statute of limitations is to encourage timely prosecution or pursuit of claims, and in so doing, provide finality and predictability in legal affairs. Such laws ensure that claims will be resolved while evidence is still reasonably available and the memories of the parties involved in a claim are still fresh. Statutes of limitations also supply limits of time for criminal prosecutions.

For the purpose of a consumer debt, a statute of limitations governs the amount of time within which a legal remedy may be brought to bear by the party that owns the debt or the party’s agents. The relevant starting date generally begins to run on the date a breach of contract occurs. Once the statute of limitations has expired, the wronged party can no longer file suit or take legal action which it previously could have taken to enforce the obligation. Because there is a statute of limitations on most debts, it’s important for collectors to be familiar with the relevant provisions.

Generally, states will designate specific time periods for specific kinds of obligations. A particular state may have a requirement specifying that oral contracts may only be enforced for a period of three years, while a written contact may be enforceable for a longer period, such as five years. Court judgments or instruments under seal generally have a specific time period during which they must be enforced. The statutory time periods for particular obligations can vary widely from one state to another. For example, Delaware allows the enforcement of a judgment for five years, while Alabama allows a period of 20 years. In Georgia, written contracts are enforceable for six years, while Illinois allows a period of 10 years.

Credit Reporting

It’s important to understand the time restrictions imposed by state statutes of limitations do not hinder a creditor or its agents from reporting a debt to a consumer reporting agency, provided the debt is still reportable according to the provisions of the Fair Credit Reporting Act (FCRA). The FCRA allows a debt to be reported for up to seven years from the date of delinquency, a longer time period than many states’ statutes of limitation.

The interaction of these bodies of state and federal law is often misunderstood by both debt collectors and consumers. Often a consumer will assume that because the debt is not legally enforceable, it should not be reported on the consumer’s credit report. After this distinction is understood by the consumer, the existence of the negative information on a credit report can be a powerful tool to motivate the consumer to pay the debt, regardless of the legal remedies available to the debt collector. Consumers often pay debts beyond the applicable statute of limitations because they need to obtain credit to purchase a home or automobile and the negative report is affecting their ability to secure credit.

Collecting Debts Beyond the Statute of Limitations

Another common area of confusion regarding statutes of limitations is the practice of collecting debts beyond the governing statute of limitations. Generally, the practice is acceptable provided the collector does not threaten suit or assert any other legal right barred by the relevant statute of limitations. The Court of Appeals for the Eighth Circuit held the statute of limitations does not eliminate the existence of a debt, rather, it merely limits the judicial remedies available. Consequently, in the absence of a threat of litigation or actual litigation, no violation of the Fair Debt Collection Practices Act (FDCPA) occurs when a debt collector attempts to collect a potentially time-barred debt that is otherwise valid. Similarly, district courts have held a debt collector did not violate the FDCPA when the collector attempted to collect a debt after the statute of limitations expired where there was no apparent threat of litigation.

However, debt collectors who do threaten suit or other legal action when collecting time-barred debts undoubtedly invite litigation. To make such threats when the right to act on the threat no longer exists could not only violate state law, it would also violate the FDCPA. Section 807(5) of the Act prohibits “the threat to take any action that cannot legally be taken.” Threats to file suit or enforce other legal remedies barred by the state’s statute of limitations violate this section of the FDCPA because the action cannot legally be taken.

It’s important to note a collector does not have to use the precise language “legal action,” “lawsuit” or “litigation” in order to violate the FDCPA in this way. Federal district courts have held the statement “further collection efforts,” when used in certain contexts, could be construed as an express threat of litigation and thus represents a deceptive collection practice in violation of the Act.

This issue can be of critical importance to debt purchases because of the age of debts that may be purchased. If the debt in question is beyond the state’s statute of limitations, collectors must be extremely careful not to assert any legal rights they no longer possess, either explicitly or implicitly. Not only can such actions result in lawsuits which can potentially hurt the bottom line of a business, but they also bring negative scrutiny to the credit and collection industry.

Wisconsin and Mississippi

Aside from potential FDCPA violations, when contemplating the collection of time-barred debts, a debt collector must consider how a state’s law is crafted. In the states of Wisconsin and Mississippi in particular, the decision to attempt to collect a time-barred debt hinges on the wording of state law. An unpublished decision in Wisconsin bore out this fact and raised questions about the ability of debt collectors to collect on “stale” debts from Wisconsin residents.

In Klewer v. Calvary Investments, LLC, the court held that attempting to collect a time-barred debt violated the FDCPA because the collection activity misrepresented the legal status of the debt. The court held that expiration of the statute of limitations extinguished the right as well as the remedy to collect on a debt. In coming to its decision, the court relied on a Wisconsin statute that states, “When the period within which an action may be commenced on a Wisconsin cause of action has expired, the right is extinguished as well as the remedy.”

Similar to the Wisconsin statute, Mississippi law states in part, “The completion of the period of limitations prescribed to bar any action, shall defeat and extinguish the right as well as the remedy.” This requirement of Mississippi applies only with respect to private debts. Mississippi state law provides that in civil cases, the statute of limitations does not run against the state, its political subdivisions or municipal corporations thereof.

Tolling Statutes, Partial Payments and Promises to Pay

Many states have enacted “tolling statutes.” A tolling statute is commonly defined as a law that interrupts or restarts the running of a statute of limitations in certain situations. The effect of a tolling statute is to stop or “toll” the running of the statutory period for a certain period of time. There are numerous instances when a particular event will toll the relevant statute of limitations. A statute of limitations is often tolled when a person is incarcerated, absent from the state during the period within which an action might have been commenced, or involved in active military duty.

For the purpose of debt collection, another important aspect of tolling statutes is the effect of a partial payment or a promise to pay made by the consumer. Some states’ tolling laws will suspend a statute of limitations when a partial payment, acknowledgement of a debt, or promise to pay is made by the consumer. While these provisions vary from state to state, the general effect of any of these actions is to “reset” the statutory clock, causing the statute of limitations to run anew.

For a better understanding of this concept, it can be helpful to examine a particular state’s law. For example, Arkansas law for written contracts states in part, “Actions to enforce written obligations, duties, or rights shall be commenced within five (5) years after the cause of action shall accrue. However, partial payment or written acknowledgment of default shall toll this statute of limitations.”

According to this Arkansas statute, a partial payment will reset the clock on the statute of limitations. Suppose then that a debt incurred in Arkansas had been delinquent with no payments for a period of four years. In that instance, a partial payment made by the consumer would effectively negate the time that had elapsed, thus allowing the collector to enforce the debt through legal means for an additional five years from the date of the payment instead of the year the debt originally became delinquent. Likewise, a written promise to pay would also reset the clock, where an oral promise of the same would not.

This scenario illustrates the potential benefits of understanding the tolling statues relevant to the states in which a debt collector does business. Debts which an agency might otherwise deem “uncollectible” might still be within the relevant statute of limitations, thus allowing greater flexibility and more options during the collection process.

Medical Debts

Another frequent source of confusion is the question of what statute of limitations applies to medical debts. At the time of this writing, only one state has a statute of limitations that deals specifically with medical debts. Under Arkansas law, the statute of limitations for medical debts is restricted to a period of two years from the date of the most recent partial payment or the date of service, whichever is later.

Aside from the Arkansas provision mentioned above, medical debts will generally fall under a state’s written contract provision. When consumers consent to medical treatment at a hospital, clinic or office, they generally sign paperwork in which they agree to pay for services should insurance fail to cover all the services provided. This is equally true if patients are uninsured. The dates of service will generally dictate the date the applicable state’s statute of limitations begins to run.

Because of the ever-increasing cost of medical care and the recent rise in the number uninsured patients, it’s possible additional states may decide to follow Arkansas’s lead. Politicians, interest groups and the general public are increasingly concerned about charity care issues and are often sympathetic to the plight of the uninsured patient. For these reasons, ACA International will continue to watch this important state law issue for legislative developments and keep members apprised of any changes.

All Things Considered

It’s important for creditors and debt collectors to be aware of and understand the statutes of limitations for each state in which they do business. Although these time restrictions can be a source of frustration, when viewed objectively statutes of limitations are essential to the greater economy because they provide clarity and finality in financial transactions. The time limits imposed by statutes of limitations vary widely depending on the particular type of obligation and the particular state in which the debt was incurred. To avoid costly litigation, creditors and debt collectors should take the time to familiarize themselves with all aspects of relevant states’ statutes of limitations before attempting to collect older debts.