What is a statute of limitations, and how does it apply to debt?
A statute of limitations is, as the term suggests, a part of the legal code that limits what the law can do. In most cases, it refers to the window of time made available to plaintiffs in pursuing criminal or civil legal action. The statute of limitations is particularly significant in how debt lawsuits are managed, as it can be raised as a defense should the collector attempt legal action. The statute of limitations, then, is a major element of debtor protection, and it should be considered whenever a source of debt is time-barred.
There are several reasons why a statute of limitations is important to the legal process. For example:
- Evidence relevant to the claim may be missing – After many years, it isn’t fair to expect a defendant to have every piece of evidence they need to prove their side. Evidence eventually becomes impossible to track down, and the statute of limitations ensures that defendants can’t be taken advantage of due to this fact.
- Plaintiffs should pursue claims in a timely fashion – Timely use of the legal system ensures it doesn’t get bogged down. By putting every claim on a clock, courts can mitigate, to an extent, spikes of legal activity that would only serve to bog down the system.
- Waiting a long time to file a claim is often a matter of spite – Legal experts have correctly noted that justified legal action is usually pursued as soon as possible. If a claim has been dormant for years, only to be suddenly resurrected, there is reason for skepticism.
Clearly, the statute of limitations is relevant to more than just debt collection cases, but in an area where consumers are often harassed and threatened, it is particularly important.
How the statute of limitations factors into debt collection
Most debts are eventually time-barred, so it is always wise for a defendant to consider statute of limitations if they are facing legal action. Here’s why:
- Some debt buyers are operating with incomplete information – When a debt buyer, or “scavenger,” purchases debt in bulk, they are acquiring hundreds, potentially thousands of accounts. It is a veritable certainty that many of those accounts will be beyond the statute of limitations. However, that doesn’t usually stop debt buyers from pursuing legal action, anyway.
- The statute of limitations has to be invoked by the defendant – If a debt collector is suing on a debt that has passed through the statute of limitations, then the defendant must point this out. The defense is not automatically engaged from the outset. It is extremely important that this defense is raised early, preferably in the answer that the defendant files in response to the complaint and summons.
- Many defendants fail to answer the initial complaint – More than 90 percent of people never properly respond to notice of a lawsuit. This, unsurprisingly, places the defendant in a precarious position because the plaintiff will win a default judgment as a result. Debt collectors are keenly aware of this, and they use it to their advantage. It’s common, then, for debt buyers and scavengers to sue even when they don’t have the legal authority to do so. After all, they will win the vast majority of the time.
It’s important to know how the statute of limitations works, and how it will work to your advantage if legal action is started. Unfortunately, this is where things can get a bit muddled because the statute of limitations is not always clearly defined in a particular case.
Every state’s jurisdiction defines the statute of limitations differently. In Louisiana, for instance, both written and oral contracts come with a 10-year statute of limitations, while in Texas, the statute of limitations is only four years for most contracts. And it gets more confusing when someone opens an account in one state and then moves to another. It is possible for the account holder to be sued in either state, but the relevant statute of limitations will usually be named on documentation tied to the account. If it’s not, the court will typically observe whichever statute of limitations expires first.
But when does the statute of limitations start? This is, perhaps, the most confusing element. Most states recognize a difference between open-end and closed-end accounts, so they start the statute of limitations clock at different times. Open-end accounts include things like credit card accounts, or any account where the credit can be used again and again. Closed-end accounts are things like car and home loans, where the credit is utilized from the outset and monthly payments are made from there on.
Normally, the statute of limitations begins from when the most recent payment is due. So, for example, if someone pays their credit card down for three months, but stops on the fourth month, the statute of limitations timer will start following the fourth month.
But this is where debt collectors will often try to trick account holders. The statute of limitations clock may be reset or delayed if the account holder starts making payments again or, even more devious, the debt collector gets the account holder to admit, on the phone or in writing, that they truly owe the debt. It’s important, then, that account holders watch what they say when interacting with a representative from the debt collector, as they can unwittingly put themselves in a tough legal position. Fortunately, courts will usually view this tactic unfavorably, but the debt collector may attempt it anyway, in the hopes that the defendant will give away their statute of limitations defense.
The concept behind a statute of limitations is simple enough, but its application is far more complex than it would seem. This is where a debt defense attorney can provide valuable insight, and ensure their client is fully aware of what the statute of limitations means for their case.