How do Statute of Limitations (SOL) work and how it benefits debtors?

A Statute of Limitations (SOL) is the maximum time allowed legally to a creditor to file a lawsuit against a debtor in a civil or criminal court. After the expiry of this period, no creditor can carry on any legal prosecution for an offense by the debtor. An SOL starts from the date of last activity on an account.

What are the types of debt contracts on which an SOL is effective?

Typical debt contracts are of 4 types:

• Oral contract: This is a contract between you and the creditor where you verbally agree to pay off your debt. This is as legal as a written contract and you are liable to pay your debt if an oral contract can be proven in court.
• Written contract: This is a contract between you and the creditor where you agree, through a written document, to pay off a loan to the creditor. This type of contract is duly signed by you and the creditor.
• Promissory Note: In this contract you agree, in written terms, to pay off your loan. Not just that, such a contract has schedule of your payments and the interest you will be paying on that loan. A good example for a promissory contract can be mortgage loan.
• Open ended accounts: These are rotating lines of credit with changing balances. An example would be credit cards.

You may want to check with your state laws to see if credit cards are considered as open ended accounts or written agreements because some states consider it so.

How does the Statute of Limitations protect debtors?

Creditors would like to pursue debtors for the money they owe for as long as possible. With an SOL in effect, debtors are protected from indefinite lawsuits filed by creditors. How the creditors report to the Bureaus also controls an individual’s credit score. The SOL has been made effective to protect debtors from long term damages to their credit reports by setting time limitations to the negative information reflecting on the credit report.

Here are 2 ways by which debtors may be protected:

1. Time limit: All negative information has a time limit up to which it can be reflected on an individual’s credit report. After this limit is up, those negative information are supposed to come off the report. Although the time for which these information can stay on your report is relatively long, you may get them removed by paying on your debts and not defaulting.

Generally negative information can be reported for 7 years. However, there are certain exceptions, like:

• Bankruptcy can be reported for 10 years.
• Information related to any legal action or a judgment against the debtor may be reported either for 7 years or till the SOL expires, whichever is longer.
• Tax liens remain on your report for 7 years from the sate they are paid.

2. Expiry of SOL: The FDCPA states that if you have a debt that is past the SOL in your state, you need not pay it back. However, whether or not you choose to pay depends on you as a debtor. Once the SOL is over, you are not legally required to pay back the money. You must remember that, if you do pay on that debt, it will have the SOL restarted.

Debtors should be aware of their rights. Check the SOL in your state to be protected from harassing collection calls.