What Is The Statute of Limitations On Collection Accounts

This BLOG On Statute of Limitations On Collection Accounts And Charge Offs Was Updated On May 15, 2017

The Great Recession of 2008 has affected the financial lives of many Americans in this country as well as globally.

  • Hard working Americans not only lost their jobs and businesses, but homeowners lost the equity in their homes and many lost their homes to foreclosure. Countless of Americans also lost their retirements, and businesses.
  • Never before in history has so many hard working Americans filed bankruptcy and lost their homes to foreclosure.
  • For those who did not file for bankruptcy protection, their credit have suffered and many ended up with judgments, collections, and charge offs that still remain on their credit reports today.

Qualifying For FHA Loans With Collections And Charge Off Accounts

Home buyers can qualify for FHA Loans with outstanding collections and charge off accounts. FHA Guidelines On Collections does not require home buyers to pay outstanding collections and charge off accounts to qualify for FHA Loans. Borrowers can have outstanding collections, charge offs, judgments, and tax liens and still qualify for FHA Loans. With tax liens and judgments, borrowers need to get a written payment agreement and make three monthly payments. With medical collections, it is exempt from debt to income ratio calculations.

With non-medical collections, here is how it works:

  • Borrowers do not have to pay off non-medical collections
  • However, if mortgage applicants has $2,000 or more in outstanding non-medical collection accounts, then 5% of the outstanding balance is used as if it were a monthly debt of the borrower even though they do not have to pay
  • If the 5% of the outstanding collection accounts is too much for home buyer to qualify for mortgage, mortgage applicant can make a written payment agreement with the collection agency on a monthly repayment plan and that figure will be used in lieu of the 5% of the outstanding collection amount
  • Charge off accounts are exempt from debt to income ratio calculations

Recovery From The Great Recession of 2008

Since the economy and housing market has recovered, what should a consumer do now since it has been years since the Great Recession of 2008?

  • File bankruptcy?
  • Negotiate with the previous creditors?

Consumers should first see if the collection account is still valid and see if the statute of limitations on collection accounts has passed. Or if it has not, consumers may want to see if they want to see how much longer they need to wait for the statute of limitations on collection accounts to take effect.

Types Of Contracts

Below are the State Statutes of Limitations On Collection Accounts for various kinds of agreements. All figures are in years.

  • Oral Contracts: Oral contracts are when consumers verbally agree to pay back the money that is loans to them. However, oral contacts are very difficult to prove in court.
  • Written Contract: Written contracts is when an agreement between creditor and debtor and the terms is written and signed by both parties.
  • Promissory Note: Promissory notes is a special form of a written contract but the difference with a promissory note is that the scheduled payments and the interest on the loan is written out on the promissory note.
  • Mortgage Notes are an example of promissory notes.

Open-Ended Credit Accounts

These are revolving lines of credit with varying balances. The best example is a credit card account.  Please note: a credit card is ALWAYS an open account. This is established under the Truth-in-Lending Act:

TITLE 15 > CHAPTER 41 > SUBCHAPTER I > Part A > § 1602 § 1602. Definitions and rules of construction(i) The term “open end credit plan” means a plan under which the creditor reasonably contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance. A credit plan which is an open end credit plan within the meaning of the preceding sentence is an open end credit plan even if credit information is verified from time to time.

Statute of Limitations On Credit Cards

Statute of Limitations on credit card debt can depend on whether the credit card agreement with the creditor was a written agreement or not.

For instance, in Missouri if the creditor is able to produce a written credit card contract, then the 10 year statute applies. If the creditor cannot show the existence of a written contract, then the 5 year statute would apply – credit card or not.  Here is case law in Missouri to illustrate this point:

In Capital One Bank v. Creed, 220 S.W.3d 874 (S.D. Mo.2000), the company alleged the parties entered into a contract, whereby the company would extend credit to the customer. The company alleged that the customer breached the terms of her contract by failing to pay the amounts for which credit was extended. The customer denied the allegations and asserted the affirmative defense that the action was barred by the statute of limitations. The appellate court ruled that the action was barred by the five year statute of limitations under Mo. Rev. Stat. § 516.120 (2000). The customer made a partial payment on December 2, 1999, and the company’s petition was not filed until January 3, 2005. The ten year statute of limitations under Mo. Rev. Stat. § 516.110 was not applicable because the company did not produce a written promise by the customer to pay money.

Why should you care about the Statute of Limitations On Collection Accounts (SOL)

Statute of Limitations On Collection Accounts

State

Oral

Written

Promissory

Open-ended Accounts

State Statute: Open Accounts

AL 6 3 6 3 §6.2.37
AR 3 5 3 5 §4-3-118
AK 6 3 3 3 §09.10.053
AZ 3 6 6 6 HB 2412
CA 2 4 4 4 §337
CO 6 6 6 6 §13-80-103.5
CT 3 6 6 6 Chapter 926 Sec 52-576
DE 3 3 3 3 Title 10 Sec.8106
DC 3 3 3 3 §12-301
FL 4 5 5 4 §95.11
GA 4 6 6 4** §9-3-25
HI 6 6 6 6 HRS 657-1(4)
IA 5 10 5 10 §614.1.5
ID 4 5 5 5 §5-216
IL 5 10 10 5 or 10*** 735 ILCS 5/13-206
IN 6 10 10 6 §34-11-2-9
KS 3 3 3 3 §60-512
KY 5 15 15 5 or 15 §413.120 & 413.090
LA 10 3 10 3 §2-3494-4
ME 6 6 6 6 §14-205-752
MD 3 3 6 3 §5-101
MA 6 6 6 6 §260-2
MI 6 6 6 6 §600.5807.8
MN 6 6 6 6 §541.05
MO 5 5 5 5 §516.120
MS 3 3 3 3 §15-1-29
MT 5 8 8 8 27-2-202
NC 3 3 5 3 §1-52.1
ND 6 6 6 6 28-01-16
NE 4 4 4 4 §25-206
NH 3 3 3 3 382-A:3-118
NJ 6 6 6 6 2A:14-1
NM 4 4 4 4 §37-1-4
NV 4 4 4 4 NRS 11.190
NY 6 6 6 6 §2-213
OH 6 6 6 6 §2305.07
OK 3 3 or 5 5 3 or 5 §12-95A(1), (2)
OR 6 6 6 6 §12.08
PA 4 4 4 4 42 Pa. C.S.5525(a)
RI 10 10 10 10 §6A-2-725
SC 10 10 3 3 SEC 15-3-530
SD 3 6 6 6 §15-2-13
TN 6 6 6 6 28-3-109
TX 4 4 4 4 §16.004
UT 4 6 6 4 78-12-25
VA 3 5 6 3 8.01-246
VT 6 6 5 6 §9A-3-118
WA 3 6 6 6 4.16.040
WI 6 6 10 6 893.43
WV 10 10 10 10 §55-2-6
WY 8 10 10 8 §1-3-105

** Georgia Court of Appeals came out with a decision on January 24, 2008 in Hill v. American Express that in Georgia the statute of limitations on a credit card is six years after the amount becomes due and payable

*** An Illinios appeals court ruled on May 20, 2009, that the statute of limitations on a credit card debt without a written contract was 5 years.

The material provided in this table for informational purposes only and should not be construed as legal advice. Although the material is deemed to be accurate and reliable, we do not make any representations as to  its accuracy or completeness and as a result, there is no guarantee it is not without errors.

Collection Accounts

Every day, consumers pay off outstanding collection accounts and charge-off accounts which they do not have to pay off because the Statute of Limitations On Collections has already expired for the open account. The main reason why consumers pay off these collection and charge off accounts is because these accounts still appear on consumer credit reports.

  • Consumers need to realize that creditors only has a limited amount of time to sue you
  • Statute of Limitations on collection accounts starts from the date of last activity on the debt consumers owe
  • The right for creditors to collect has nothing to do with the negative reporting item on consumer credit reports

Collection Accounts Not Reported On Credit Report

Consumers are sometimes tricked into paying outstanding collection accounts not reporting on their credit reports:

  • Beware of collectors trying to trick to pay collection accounts that has the statute of limitations on collection accounts expired but yet trying to collect on the collections and charge offs

Does Statute of Limitations On Collection Accounts Make Debts Go Away?

The Statute of Limitations on Collection Accounts will not always make consumer debts to diminish after the statute expires:

  • Creditors can still try to sue consumers
  • However, consumers will have the defense that the statute of limitations on collection accounts has passed
  • It is the job and right of the consumer to present the defense that the statute of limitations on collection accounts has passed
  • Just because the statute of limitations on collection accounts has expired does not mean that consumers just ignore a lawsuit from creditors
  • Consumers should tell the collection agency and/or creditor that the debt is no longer valid due to statute of limitations on collection accounts has passed
  • Consumers who are served with lawsuit should go to court and present to the judge that the debt is no longer valid because of the statute of limitations has passed

Start Date Of Statute of limitations On Collection Accounts

Statute of Limitations On Collection Accounts is a set amount of time by law if the creditor does not do anything to collect the debt owed by the debtor, the debt owed is no longer collectible. There is a start date when the statute of limitations on collection accounts starts.

Here is the start date:

  • Date Of Last Activity or DLA: This date is the date that debtors failed to make a payment on their credit account
  • The date that the creditor sent consumer a demand letter for full amount of payment

Any can be true, depending on the credit card agreement.

Here’s why: The length of the statute varies from state to state and depends on the type of agreement, i.e. oral, written, etc. The one aspect of a statute of limitations that is pretty constant throughout all of US states’ laws is when it begins to run. A statute of limitations, or limitations of action statute, begins to run when a cause of action accrues. In plain English, that means the statute begins to run when you have done something contrary to the terms of your agreement for which you can be sued. Most of the time, that “something” is failure to pay your bill. When you don’t make your payment on time, you have violated the terms of your agreement and you have given the creditor a cause of action. Some credit agreements include an acceleration clause which must be invoked before a creditor has a cause of action. The acceleration clause could be activated by the creditor sending you a demand for payment in full by a certain date.  In these instances, you must fail to pay the creditor after it has invoked the acceleration clause before the creditor has a cause of action, and the statute of limitations starts to run. You need to become familiar with the terms and conditions of your specific agreement to know for sure which event triggers a cause of action and thus, begins the running of the statute of limitations.

In the event if creditors does not go after the consumer in a time frame permitted by law, consumers do have the right of defense against the creditor which the creditor can no longer come after them due to the elapse of the statute of limitations on collections accounts

  • Consumers should take the date of last activity which is the date of last payment made by the consumer or the date of of payment demand letter by the creditor.
  • Then add the time that has elapsed by the statute of limitations on collections accounts in the state the debtor defaulted.

Case Scenario On Statute Of Limitations On Collection Accounts

Case Scenario:   Consumer date of last activity on credit card payment was January 15, 2001. The credit card company sent demand letter for full payment on July 15, 2001. There is a 6 year statute of limitations on credit cards. Here is the date where the statute of limitations on collection accounts from the credit card date becomes effective:

No Acceleration clause: Jan 15, 2001 + 6 years = January 15, 2007 Acceleration clause: July 15, 2001 + 6 years = July 15, 2007.

Depending on what state you live in, if you make a partial payment, you could be postponing the Statute of Limitations’ taking effect on your collection account or charge-off. A collector might call you one day and say you waived your rights when you made a deal with the collection agency. Do not take anything a collector tells you for granted. Make them prove it to you, in or out of court. For about half the population, the Statute of Limitations started ticking the day they made the last payment for their account.

Some states have laws which specify that a partial payment does not restart the clock on the SOL, unless there is a new written promise to pay.  What that means is that you actually write out a new agreement with the original creditor and/or collection agency.  If you live in one of these states, simply sending in a check doesn’t restart the clock. The statute of limitations is only extended by new written promise to pay in these states:

Arizona, California, Florida, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New York, Texas, Virginia, West Virginia, Wisconsin.

Even though a debt is an absolute promise to pay, if the Statute of Limitations expiring is in force and the creditor tries to force you to pay the debt, you have the right not to fulfill the promise to pay the debt.

Consumers with outstanding collections and charge off accounts can still qualify for FHA Loans. Home buyers with collections and charge offs do not have to pay off outstanding collections and/or charge off accounts. For more information, contact The Gustan Cho Team at 800-900-8569 or text Gustan at 262-716-8151 or email us at gcho@gustancho.com.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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