Statute of Limitations on Unsecured Credit

When an individual's debt is secured by property he owns and he stops making payments to his lender, the lender has only to seize the property as payment. Unsecured creditors lack this ability. To gain the right to seize money and property from the debtor, they must first win a lawsuit against him. The statute of limitations is one restriction creditors face when collecting unsecured debts.

Facts

The statute of limitations for debt collection is a period -- set on the state, rather than federal, level -- that determines how much time an unsecured creditor has to file a lawsuit against a debtor. Each state has a different enforcement statute for creditor lawsuits, but most state's statutes of limitations range from four to six years.

Considerations

A state's statute of limitations for debt collection applies to the debt itself rather than the creditor who owns the debt. If, for example, a consumer leaves a credit card debt unpaid and the credit card company eventually sells the defaulted account to a collection agency, the statute of limitations does not begin anew merely because the account's ownership changed.

Effects

Although the statute of limitations is intended to prevent creditors from suing for old debts, some creditors file out-of-statute lawsuits anyway. If a creditor files a lawsuit after the debtor's state statute of limitations times out, it can still win its lawsuit and gain the right to legally force the individual to make a payment. Once the creditor files suit, the debtor must use the statute as his defense in court for it to protect him. Out-of-statute lawsuits are most common with collection agencies.

Time Frame

The clock begins ticking on each state's statute of limitations for debt collection once the debtor does not make any payments for 180 days. Thus, if a state's statute is four years, 4 1/2 years must actually pass before the consumer obtains legal protection from her creditors. Unfortunately for debtors, making payments on old accounts automatically resets the statute of limitations -- making them vulnerable to creditor lawsuits.

Misconceptions

Many consumers confuse the statute of limitations for debt collection with a similar statute of limitations that applies to credit reporting. The credit reporting period, which is the length of time a given entry can remain a part of a consumer's credit history, is federal law and has no bearing on whether the debt is still legally valid. The Fair Credit Reporting Act notes that the credit bureaus maintain a record of most unpaid debts for no longer than seven years. Unlike the statute of limitations for creditor lawsuits, the credit reporting period for an item cannot be reset.