Definition of Uncollectable Debt

If someone does not pay money that they owe, their creditor has few options to collect the money owed. If the debtor does not respond to letters and phone calls, the creditor can sue the debtor. However, if a debt has been listed in a bankruptcy or past the statute of limitations, the debt is legally uncollectible.

Statute of Limitations

Most states set a statute of limitations on how long a creditor has to file a lawsuit against a debtor. If a debt is older than the statute of limitations, the debt is no longer legally collectible via court judgment.

There is also a statute of limitations on the collectibility of judgments in most states. Even if a creditor wins a lawsuit, the creditor is responsible for collecting the debt within the statute of limitations on judgments in that state.

Bankruptcy

In a bankruptcy, a person or a business asks the court for protection from creditors. Depending on the type of bankruptcy, the debts may be eliminated or repaid under a court-ordered payment plan. If a creditor is owed money, the creditor must work with the court to receive some repayment, which, depending on the type of bankruptcy and the debtor's assets, may be very little. If a debt has been listed by a debtor in his bankruptcy proceedings and is not exempt from bankruptcy protection, a creditor can no longer attempt to collect the debt directly from the debtor.

Exceptions

Certain debts cannot be discharged by bankruptcy, nor can student loans, child support payments, fines for criminal conduct and costs that are the result of causing injury or death while driving drunk. There is also no statute of limitations on the collection of federal student loans or child support.

Misconceptions

The statute of limitations in debt is a defense against a court judgment: If a creditor tries to sue someone for a debt that is past the statute of limitations, you can ask that the case be dismissed. However, the creditor can still try to collect the debt via telephone calls or sending letters. The creditor just can't legally seize assets or otherwise force a debtor to pay the debt.

Many people confuse the statute of limitations for collecting debt with the time limit on how long a negative item can be reported on a credit report. It is important to keep in mind that these are two different things: Each state sets its own statute of limitations on debt collection. The statute of limitations may be longer, or shorter, than the federal law, which stipulates a seven-year time limit on reporting negative credit information.

Warning

While there is a statute of limitations on court judgments in most states, it can be renewed by a judge. Judges routinely order renewals, so don't think that a judgment will automatically go away after the statute of limitations runs out.