Statute of Limitations for Unsecured Debt

Any debt you incur without providing your creditor with collateral is "unsecured." Medical debts, mortgage deficiencies, collection accounts and most credit card debts fall into this category. While unsecured creditors can seek legal recourse when recovering unsecured debts, they can only do so unhindered until the statute of limitations in the debtor's state expires.

Statute of Limitations

The statute of limitations is a time period after which a debtor can claim in court that the debt is question is too old to legally enforce. It does not prevent the creditor from filing a lawsuit, but, providing the debtor is aware of the expired statute, it does prevent the creditor from obtaining a court judgment.

Time Frame

States set varying statutes independently of one another. Thus, the statute of limitations in one state can be two years while the statute in another is six years. Another factor that influences the statue of limitations is the type of debt the creditor wishes to collect. Credit card debts, for example, fall under the category of "open" debts in most states. Open debts have the shortest statutes of limitation. Written contracts, such as a contract for a personal loan often carry longer statutes of limitation than other forms of unsecured debt. Like the statute itself, the way different debts are categorized varies by state.

Consumer Misconceptions

An expired statute of limitations does not bar a creditor from collecting a debt, it merely grants the debtor a court defense to use against the creditor should it file suit. Because the creditor cannot sue and obtain a judgment, it cannot utilize collection options such as liens and garnishment to force the debtor to resolve her financial obligation.

Should the debtor agree to a voluntary payment plan, the creditor retains the right to collect the money. Unfortunately for the debtor, agreeing to a payment plan, making a payment, and then defaulting on the debt a second time places him in a dangerous position. Making payments restarts the clock on the statute of limitations--stripping the debtor of his valid defense should the creditor file a lawsuit.

Exception

Federal student loans are the exception to the rule. Regardless of your state of residence, the U.S. Department of Education notes that federal law allows the government to use whatever means necessary to collect defaulted student loan debts until you pay off the debt in full. This includes garnishment, tax refund offset and property seizure. The statute of limitations does not apply to federal student loans.