When you're delinquent on a debt, the creditor that you owe may attempt to collect the debt from you in court. Each state has its own laws regarding how long creditors can collect debts, and the rules vary depending on whether or not the debt is from an oral or written agreement, promissory note or open-ended contract.
Types of Contracts
Four types of contracts exist that states consider enforceable and collectible in court. Oral contracts, also known as "handshake agreements," are the most difficult to prove because nothing in writing establishes the loan's details or even if it occurred. Written contracts are enforceable because they're signed by both parties; they're similar to promissory notes, which go one step further than written contracts because a payment and interest schedule is included. An open-ended account is a line of credit where the outstanding balance varies. Credit cards are usually considered open-ended accounts.
Statute of Limitations
Knowing what type of contract you have is important because each state's statute of limitations varies based on this fact. For example, in Delaware, creditors have three years to sue a debtor who's delinquent on an oral, written or open-ended contract, but six years to sue for a promissory note debt. Rhode Island lets creditors sue within 15 years of oral or written contract default, and 10 years for promissory note or open-ended contract default. Virginia has a three-year lawsuit statute of limitations for oral contracts, while allowing five years for written, six years for promissory notes and three years for open-ended contracts.
Changing Residency
If you are being chased by creditors and decide to move to a different state, the creditor may decide to sue you in the state with friendlier lawsuit terms. For example, if you move from Virginia to Rhode Island and have credit card debts, then the creditor may sue you in Rhode Island, even if the Virginia statute of limitations has passed. However, MSN Moneycentral columnist Liz Weston recommends fighting that lawsuit because your state of residence should determine what statute of limitations applies. Weston also states that just because the statute of limitations has run out, that doesn't mean a creditor won't still try to sue you. If this happens, you'll need to go to court to fight the suit based on your evidence that the time limit expired.
Restarting the Clock
Many debtors accidentally restart the statute of limitations clock. In other words, the time limit on the statute of limitations begins from the date of your last payment or transaction. Some states permit creditors to restart the clock by getting the debtor to acknowledge the debt or agree to a payment plan. Finally, keep in mind that even if the creditor can't sue because you've moved to a different state or the time limit passed, the debt still exists, and the likelihood that the creditor will continue its collection efforts is high.
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