Ignoring a debt you owe does not make the debt disappear, but if your creditor does not successfully collect the debt within a state-mandated time frame, they face limited collection options from that point on. The statute of limitations provides each creditor with a pre-set amount of time during which it may pursue legal action against a debtor when recovering an unpaid debt.
Significance
The statute of limitations protects you from retaining legal liability for an unpaid debt beyond a certain time frame. The statute of limitations for debt collection only applies to debts that are not secured by your property or other assets, such as unpaid hospital bills, credit card bills and personal loans. It usually does not apply to car loans, mortgages or home equity loans.
State Regulations
The statute of limitations varies in each state. Further variations exist in each state regarding the type of unsecured debt you owe. Depending on your state of residence, the statute of limitations may range anywhere from two years to ten years. Once the statute of limitations for debt collection expires, however, a creditor loses its legal right to sue you in an effort to force you to pay the debt involuntarily through garnishment or liens -- but some unethical debt collectors violate the law by doing so anyway.
Categories of Debt
States divide debts into three categories: oral agreements, written agreements and open agreements. An oral agreement refers to a verbal contract you enter into to repay a debt, while signed promissory notes -- such as those required with unsecured personal bank loans -- constitute written agreements. As revolving debts, credit cards typically fall into the "open" category.
Restarting the Clock
Regardless of your state of residence, the clock for the statute of limitations begins ticking 180 days after you made the most recent payment on the account. Unfortunately, this means that making a payment on an old debt "restarts" the clock -- refreshing a debt collector's right to sue. Depending on your state's laws, even making a verbal promise to repay the debt could restart the clock on the statute of limitations -- even if you had no real intention of making a payment on the debt.
Expired Debt Lawsuits
An expired statute of limitations does not provide you with absolute protection from lawsuits. Rather, it gives you a legal defense you can use should a creditor sue you. Although taking legal action against a consumer on an expired debt is illegal, that does not stop some unethical creditors and collection agencies from participating in the practice. If a creditor sues you for an out-of-statute debt, and you do not use the expired statute as your legal defense, the judge, ignorant of the actual age of the debt, may still award your creditor a judgment against you in court.
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