March 11, 2009


A subject of great concern to many people with damaged credit is the issue of time limits (i.e., statute of limitations). In other words, how long will negative information impact me … The statute of limitations begins to run when you have done something contrary to the terms of your agreement for which you can be sued (typically a failure to pay the bill). There are two primary areas to cover to properly address this: (1) Debt collection-related issues and (2) Credit reporting-related issues. The statute of limitations gives creditors a certain period of time (3-6 years in most states – see chart) to sue you over a debt. The impact on your credit is an entirely different thing. Many people believe [incorrectly] that when the statute runs out that the item will be removed from one’s credit report. THIS IS NOT THE CASE. These are two separate issues…

Collections. Creditors or third-party collection agencies can legally demand or request payment on a debt (via letters and phone calls) forever, as long as the debt remains unpaid. An “expired” debt (one which has passed its statute of limitations) doesn’t go away simply because time has passed. You can ask them to cease communication (see the Fair Debt Collection Practices Act) which should end the routine demands from that source [unless/until they file a lawsuit] – this remedy, however, only impacts collectors (not the original creditor).

Lawsuits. When a person is seriously delinquent (late) on a debt, there is a possibility of the creditor filing a lawsuit. The time limit for them to do so is referred to as the statute of limitations (SOL), a period set by individual states. This time period starts when you become delinquent. The relevant statute is the one for the state in which you resided at the time of the delinquency (if the creditor is based in another state, however, they can choose which state to file in – typically the one with the longer SOL). The expiration of the SOL covering a debt WILL NOT necessarily prevent a lawsuit from being filed, but it does provide you an absolute defense for having the suit dismissed. If you are sued and you do not document that the SOL has expired (or you simply don't show up!), you will lose the lawsuit and a judgment will be placed against you!

Judgments. If a lawsuit has already been filed and won by a creditor, there is separate SOL for enforcing (collecting) the judgment. Here is a chart with the judgment enforcement time limits for each state.

• There is no SOL or other time limit for lawsuits or other enforcement action on defaulted federal student loans.

The credit reporting time limit is the max amount of time credit bureaus can report delinquent debts (as well as other components of your financial history) on your credit report. For most types of accounts, it's seven years from the date of delinquency. Bankruptcies and tax liens are exceptions to this. The time limits are dictated by the Federal Fair Credit Reporting Act and do not influence the statute of limitations for collecting a debt.

Reporting of Collection Accounts. The date of delinquency IS NOT reset when an account is sold to a collection agency. The date of delinquency still refers to the original delinquency with the original creditor, regardless of when the collection agency began working the debt. Collection agencies may try, but they cannot legitimately "reset the clock."

Contrary to popular belief, making payments (including partial payments) on bad debts DOES NOT impact the time allowed for companies to list information on your credit report. The exception to this is tax liens and federal student loans. All other types of items should expire on a “known” schedule (based on the allowances outlined in the Fair Credit Reporting Act). The report time is based on the original dates, regardless of when or whether they are paid.

There historically has been a great deal of confusion over the starting point (exactly when the clock (typically 7 years) begins ticking), which often is misinterpreted as the date of the last activity on the account. This obviously would result in the possibility of "re-setting the clock" on an old, bad debt by making a payment on it. The issue was clarified in 1996 amendments to the Fair Credit Reporting Act (FCRA), which set a specific starting date linked to the original delinquency date (see FCRA Section 605(c)(1)).

NOTE. Credit cards are generally considered Open Accounts. Auto loans and other installment agreements are typically treated as Written Contracts. Remember that if there has already been a lawsuit resulting in a judgment, that judgment has a separate Statute Of Limitations, which you can find here. You will want to check with your own state (and/or consult with an attorney) to find out how they treat these issues specifically – some states will vary in their definitions. For example, a credit card is an open account in most states, but is a written contract in others …