Debt collectors do not want you to know this, but sometimes a debt is just too old to collect. All states have “Statutes of Limitation” that prevent a creditor from enforcing a debt, if the creditor does not file suit within a certain period of time. In other words, if a creditor waits too long to sue you, it is simply out of luck. Unfortunately, there are “vulture” debt collectors who will continue to try to collect on debts after the Statute has run out. Therefore, before resorting to bankruptcy or beginning debt negotiations, it is important to know what the Statute of Limitations is and how it can protect you.
The Pennsylvania Statute of Limitations on debt
The Pennsylvania Statute of Limitations on written contracts, oral contracts, promissory notes, and open-end accounts (e.g., credit cards) is 4 years. (42 Pa. C.S. 5525(a)) The creditor has 4 years to file suit from the date of the last activity on the account, which almost always means the last time the debtor made a payment. If the creditor has not filed suit within 4 years of that last payment, the debt is unenforceable. (If the debtor made no payments at all on the account, the Statute runs from the date that the first payment was due.)
Example: Ann owes $2000 on her ABC credit card. She last made a payment on the card on June 10, 2010. If Ann makes no more payments, ABC has until June 9, 2014 (4 years from the last payment) to file suit against Ann. If ABC fails to sue Ann by June 9, 2014, the creditor’s claim is barred by the Statute of Limitations.
Stopping and Starting
Certain events, such as moving out of state, may “toll” or suspend the Statute of Limitations, meaning that it stops running during the event and starts running again when the event is over. Bankruptcy also tolls the Statute, which we will discuss in another post. You must take into account any tolling period when calculating when the statute runs out.
Example: If Ann from the example above moves out of state on January 15, 2011 and returns on January 14, 2012, the Statute would be tolled during the year that she was out of state. Therefore, it would run out on June 9, 2015 rather than June 9, 2014, giving the creditor another year in which it can file suit.
Quick Point: The Statute of Limitations is an “affirmative defense”, meaning that if the creditor sues you, you must raise this defense in your answer to the lawsuit. If you do not respond to the lawsuit and raise your Statute of Limitations defense in your answer, you could end up with a judgment against you, even though the debt is beyond the Statute.
You might wonder why a creditor would try to collect on a debt after the Statute of Limitations has run out. However, it can be a lucrative business, particularly if you lack scruples. “Vulture” debt collectors purchase very old accounts on which the Statue of Limitations has run out for a few cents on the dollar. They count on debtors not understanding that these debts are unenforceable. I see this situation more and more in my Philadelphia bankruptcy and debt settlement practice. Many of these debt collectors use extremely aggressive tactics.
Using the Statute to stop vulture debt collectors
What should you do if a debt collector tries to collect on a debt after the Statute of Limitations has run out? Simply, tell the debt collector in writing that the Statute of Limitations has run out on the debt and instruct the collector not to contact you again. Because they count on debtors not knowing their rights, it is usually enough to let collection agencies know that you are aware that the Statute of Limitations has run out. They will generally move on to another victim. However, do not admit to owing the debt, make a payment, or agree to make a payment. If you do, you may compromise your Statute of Limitations defense.
What if the debt collectors still will not stop? If the Statute has run, and the collectors persist in trying to collect, you may have a case against them under the federal Fair Debt Collection Practices Act and related state statutes. (Note that if a debt has been discharged in Chapter 7 or Chapter 13 bankruptcy, the statute of limitations does not apply, and any attempt to collect the discharged debt is a violation of the Bankruptcy Code.)
Knowing your rights can help you keep unscrupulous debt collectors at bay, and sometimes make them pay. In our next post, we will discuss how you can avoid costly mistakes people make regarding the Statute of Limitations.