The four-year Pennsylvania Statute of Limitations on debt is an often overlooked but powerful defense for consumers facing aggressive creditors. 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 is 4 years. (42 Pa. C.S. 5525(a)) As a practical matter, the Statute covers most types of debt, including credit cards, medical bills, personal loans, etc. 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.
Will the Statute of Limitations Apply To Your Debt?
Unsecured Loans: If the debt arose from a credit card, store credit card, personal loan, overdraft protection, unsecured line of credit, medical bill, or other unsecured debt, then the four-year Statue of Limitations most likely applies. The Statute also applies to most private student loans (not government loans).
Secured Loans for Personal Property: Although the Statute does not eliminate any lien that a creditor may have, if the loan was secured (e.g., a car loan, some store accounts), it does limit the period of time to sue on any deficiency on such loans after repossession. In other words, the Statute cannot stop repossession, but does limit the period of time in which to sue to collect the remaining balance to four years.
Mortgages and Lines of Credit: The Statute does not generally apply to mortgage loans, which are governed by separate rules. (See below for more detail.) However, it does apply to second and later mortgages and secured lines of credit that become unsecured as a result of a foreclosure.
Stopping And Starting (Tolling)
Certain events, such as moving out of state or deliberate concealment, 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. Therefore, if you file for bankruptcy under any chapter, but the case is dismissed, the statute is tolled during the time that the bankruptcy was pending. Thus, 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 Note: 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. In other words, you lose your Statute of Limitations defense by failing to raise it.
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.
When The Four Year Statute of Limitations Does NOT Apply
The Statute of Limitations on contracts does not apply to judgments. Once a creditor has obtained a judgment against you, there is no Statute of Limitations defense. Judgments are essentially forever in Pennsylvania and act as a lien on real property. However, there is a limitation, albeit not a very useful one. The judgment creditor has twenty years to execute against the debtor’s personal property (e.g., money in bank accounts, furnishings, vehicles, etc.) to collect the judgment. In some circumstances, for example if you were not served properly with the initial lawsuit, you may be able to reopen a judgment and raise the Statute of Limitations and other defenses.
The four-year Statue of Limitations on contracts does not apply to “instruments signed under seal. Documents signed under seal are documents with the word “seal” in the signature block. No actual seal is required, although there is a legal argument as to whether the seal is effective on certain contracts. Mortgage loans and other promissory notes are often signed under seal. Such documents have a 20-year Statute of Limitations, unless shortened by some other statute.
The four-year Statue of Limitations on contracts does not apply to mortgage loans. There is no statute in Pennsylvania requiring a mortgage lender to foreclose within a certain time period after a default. Although there is an argument that the 20-year Statute of Limitations on documents under seal should apply to mortgage loans, that issue is not settled.
Fortunately for Pennsylvania debtors, there is another important time limitation that does apply to mortgage lenders. The mortgage lender has only six months after a sheriff’s sale to seek a deficiency judgment. If it fails to do so, it cannot pursue one later.
Quick Note: The four-year Statute of Limitations may apply to a second mortgage or subsequent mortgage that has a remaining balance after a sheriff’s sale. When a second mortgage is not paid in full from the proceeds of the sheriff’s sale, it becomes an unsecured personal debt (like a credit card or personal loan). The Statute on that debt runs from the date of the last payment made on the second mortgage, not from the date of the sale. However, beware that if the promissory note was signed under seal, the creditor may argue that the 20-year Statute of Limitations on documents under seal applies.
The four-year Statute of Limitations does not apply to taxes, civil fines (including parking tickets), criminal fines and restitution, federal or federally-backed student loans, or domestic support obligations. For the most-part, the Statute does not apply to government obligations.
Quick Note: Although federal student loan lenders can bypass the Statute, the four-year Statute of Limitations does apply to private student loans (i.e., loans that are not issued by or backed by the government) and most non-student loan tuition debt. Not surprisingly, debt collectors have been know to lie about this fact. However, private student loan lenders in some case have argued that the promissory note was signed under seal and subject to the 20 year Statute.
The Statute of Limitations does not prevent a debt collector or creditor from trying to collect a debt outside of court. The Statue of Limitations bars a creditor from collecting the debt in court after a certain amount of time has passed. Nonetheless, a creditor or collector can still try to collect the debt outside of court after the Statute of Limitation runs out. However, collectors who collect on debts that are beyond the Statute can easily run afoul of federal and state consumer statutes by threatening to sue, reporting false information on a credit report, etc. Violations of the federal Fair Debt Collection Practices Act (“FDCPA”), Pennsylvania’s Fair Credit Extension Uniformity Act, or the Fair Credit Reporting Act (“FCRA”) can result in the collector paying both damages and your attorney’s fees. (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 and possibly the FDCPA.)
Quick Note: The Statute of Limitations on dishonored personal checks is three years from the date the check was dishonored or ten years from the date on the check, whichever expires first. 13 Pa.C.S.A. § 3118(c). (Generally, the ten year Statute only comes into play where someone has held onto a check for a long time without cashing it.) As for criminal prosecution, the Statute of Limitations is two years for a misdemeanor (under $75,000) and three years for a felony ($75,000 or over). 42 Pa.C.S.A. §5551-5554. However, threatening criminal prosecution to collect on a bad check or any other debt, though common, is a violation of the FDCPA and other consumer statutes.
Sometimes another state’s Statue of Limitations may apply. If you are sued in Pennsylvania, the question may arise as to which state’s Statute of Limitations applies. For example, the contract may specify that statute of Limitations of another state applies. Fortunately, Pennsylvania has a “borrowing statute,” which applies either (1) the Pennsylvania Statute or (2) the other state’s Statute, whichever is shortest. Therefore, if the contract states that the Statute of Limitations of another state applies, the court may apply that state’s Statute of Limitations, but only if it is shorter than the Pennsylvania Statute. Choice of laws can be complex, but the borrowing statute simplifies the matter in most cases file in Pennsylvania. However, not all issue surrounding the borrowing statute and when it applies are settled.
USING THE STATUTE OF LIMITATIONS 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? Because they count on debtors not knowing their rights, it is often enough to write to the creditor to demand (1) validation of the debt (essentially proof that the debt exist and that the creditor owns the debt) and (2) proof that the Statute of Limitations has not run out. They will generally move on to another victim. Of course, if you talk to or write to a creditor, 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. Better yet, speak to an attorney before taking any action.
Quick Note: Creditors and debt collectors will lie to you. Do not trust a debt collector who tells you that the Statute of Limitations does not apply, that another state’s longer Statute applies, or that you made a payment that you do not recall. Check your own records and obtain the assistance of an attorney, if necessary.
What if the debt collectors still will not stop? You may need to retain an attorney to write a cease and desist letter or file suit against the collector. Many bankruptcy attorneys and consumer lawyers also handle debtor defense and FDCPA and FCRA matters. Knowing your rights can help you keep unscrupulous debt collectors at bay and sometimes make them pay.
CREDIT REPORTING AND THE STATUTE OF LIMITATIONS
The Statute of Limitations does not prevent accurate reporting of negative credit information. I often get the following question: “The Statute of Limitations ran out on my debt. Why is it still being reported on my credit report?” The answer is that the Statute of Limitations and the laws governing credit reporting, such as the Fair Credit Reporting Act (“FCRA”), are separate and essentially unrelated. Generally, negative credit information (late payments, defaults, etc.) can be reported on your credit report for 7 years from the date that you first missed a payment and never brought the account current. Therefore, even if the Statute of Limitations runs out after 4 years, the creditor can still report the delinquency on your credit report for three more years. Think of it this way: the Statue of Limitations makes debts noncollectable in court, but it does not erase the debt or the record of the debt.
Quick Note: If a creditor reports false information on your credit report or tries to “Re-age” the debt (falsely change the last activity or payment date), you may have a cause of action against the creditor or the credit reporting agencies under the FCRA, FDCPA, and other statutes.
Should you settle a debt that is beyond the Statute of Limitations to improve your credit report? It is really depends upon your personal financial situation and goals. When a debt is paid for less than the balance, it will often be reported as “settled for less than the balance,” which is negative but better in the along run than having an unpaid overdue debt. However, it is risky to settle a debt, particularly a large debt, without consulting an attorney. You do not want to settle a debt only to see it pop up again years later. In addition, be aware that there can be tax consequences for settling an old debt, although they can often be minimized or eliminated. If you are interested in settling a debt, seek out an attorney who handles debt negotiation and avoid debt settlement companies.
Other options to stop a debt that is beyond the Statute from being reported as delinquent on your credit report, include (1) waiting out the reporting period, (2) discharging the debt in bankruptcy, or (3) disputing the debt (e.g., if it is reported incorrectly). However, some of these actions can also have a potential negative impact on your credit report. Therefore, it is crucial to discuss all options with an attorney before acting.