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 – OVERVIEW
How long is the Pennsylvania Statute of Limitations on debt? The Pennsylvania Statute of Limitations on written contracts, oral contracts, promissory notes, and open-end accounts is four 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.
How does the Statute of Limitations work? Under the Statute, the creditor has four years to file suit from the date the debtor defaulted on or breached the contract. If the debtor fails to file suit within four years, the creditor is barred from collecting the debt in court.
Quick Note: I often hear the term”breach” used interchangeably with the term “default”, although “default” is usually defined specifically in the contract. A default is a breach, but not all breaches are defaults. Most contracts specify that failure to pay is a default. However, even if it is not so specified, failure to pay by the due date is almost certainly a breach of the contract. This is all kind of wonky, so I would not worry about these terms too much.
When does the Statute of Limitations begin to run? The Statute of limitation runs from the date of default. Typically, debtor defaults on (or breaches) the contract by failing to make a payment by the due date. Thus, the Statute begins running when the debtor fails to make a payment when it is due. If the creditor has not filed suit within four years of the date that the debtor missed the first payment, the debt is unenforceable in court.
Example: Ann owes $2000 on her ABC credit card. She last made a payment on the card on June 1, 2016. She misses the payment due on July 1, 2016. If Ann makes no more payments, ABC has until June 30, 2020 (four years from the last payment) to file suit against Ann. If ABC fails to sue Ann by June 30, 2020, the creditor’s claim is barred by the Statute of Limitations.
As a practical matter, in most consumer cases (credit cards, loans, etc.), the Statute usually begins to run around thirty days after the last payment date, if the last payment was on time. (If payments are quarterly, annual, or some other term, the default may take place at some other specified time.)
What if the debtor makes a payment after defaulting on the debt? If the debtor makes the last payment after a default, the Statute of Limitations may run from that last payment or activity date. (See “Resetting the Statute of Limitations” below.)
Example: Ann owes $5000 on her DEF credit card. Her payment is due the first of each month. Ann fails to make her payments for January, February, or March of 2016. If Ann never makes another payment, the Statute would begin running on January 1, 2016, when she missed her first payment. However, on April 1, 2016, Ann makes a partial payment. She makes no other payments after April. The Statute runs from April 1, 2016 .
Keep in mind that every case is different. To determine the date that the Statute of Limitations began to run in your case, you should review your case with an attorney.
What if the debtor made no payments at all? If the debtor made no payments at all on the account, the Statute runs from the date that the first payment became past due.
How do you determine the date of your last payment? You should first review the last activity date or last payment date on your credit reports. I suggest pulling reports from all three major credit bureaus. (You can do so for free once per year at www.annualcreditreport.com). However, it is not uncommon for the credit report to contain inaccurate information. Therefore, the best way to verify the last payment date is to search your own bank and financial records.
You can also demand a payment history and copies of statements from the creditor, which you can check against your own records. (If you are being sued by a creditor, you can demand this information through the discovery process.) If the creditor cannot provide this information, it is unlikely that the creditor can prove its case in court. Never take a creditor’s word regarding the last payment date.
Quick Note: Some creditors, in an attempt to avoid potential legal problems, will note on the collection letter that the debt is barred by the Statute of Limitations and that the creditor will not sue you. Often this language is unclear and may state that the debt is “time-barred” or something similar. You should check any collection letter to see if the creditor has admitted that the debt is beyond the Statute.
Sometimes another state’s Statute 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 filed in Pennsylvania.
DOES THE STATUTE OF LIMITATIONS APPLY TO YOUR DEBT?
The four-year Statute of Limitations applies to the following debts:
Unsecured Loans, Promissory Notes, and Revolving Credit. If the debt arose from a credit card, store credit card, personal loan, overdraft protection, unsecured line of credit, medical bill, or other unsecured credit, then the four-year Statute of Limitations most likely applies. The Statue applies to both written and oral contracts (sometimes called “verbal contracts” by non-lawyers). Whether the creditor is Big Giant Bank or Aunt Becky, the four-year Statute applies.
Private Student Loans. The Statute applies to most private student loans (not government or government-backed loans).
Secured Loans for Personal Property. Although the Statute does not eliminate any lien that a creditor has if the loan is secured (e.g., a car loan, some store accounts), it does limit the period of time to sue for any deficiency on such loans after repossession. In other words, the Statute cannot stop repossession (or force the lender to repossess), but it does limit the period of time the creditor has to sue to collect any remaining balance.
Second Mortgages Following Foreclosures. Although the four-year Statute of Limitations does not generally apply to first mortgage loans, it does apply to second and later mortgages and secured lines of credit that become unsecured as a result of a foreclosure. 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 of Limitations on that debt runs from the date of the last payment made on the second mortgage, not from the date of the sale. However, the Statute is limited to balances remaining after the sheriff’s sale. Moreover, note 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.
RESETTING THE STATUTE OF LIMITATIONS
Do not admit owing the debt. Like making a payment, admitting that you owe a debt can also reset the Statute of Limitations. The courts require that this admission be clear and convincing. Nonetheless, be careful with your interactions with creditors and debt collectors.
Do not pay a creditor if you believe the debt is beyond the Statute of Limitations. If you make any payment to a creditor, no matter how small, it may reset the Statute of Limitations. In other words, if you pay the creditor, the Statute of Limitations may start over because the payment can seen as an admission of debt. For this reason, many debt collectors will try to get you to make a small “good faith” payment on the debt. Making a small payment on an old debt to get the creditor off your back may be a huge mistake.
If you do reset the Statute of Limitations by making a payment or admission of debt, the new Statute of Limitations period will begin running from the date that you made the payment or otherwise admitted the debt (assuming you make no more payments).
There is certainly an argument that making a small payment to a debt collector to get the collector to stop harassing you is not an admission of the debt and, therefore, does not reset the Statute. However, why take the chance and have to make this argument in court? Rather than take the risk of resetting the Statute, consider speaking with a debt attorney before making any payment or entering into discussions with the creditor.
TOLLING: PAUSING THE STATUTE OF LIMITATIONS
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.
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 four-year Statute of Limitations on debt does not apply to the following:
Judgments. 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. The creditor must also revive the judgment every five years to keep its priority against other creditors having liens on your real property. However, failing to revive the judgment does not make it go away.
Quick Note: In some circumstances, 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.
Certain Documents Signed Under Seal. The four-year Statute 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.
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 an important time limitation that does apply to mortgage lenders. The first 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. (See above for information on second mortgage balances after foreclosure.)
Taxes. The four-year Statute of Limitations does not apply to taxes. Although there is a Statutes of Limitations for the collection of federal taxes, there is no statute of limitations on most Pennsylvania state and local taxes. However, some federal, state, and local income taxes are dischargeable in bankruptcy.
Civil Fines (Including Parking Tickets), Criminal fines, and Restitution. For the most part, the Statute does not apply to government obligations.
Federal or Federally-Backed Student Loans. Federal and federally guaranteed student loans do not fall under the Pennsylvania Statute of Limitations. In fact, there is no Statute of Limitations on federal student loans. (See above for private student loans.)
Domestic Support Obligations. Alimony, child support, and other domestic support obligations are generally exempt from the Statute of Limitations in Pennsylvania.
DEBT COLLECTION AFTER THE STATUTE OF LIMITATIONS RUNS OUT
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 or debt collectors who try to collect on debts that are beyond the Statute can easily run afoul of federal and state consumer statutes. Common violations include threatening to sue after the Statute of Limitations has run, reporting false information on a credit report, etc.
Common illegal debt collection tactics include threatening to sue after the Statute of Limitations has run, reporting false information on a credit report, threatening criminal prosecution, etc. Such actions are violations of the federal Fair Debt Collection Practices Act (“FDCPA”), Pennsylvania’s Fair Credit Extension Uniformity Act, or the Fair Credit Reporting Act (“FCRA”) and can result in the debt 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.
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 exists 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.
What if the creditor sues after the Statue of Limitations has run out? If a creditor files suit, you must respond to the lawsuit, even if you are absolutely certain that the debt is barred by the Statute of Limitations. You can lose your Statute of Limitations defense if you do not respond to a lawsuit. The Statute of Limitations is an “affirmative defense”, which means that you must raise this defense in your answer to any lawsuit that a creditor has filed against you. 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. The court will not raise this defense for you.
Quick Note: Never ignore a lawsuit. Creditors count on the 95% of all debtors who fail to respond to lawsuits. If a creditor sues you, regardless of the circumstances, call an attorney immediately. Many collections lawsuits can be won.
Debtor Defense — Other Defenses to Creditor Lawsuits. Keep in mind that the Statute of Limitations is not the only defense to a collection lawsuit. For example, many bad debt buyers have insufficient documentation to prove in court that they own the debt. Debtors win such cases frequently. In addition, many judgments result from lawsuits where there was defective service on the debtor. In such cases, it is sometimes possible to reopen the judgment and raise any defenses you may have, including the Statue of Limitations.
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 federal 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 seven 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 four 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 depends on 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 long 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.