Credit

How Long Can You be Sued for a Bad Debt?

The world of credit is a complicated and acronym-filled jungle.  In fact, the first person who can successfully decipher these credit related acronyms will officially be conferred the title, “credit acronym expert.”  Please use the comments section below for your answers.

Here goes…FCRA, FACTA, AA, FACS, CROA, DSCPA, FICO, SOL, EFX, CRA, CRO, RMCR, CDIA, FDCPA, TILA, ECOA, TU, XPN, and DPD.  I’ll reveal the answers in my next Mint.com article.  I’ll even give you one just to show you I’m a nice guy…SOL means “Statute of Limitations” and it’s the subject of this article.

“Statute of limitations” refers to the amount of time that can pass after some sort of event before legal actions regarding that event can no longer be initiated.  So for example, in the credit world, if you incurred some sort of contractual debt in the state of California and defaulted, you can’t be sued for collection after 4 years.  After the statue of limitations has expired that debt becomes a “time barred debt,” meaning the lender’s ability to sue you for collection has passed.

Now, don’t get me wrong: I’m not talking about the amount of time it can be reported to the credit bureaus and I’m not talking about the amount of time the lender or collection agency has to collect on the debt.  “Time barred” just refers to when the court loses the ability to legally force you to pay.

Here’s the straight info on time barred contract debts:

 

If you lived in this state when you incurred the contract debt…

…then this is how many years the collector has to sue you.

Washington, D.C., DE, MD, MS, NC, NH, SC

3

CA, PA, TX

4

FL, ID, NE, OK, RI, VA

5

AL, AK, AZ, AR, CO, CT, GA, HI, KS, ME, MA, MI, MN, NV, NJ, NM, NY, ND, OR, SD, TN, UT, VT, WA, WI

6

MT

8

IL, IN, IA, LA, MO, WV, WY

10

KY, OH

15

It’s important to point out that where you lived when you incurred the debt may take precedence over where you currently live.  “Generally speaking, the statute of limitations of the state where the contract was formed will control if the contract is silent on the issue,” says Sean P. Flynn, Esq., a shareholder with Ropers, Majeski, Kohn & Bentley, PC, a law firm that represents defendants in Fair Debt Collection and Fair Credit Reporting litigation in California and New York.

If you signed a contract with a bank while you lived in Mississippi but then moved to Ohio then the statute of limitations could be based on Mississippi law.  And that’s good news because you can be sued for only 3 years in Mississippi versus 15 years in Ohio.

Here’s the straight info on how long defaulted debts can be reported to the credit reporting agencies. It’s pretty simple:

 

The State You Lived in When You Incurred the Debt

The Number of Years a Creditor or Collector Can Credit Report the Item

All 50, plus DC

7

When Do You Not Pay Your Bill?

If the collector can’t sue you for payment any longer then do you really need to pay the debt?  I would argue that you should always pay your obligations as long as you’re really the one who owes it.  And, just because they can’t sue you it doesn’t mean they can’t report it to the credit bureaus.  Having a paid-off debt is better than having an unpaid debt. In fact, some creditors will require that you pay off collections before they’ll do business with you, regardless of your credit scores or the age of the debt.

Will Creditors Really Sue Me for Non-Payment?

The short answer is “yes.”  The better answer is “If you owe a creditor more than $1,000 in defaulted debt and you’re ignoring them, then you stand the risk of being sued.”

The higher the dollar amount, the better (or worse) your odds of getting sued.  A fantastic proxy for “collection aggression” is the number of FDCPA (Fair Debt Collection Practices Act) and FCRA (Fair Credit Reporting Act) lawsuits filed against collectors and creditors for illegally attempting to collect debts and reporting of those debts to consumer credit reports.  According to Jack Gordon, President of Michigan based WebRecon, a company that tracks FDCPA and FCRA lawsuits, “there were 12,213 FDCPA and FCRA lawsuits filed in 2010.  That’s a record number.”

What this means is collectors were very aggressive in 2010 and there’s really nothing to indicate that they’ll calm down in 2011.  And while many of these above-mentioned lawsuits are baseless shakedowns of collection agencies, it’s no secret that collectors have become more industrious with their tactics, including litigation.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit.