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How Does the Statute of Limitations Work for Debt?

Statute of Limitations on DebtTo start it helps to understand the purpose behind statutes of limitations. They are policy decisions by state legislatures intended to limit how long a person or business can pursue someone in court on certain kinds of legal claim before the evidence for that type of claim tends to deteriorate or disappear.

When a person fails to pay a debt, that's considered a "breach of contract." That breach of contract gives the creditor a "claim" or "cause of action"—a legal reason to file a lawsuit against the person. Different states have different lengths of time in their statutes of limitations for various categories of claims, such as for breach of contract.

WHAT EXACTLY IS A "STATUTE OF LIMITATIONS" ON A DEBT?

This term is often misunderstood. It is often thought to be the length of time that you can be sued for a debt. Or sometimes it is considered the length of time that you owe a debt, after which that debt is gone, no longer owed.

No.

First, a debt continues to be owed after the period of time specified in the statute of limitations has expired. The debt is not eliminated.

Second, in most cases you can even still be sued on a debt after that period of time has expired. But the creditor's legal remedies are limited, IF you are paying attention and know your rights.

What a statute of limitations does is give you a defense to a lawsuit claiming that you owe the debt. If the judge agrees that in fact the statute of limitations has expired, the lawsuit would be dismissed—thrown out. It may even be dismissed "with prejudice," meaning that the judge rules that because the statute of limitations has expired, the lawsuit can never be filed again.

WHY IS THIS DISTINCTION IMPORTANT?

It means that if you are sued by a creditor, you must respond by the deadline stated on the summons by filing a document telling the judge that you believe the statute of limitations has expired. You must "timely raise this affirmative defense." Otherwise, most likely the creditor will get a "default judgment" against you, which is a formal court determination that you legally owe the debt. A judgment would empower the creditor with many aggressive ways to collect the debt, including garnishment of your paychecks and bank accounts. After a judgment is entered, it is almost always too late to argue that the statute of limitations has expired.

WHAT DOES THIS DISTINCTION MEAN FOR MY CREDIT RECORD?

The statute of limitations does not set how long a debt can be on your credit report. They are totally separate concepts—the length of the statute of limitations on a debt has no bearing on the length of time that debt is in your credit record.

HOW LONG IS THE STATUE OF LIMITATIONS ON A DEBT?

The statute of limitations period for debt varies in every state. In California it is 4 years on a claim for breach of contract. Each states has different time requirements for how long their statue of limitations are for breach of contract. Generally the statute of limitations in most states vary from 3 to 6 years. In the next article we will look at how the statute of limitations for debt applies in California.

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