Myth: Negotiating Debt Restarts the Litigation Clock Under the Statute of Limitations

Key Takeaways
  • The statute of limitations gives companies a set time to bring legal action as a means to collect a debt.
  • Certain actions can restart the statute of limitations. However, settling a debt for less than the full balance is not one of those actions.
  • The statute of limitations depends on the jurisdiction and type of debt.

The statute of limitations can be confusing because the rules are different for every state, and it is often hard to determine what rules apply to which accounts. However, in every case, negotiating and settling a debt for less than you owe will never restart the statute of limitations.

Here are other factors you need to know about the statute of limitation laws and when it applies to your debt.

What is the Statute of Limitations?

When you miss payments on an account, the creditor will take collection measures and demand compensation. A debt secured by collateral gives the lender more leverage to force payment because they can take the asset if you fail to catch-up the delinquency. Credit cards and other unsecured debt offer creditors fewer avenues to collect on delinquent debt.

The statute of limitations or SOL sets a time limit on when companies can bring legal action to collect on past due accounts.

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How Long Can a Company Sue For Past Debts?

The statute of limitations depends on the type of debt and the jurisdiction of the account. Each state has its own rules around the legal right to sue as a means of recovering delinquent debts. The period typically ranges from three years to six years for consumer debts. Rhode Island and Wyoming are the outliers at ten and eight years, respectively.

What Determines the Statute of Limitations on Consumer Debt?

The statute of limitations depends on the type of debt involved. The law breaks down contracts into four categories, oral agreements, written contracts, promissory notes such as a mortgage, and open-ended contracts like credit card accounts.

Written contracts and promissory notes have the most extended statute of limitations, and open-ended accounts have the shortest.

The other factor that will determine the statute of limitations on your account is the jurisdiction, which is not always clear. It is typically either your state of residence, the state you lived at the time you opened the account, or the state the lender is incorporated. Many credit card agreements give the creditor the “choice of venue,” which allows the company to file a suit in the most advantageous state.

When Does the Statute of Limitations Begin?

The statute of limitations begins on the date of your last payment.

What Can Restart the Statute of Limitations?

Signing an agreement to pay or making a payment will restart the statute of limitations. Other factors will vary by state. In some cases, acknowledging the debt, verbally agreeing to make a payment, or other affirmations could restate the clock.

When paying a negotiated settlement, there is never a case that will restart the statute of limitations because a debt settlement legally relieves you of any further obligation to repay the creditor.

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How Does the Statute of limitations Affect Credit Reporting?

The statute of limitations and the time a debt remains on your credit file are two different things. Late payments stay on your credit file for seven years from the date of your last payment. In many cases, a creditor can no longer sue to recover the debt but will continue to report the delinquency or collection account on your report for the full seven years.

The effect of late payments on your credit score diminishes over time, regardless of the time the creditor has to sue.

Final Thoughts

The statute of limitations will often impact a creditor’s willingness to settle an account because of the elimination of legal remedies. It will not affect your credit. Nor will settling the debt change the statute of limitations on the debt.