Know Your Limitations

Dec 9, 2011 by

To be clear: I’m not going to be suggesting here that people should under any circumstances ignore legitimate debts that they can afford, even over time, to repay. However, if you do have overdue debts, it’s wise to make an effort to understand your rights and the limitations on debt collectors’ rights.

The Only Ways Not to Owe

If you have a legitimate debt, exactly three options exist to erase it:

  • Pay it off
  • Settle with the creditor or debt collector (“Settle” means come to a negotiated agreement to end your liability after paying an amount less than the total due. More on debt settlement in a future post.)
  • Have the debt discharged through bankruptcy

Until you’ve accomplished one of the above, you still owe the debt.

Statute of Limitations

In most states, after passage of a period of time specified by a “statute of limitations,” a debt collector loses its right to pursue in court authorization to garnish a debtor’s wages or a bank account or place a lien on his or her property. This would not mean the debtor no longer owes the money; it only means the collector has lost its most powerful tool to compel the debtor to pay. The statute of limitations for consumer debt varies by state, but typically is in the 3-6 year range. Talk to your state’s attorney general’s office if you have any doubt whether a particular debt is past the statute of limitations.

Re-Starting the Clock

If you have a debt long past due, be very careful of unintentionally re-setting the statute of limitations clock back to zero. For example:

Say you’ve made no payments on a debt for 10 years and the statute of limitations kicked in at 6 years, or four years ago. Nevertheless, you still owe the debt and collection agencies may continue calling you. Maybe you’re feeling generous one day and take a call from a particularly persuasive or obnoxious debt collector and so decide to send the collector a check for $10 just to make the collector go away. By doing so, you‘ve likely re-started the statute of limitations clock at zero. Now the collector could again pursue garnishment through the courts, and may well do so, potentially forcing you to opt for bankruptcy.

The statute of limitations clock on consumer typically debt starts—and re-starts—on the date of the most recent payment, not the date the debt first became past due.

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