Consumer Debt & The Statute of Limitations

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February 6, 2013 by Rick B

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We are frequently asked, by both our clients and consumers, about the statute of limitations on debt.  It is important to note that third party collection agencies abide by the same laws as the entities where the debt originated.  In many instances this is not the case, but with the statute of limitations, everyone abides by the same set of rules/laws.

For clarity, the statute of limitations is defined as follows; a law that establishes a time limit for bringing a civil suit or other legal action.  For consumer debt, this is essentially the time frame an agency has to take legal action in order to get a debt resolved.

When the statute of limitations expires, the debt is considered time-barred.  Legal action cannot be taken against a time-barred debt, however, that does not necessarily mean a consumer is no longer obligated to pay the debt.

As I cited above, the statute of limitations varies by state, and also by the type of debt.  Here are the 4 types of consumer debt:

Written Contracts    Oral Contracts    Promissory Notes    Open-ended accounts

Remember, each state will have their own statutes for each type of debt; they are not always the same time period, for instance:

Wisconsin:  6 Years on written and oral contracts as well as open-ended accounts (e.g. credit cards), but 10 years on all promissory notes.

Illinois:  10 years for written contracts and promissory notes, 5 years on oral contracts, and 5-10 years on open-ended accounts (depending on the type of account).

Minnesota:  6 years across the board for all 4 types of debt.

As you can see, there are many factors pertaining to the statue of limitations. It is essential to understand the type of debt, where it was initiated, and when it was initiated.

Now in some states, the clock on the statute of limitations resets if the debtor makes any type of payment on the account.  For example, the statute of limitations for written contracts in the state of Wisconsin is six years.  If Mr. Jones has a debt that originated 4 years ago and he makes a payment today, the time-clock would reset, and he would be susceptible to legal recourse for 6 additional years, starting today, and so forth—with the clock resetting with each additional payment.

We’ve explored what the statue of limitations means to
consumers, but what does it mean to your organization?

In my experience, it is fairly common to see a business stock-pile their past-due receivables and bad checks.  They do this for usually one of two reasons.  They are either waiting for a bunch to accumulate or they are putting them all in one place until there is a good time to deal with them.  Often times the entity has the best intentions in mind, and plans on collecting this money.  As I certainly know from experience (and I’m guessing many of you do as well), best intentions do not always lead to the best results.

Like driving a car, the key to a healthy revenue cycle can be found in the right balance between looking forward, and in the rear view mirror.  Sending old receivables to collections is a practical and useful way to increase your cash flow.  Generally speaking, an account that is 3 months delinquent is easier to collect than an account that is 3 years old—so don’t sit on them for too long!  The key is taking advantage of the statute of limitations while it can still work in your favor and not against you.

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