Statute of Limitations on Debt

Here’s some good news if you’re struggling with debt: As time passes, your old bills can lose some of their power to hurt you.

This is true, in part, because of your state’s statute of limitations laws.

Let’s learn more.

Table of Contents:

  • Statute of Limitations vs. Credit Reporting
  • How Statutes of Limitations Can Help
  • How Statutes of Limitations Work
  • For Medical Debts
  • State-by-State Guide
  • Not all Debt has a Statute of Limitation
  • FAQs

Statutes of Limitations vs. Credit Reporting

I want to be clear on this first: Your debts will not go away unless you pay them off, no matter how much time passes.

That being said, time can help protect you from the effects of your debt in two distinct ways:

  • Credit Reporting: After seven years (10 years for bankruptcies and up to 15 years for income tax debt) your creditors will no longer report your debt to credit agencies. An unreported debt can’t pull down your credit score.
  • Statute of Limitations: Each state sets a time limit during which your creditors can sue you for non-payment. After this time limit expires, you’re no longer legally responsible for many kinds of debt.

These two protections — credit reporting deadlines and statutes of limitations — operate independently from each other.

This means your debt can still appear on your credit report even after your statute of limitations has expired, assuming your state’s statute of limitations is shorter than seven years.

Likewise, you can still be sued for a debt even after it no longer appears in your credit history if your state’s statute of limitations on debt extends beyond seven years, as many do.

How Statutes of Limitations Can Help You

While an expired statute of limitations will not erase your debt, it can protect you from legal responsibility for your debt.

This means you couldn’t be successfully sued and ordered by a judge to repay the debt or to have liens placed on your property or income to satisfy the debt.

Notice I said you can’t be “successfully sued.” You could still be served with a lawsuit. But you should be able to get the action dismissed by citing your state’s statute of limitations law.

In fact, some debt collectors still send threatening letters after a debt’s statute has expired, hoping fear will prompt you to make a payment.

It’s up to you to know, and to exercise, your rights.

How Statutes of Limitations on Debt Work

To understand the statutes of limitations, it may help to envision a clock or the stopwatch app on your phone.

When a debt’s stopwatch reaches the time limit set by your state — these limits vary from 3 to 15 years — your legal responsibility for the debt expires.

This seems simple enough, but here’s a more complex question: When does the stopwatch start, and can it be reset?

Starting Your Statute of Limitations

The clock on your statute of limitations starts on the date of your last contact with the account. Your date of last contact could be:

  • The date of your last payment.
  • The date you last spoke on the phone with the creditor.
  • The date of a letter or email you sent to the creditor.
  • The date you chatted online with a customer service rep on the creditor’s site.

You get the idea.

A More Complicated Start Date

Sometimes, though, the clock starts on the due date of your first missed payment, assuming you haven’t been in contact with the debtor since that date.

For example, if you owed $2,500 to a credit card company and failed to make the payment due on Oct. 1, 2017, the clock on your debt started then, even if you did make a payment the previous month, on Sept. 1, 2017.

This distinction can seem trivial at first, but it could impact your statute of limitations.

Making a Payment Can Reset Your Statute’s Clock

Let’s say two years pass and you’ve been ignoring this $2,500 in credit card debt. Then, one day, you receive a letter threatening legal action if you don’t pay the entire balance.

You can’t afford to pay the entire $2,500 plus interest and fees, but you do have a couple hundred dollars you can spare, so you send it in hoping it’ll cool off the collector’s pursuit of your debt.

This is an admirable gesture, but there’s a downside: Making this payment will restart the statute of limitations on your debt, meaning you’ve just given your creditors two more years to pursue legal action — and you haven’t come close to paying off the debt.

Before making any partial payments on old debt — before even starting a conversation with your creditor about your debt — be aware you’re resetting your statute of limitations on the debt by making this contact.

Before contacting your creditors in any way, I recommend being prepared to satisfy the debt, either by repaying the balance in full or by getting a debt settlement in writing with your creditors.

Statute of Limitations for Medical Debts

Not all kinds of debt are subject to the same statute of limitations timelines. Medical debt works differently than mortgage debt or credit card debt.

Debt falls into four categories, and each category can have a different time limit depending on your state’s laws:

  • Oral: If you buy a friend’s car for $1,500 and, during a brief conversation, agree to pay $500 a month for three months, you’ve made an oral agreement.
  • Written: Medical bills are common forms of written debt. Any time you sign an agreement to pay — whether you’re writing on a paper napkin, a notarized legal document, or an iPad in the emergency room — you’ve taken on written debt.
  • Promissory: Agreeing to make monthly payments with interest until a specified date in the future qualifies as a promissory agreement. Mortgages and car loans fall into this category.
  • Revolving: Debts that can last and continue to change indefinitely — like credit cards or lines of credit — constitute a revolving or open-ended debt.

Your state’s laws will list a statute of limitations for each one of these debt categories. The statutes for different kinds of debt within a state can vary widely.

In Kentucky, for example, you’re legally responsible for credit card debt for five years but you’re legally responsible for a mortgage for 15 years. A few hundred miles away, in South Carolina, no debt category extends beyond three years.

State-by-State Guide for Statutes of Limitations

Here’s a state-by-state list of statutes for each kind of debt:

State Oral Written Promissory Open
Alabama 6 6 6 3
Alaska 3 3 3 3
Arizona 3 6 6 3
Arkansas 3 5 3 3
California 2 4 4 4
Colorado 6 6 6 6
Connecticut 3 6 6 3
Delaware 3 3 3 4
Florida 4 5 5 4
Georgia 4 6 6 6
Hawaii 6 6 6 6
Idaho 4 5 5 5
Illinois 5 10 10 5
Indiana 6 6 10 6
Iowa 5 10 5 5
Kansas 3 5 5 3
Kentucky 5 10 15 5
Louisiana 10 10 10 3
Maine 6 6 6 6
Maryland 3 3 6 3
Massachusetts 6 6 6 6
Michigan 6 6 6 6
Minnesota 6 6 6 6
Mississippi 3 3 3 3
Missouri 5 10 10 5
Montana 5 8 8 5
Nebraska 4 5 5 4
Nevada 4 6 3 4
New Hampshire 3 3 6 3
New Jersey 6 6 6 6
New Mexico 4 6 6 4
New York 6 6 6 6
North Carolina 3 3 5 3
North Dakota 6 6 6 6
Ohio 6 8 15 6
Oklahoma 3 5 5 3
Oregon 6 6 6 6
Pennsylvania 4 4 4 4
Rhode Island 10 10 10 10
South Carolina 3 3 3 3
South Dakota 6 6 6 6
Tennessee 6 6 6 6
Texas 4 4 4 4
Utah 4 6 6 4
Vermont 6 6 5 3
Virginia 3 5 6 3
Washington 3 6 6 3
West Virginia 5 10 6 5
Wisconsin 6 6 10 6
Wyoming 8 10 10 8

*Georgia law specifies a 6-year statute of limitations for credit card debt; other kinds of revolving debt have a 4-year statute.

^Prior to 2012, all categories of debt in Ohio had a 15-year statute of limitations. That law still applies to debt incurred in 2012 or earlier.

Not All Debt Has a Statute of Limitations

Your statute of limitations will not apply to all kinds of debt. Here are some common exclusions:

  • Federal Student Loans: You can be held legally responsible for this debt for the rest of your life. Private student loans typically fall into the category of written debt.
  • Income Tax: The IRS can always hold you responsible for past-due taxes. From the IRS’s point of view, you’re holding onto their money.
  • Child Support: Your legal responsibility to pay court-ordered or legally arbitrated child support payments also never expires.

Other Statute of Limitations FAQs

If you have specific questions, you should contact a lawyer or debt counselor in your state. Here are some general questions that come up a lot:

What State’s Laws Apply: The Bank’s or Mine?

What a great question. Sadly, I don’t have an ironclad answer.

In most cases, the state you live in — or at least the state you lived in when you took on the debt — takes precedence over the laws from the bank’s home state.

However, your creditor can sue you in either state. If your state’s statute is shorter than the bank’s statute, the bank may try to sue you in its state of operation.

It would be up to you to defend yourself by asking the judge to use your state’s laws instead.

Can I Pay a Debt After the Statute Expires?

Most definitely. After all, even after the statute expires, you still owe the money.

Remember, though, partial payment can restart your statute, making you legally responsible for the debt again.

Can Creditors Still Contact Me After My Statute Expires?

Creditors can continue seeking repayment from you even after the statute of limitations expires. They can threaten legal action. They can even file lawsuits.

However, you could most likely get the lawsuit dismissed using the statute of limitations as a defense.

Why is Old Debt Still on My Credit Report?

Mississippi and Delaware, for example, have short statutes: just three years for each kind of debt.

However, the debt will remain on your credit report for seven years. So your debt could still be hurting your credit score even though you can’t be legally ordered to pay it.

Credit reporting rules and statutes of limitations operate independently from one another.

What About Medical Financing Options?

In most cases, medical debt qualifies as written debt, and your state’s statute for written debt will apply.

But if you finance a medical procedure using Care Credit or another medical credit card, you’re incurring open-ended or revolving debt which often has a longer statute of limitations.

Bottom Line: Statutes Help Protect But Not Forgive

The statute of limitations on your debt can help protect you from legal responsibility, but these laws will not erase your debt.

Your creditors can continue seeking repayment. It’s up to you to know your legal responsibility for your debt.

Good Debt vs. Bad Debt | Why You Shouldn’t Believe The “Good Debt” Myth

When people talk about “good debt” they usually mean debt that eventually creates value. In other words, it’s debt that will hopefully create wealth sometime in the future.

By this same logic, “bad debt” is debt that simply pays for consumer goods which depreciate in value.

But are there really good and bad types of debt? Isn’t debt always risky? This is an interesting and controversial topic that’s well worth our time.

Examples of Good Debt

I think any kind of debt — especially credit card debt and other high-interest debt — is risky.

But some types of debt make more sense than others.

For now, let’s call these more sensible types of debt “good debt:”

  1. Student Loan Debt
  2. Home Mortgage Debt
  3. Business Loan Debt

Student Loan Debt

A lot of people point to student loans as a classic example of good debt.

Going into debt with a student loan can create a better future — one in which a college education provides a much higher paying job that creates more wealth.

In that scenario, the student loan’s monthly payments — even though they include a lot of interest — are worth the money.

Borrowing money was necessary because it made the college education possible — and college unlocked the ability to achieve additional financial goals.

Makes sense, right?

Home Mortgage Debt

Here’s another classic example of good debt that people point to: a home mortgage.

The median price of a house in 2020 is about $284,000 according to the National Association of Realtors.

Unless you have $284,000 in cash, you can’t buy such a home without borrowing money and paying the lender’s interest.

Over time, the value of your home should increase. According to the good debt philosophy, the increase in your home’s value will justify the expense and risk of borrowing money.

Homes do tend to appreciate in value — at least collectively. U.S. Census data from 2000, for example, show the median price of a home was about $140,000 at the end of 2000. Median home prices have more than doubled since then.

Business Loans

The other oft-cited example of good debt is a small business loan that allows the borrower to start or expand a business.

Once again, the positive outcome — a successful, money-making business — justifies the expense and risk of borrowing which meets the definition of “good debt.”

Examples of Bad Debt

Are you borrowing money to pay for consumer goods or property that depreciates in value? If so you’re taking on “bad debt.”

  1. Car Loan Debt
  2. Personal Loan Debt
  3. Credit Card Debt
  4. PayDay Loan Debt

Car Loan

Sadly, a car, van, or truck’s value depreciates along with its age, mileage, and condition.

The interest paid on a car loan does not help you own a more valuable asset. In fact, the more you pay in car payments, the less value your car holds.

By our definition, a car loan is bad debt.

That said, couldn’t you argue that a new car gets you to work which definitely helps your personal financial situation?

Yes, and that’s one thing that makes this discussion so interesting.

For example, someone could counter your argument by saying a car loan probably isn’t your only option for getting to work.

Personal Loans

Banks and credit unions — along with online lenders — offer unsecured personal loans with repayment terms spread over two to seven years.

Compared with a mortgage or car loan which has built-in collateral, personal loans have high-interest rates. Their underwriting depends a lot on your credit score.

People use these loans to consolidate credit card debt, pay for home improvements, or create some short-term liquidity.

By the classic definition, personal loans are bad debt.

Credit Cards

Credit card debt is one of the worst kinds of debt because the annual percentage rates tend to be so high — and because of their revolving balances.

When you buy groceries, gifts, gas, clothes, books, and the like with a credit card, you’re simply putting off paying for your items — and paying a huge amount of interest for this convenience.

Credit cards do offer rewards like cash back on purchases but your outgoing interest payments will likely dwarf your incoming rewards unless you always pay off the credit card’s balance each month.

Payday Loans

Carrying a credit card balance is terrible for your net worth. Payday loans are much, much worse. I’d lump title loans in, too.

These kinds of loans prey on people with financial challenges. They’re illegal in 23 states because they’re a personal finance nightmare.

Try to stay away from this kind of bad debt.

Is ‘Good Debt’ Really Good Debt?

Remember our “good debt” examples from above?

Student loans, home mortgages, and small business loans all qualified as good debt because the borrowed money unlocked more wealth in the future.

Well, let’s look a little more closely at those examples to see how good they really are:

Is a Home Mortgage Good Debt?

On average, home prices increase over time. But anyone who owned a house back in 2008 knows this isn’t always true. The housing market crashed that year, and it took several years to bounce back.

If you bought a house in 2005 and needed to sell the same home in 2010, for example, there’s a good chance you lost money. Your “good debt” was suddenly bad debt.

And some pockets of the housing market grow at different rates than others. Some neighborhoods decline in value even while the national median home price increases.

Most of the time, borrowing money through a home mortgage is a good idea, especially if you have control over when you sell your home. But you still have to make smart decisions to ensure your interest repayment works in your favor.

With today’s lower interest rates on mortgages, this process has gotten easier.

Is a Student Loan Good Debt?

Statistics show people with college degrees have more earning potential than people without four-year or more advanced degrees.

But just like with the home mortgage example, student loans aren’t guaranteed to pay off for every borrower.

Student loan debt loads have accelerated over the past generation. Part of the reason is the rising cost of tuition. But the job market is changing too. A college degree doesn’t guarantee a higher monthly income.

If you borrowed $40,000 to pay your tuition and then couldn’t turn your degree into a higher paying job, you’d be still be saddled with loan payments from the student debt. This “good debt” wouldn’t seem all that good.

Again, you have to make smart decisions. Try to find a degree program that prepares you for a vibrant job market. Borrow only what you need.

Are Business Loans Good Debt?

Small business loans are hard to get because so many small businesses fail within the first couple years.

Just like with student loans and home mortgages, a business loan has to work out just right to fulfill its promise as “good debt.”

Look no further than the 2020 coronavirus pandemic which sent thousands of businesses spiraling. Businesses with more debt were in more precarious situations. A debt-free business or a business with low debt management costs had a better chance of surviving.

There is No ‘Good Debt’ Guarantee

Any kind of debt is or can become a liability. To be “good debt,” the end result of the loan has to outweigh the costs of borrowing — and unless you can see the future, you can’t know for sure whether this will be true when you borrow.

In short: No single kind of debt can guarantee its rewards will outweigh its risks.

I think we can agree most people get into debt out of necessity.

In other words, most people wouldn’t take a student loan if they had the money set aside to pay for school.

Interest vs. Investing

Most people wouldn’t get an auto loan if they could pay for the car outright.

And most people probably wouldn’t use credit cards if there weren’t any reward points and they had the money in the bank.

Debt proponents say you should use debt as a tool. Even if you have enough money to buy a car, for example, they say you should get a car loan.

Rather than spending your own cash, you should invest it.

By investing your cash at a higher rate of return than the low-interest rate you’re paying for the car loan, you’re coming out ahead.

I can see this logic, of course. It’s simple math. But simple math doesn’t always leave room for the unexpected, and life is all about the unexpected.

Expecting the Unexpected

For example, what if you can’t invest in a way that outperforms the fixed interest rate of your car loan?

What if you lose your job and suddenly needed the cash you’d spent on the car? What about the depreciation in the value of the car itself?

You’d have to be a very savvy investor to be reasonably certain you could outperform the loan interest rate. And most people simply are not savvy investors.

I’d recommend meeting with a financial advisor if you’d like to invest in a way that can outperform the interest rate on personal loans or auto loans.

Let’s Retire the Good Debt Myth

I think this kind of “good debt” debate is a question only if you have plenty of wiggle room in your monthly budget.

For most people, a car loan or a personal loan is a necessary evil that comes at a cost.

For them, it’s not a choice between taking out a loan or paying in cash. There’s only one choice: the loan — because the cash simply isn’t available.

I’m not against using debt when you have to, but I am against the term “good debt.”

For most people, debt is simply a necessity that you have to deal with.

It’s Good to Get Out of Debt

In fact, I believe you should avoid debt whenever you possibly can, and pay it off with the debt snowball method when you cannot.

Before going deeper into debt — or re-arranging your debt — always consider the long-term as well as the short-term costs.

A balance transfer card, for example, may help you avoid higher interest payments on your existing credit cards. But what about its annual fees? Will the card’s interest rate increase after the first year?

You have to ask these questions even with home mortgage loans, home equity loans, and refinances.

Before borrowing, you need to know if the costs will outweigh the benefits.

With that in mind, let’s look at the real costs of borrowing money to buy a home:

‘Good Debt’ vs. ‘Bad Debt’ in a Home Mortgage Loan

Most people would probably agree a home mortgage qualifies as good debt.

But that’s not always true, especially in the short term. Let’s take a closer look at the costs you’d pay to get a home mortgage.

Let’s say your house costs $284,000 which is the median price of a home in 2020 according to the National Association of Realtors.

Here are some costs of borrowing:

  • Down payment: Let’s say you put 10 percent down. That would be $28,400. Your home loan would cover the other $256,000.
  • Closing costs: Closing costs would be about $9,000.
  • Monthly payment: Payments are about $1,080 a month (at 3% interest for 30-year fixed. Mortgage insurance adds about $213 a month to make the total monthly payment $1,293.

In the first year of homeownership, you would spend $37,400 in cash upfront plus $15,516 in 12 monthly payments. Together that would be $52,916.

The second-year you wouldn’t pay the down payment or closing costs so you’d spend only the $15,516 in monthly payments.

So the combined cost of the first two years of homeownership would be $68,432. (And this doesn’t include repairs, taxes, homeowners insurance premiums, or extra money paid onto the principal.)

Now, let’s say you get a job offer in a different state and decide to sell your home after the second year. Assuming your home’s value appreciated at 3% per year, your home would now be worth $301,296, an increase of $17,296 — which is not enough to cover your losses.

You would get your down payment back in this scenario, but you would have made two years worth of monthly payments totaling $31,032, most of which paid the interest on your home mortgage.

For this home mortgage to pay off as good debt you’d need to stay in the home several more years.

How Much The House Really Costs You

Using the numbers outlined above, let’s assume you did stay in the home for 30 years, paying the mortgage on time every month for 360 payments.

Not counting mortgage insurance which you can cancel on a conventional mortgage once you get the loan paid down to 80% of the home’s value, you’d make $388,550 in payments on this $256,000 loan.

The difference — $132,550 — is the total amount of interest you’d pay in these 30 years at today’s low-interest rates. (3% in our example.)

Is this a good deal? Is it good debt? It could be if the home appreciates enough to outpace the cost of borrowing. And you can help yourself by making extra payments on the principal whenever you can.

How Much Will the House Be Worth in 30 Years?

It’s hard to bank on real estate appreciation. Historically, homes appreciate at 3% to 4% a year on average. But this isn’t true in all markets at all times.

Plus, you have to consider inflation which provides the context for the appreciated value of your home in 30 years.

Good Debt vs Bad Debt: It Boils Down to Decisions

Like I said at the beginning of this article, I believe in keeping debt at a minimum. Ultimately buying a home is a good idea because you’d be spending money on rent otherwise.

Buying a home means you’re investing your monthly housing budget in yourself instead of your landlord.

But a home mortgage is good debt only if you make the right decisions — decisions that lower your borrowing costs and optimize your upfront investments in closing costs and your down payment.

Likewise, a personal loan could qualify as good debt if you’re using it to unlock a more stable future and you have no other way to achieve that financial goal. Once again, it goes back to your decisions.

How Is Your Credit Score?

By the way: Fixing your credit score in order to get a mortgage loan will go a long way toward lowering your borrowing costs. Borrowers with the best credit scores get the lowest interest rates in most cases.

Start by removing any collections from your credit report. But after you have a mortgage, there is no need to use a lot of debt. In most cases it’s much more financially responsible to simply save up for purchases like cars and other big ticket items.

This topic is quite controversial. I’d love to hear your feedback in the comments section. Do you agree with me, disagree?