A mountain of credit card debt built up during the recession is
eroding, becoming legally uncollectible one debt at a time.
But if you're in one of the millions of U.S. households with a
credit card debt in collection, it's tough to tell when an
individual legal obligation expires. Three years? Ten? Credit card
agreements can say one thing, state laws another and then judges
reinterpret them both.
"Ultimately you wind up with 50 different statutes of
limitations, depending on the debt," said Mark Schiffman, spokesman
for the debt collection trade group ACA International, which has
proposed a seven-year debt collection clock nationwide. "It's
confusing and frustrating for collectors; it's confusing and
frustrating for consumers."
Some 17 states have "statutes of limitation" that say credit
card debts become legally uncollectible after three or four years.
That means bad debt from the height of the recession in 2009 is
either expiring this year or has already gone off the clock. See
our list of (
statutes of limitations, all 50 states
.) A lot of money is involved -- banks saw a record $72 billion in
unpaid card debt go into default in 2009 that was not erased in
bankruptcy, according to Federal Reserve data analyzed by Moody's
Analytics. Another $61 billion in defaults were recorded in
Expiring debt should lift a burden from millions of families:
Nearly 15 percent of U.S. households had at least one loan of some
sort in collections at the end of 2012. In addition to their moral
obligation to repay, they face legal consequences including wage
garnishment until that debt ages beyond the statute of
If that debt was run up on credit cards, the timing can become
murky. Few state laws mention "credit card debt" by name, so courts
apply contract law on a case-by-case basis. In many states, a card
debt may fall short of the legal definition for a written contract,
giving it a shorter lifespan. What's more, card issuers are likely
to say the law in their home state -- not yours -- is what governs
their card agreements.
Conflict of laws
The limitations are meant to protect people from claims so old that
the evidence to defend against them has gone stale or
disappeared. The typical clock for credit card debts runs for
six years, the length of the law's arm in 19 states.
This doesn't mean the debt melts off your credit report sooner
than the seven-year period established under federal law. Nor is it
necessarily the end of collection action. After a debt's legal
status has expired -- making it "time barred" or "out of stat" --
collectors can still seek repayment. They just can't use court
action to do so, or threaten to haul you into court.
Borrowers who dig out of their financial hole may decide to pay
a legally expired debt. But those who are still struggling can
breathe easier when a debt reaches its statutory limit, and the
threat of a lawsuit stops hanging over it. Once that happens, it is
easier to turn a deaf ear to collection calls and to send a
cease communication letter
to collectors that should halt collection activity, under the Fair
Debt Collection Practices Act.
How difficult is it to tell that a debt has expired? Two recent
rulings in Rhode Island show that legal clocks can run at sharply
Rhode Island resident Frank Fiorenzano was sued by a debt buyer
for a $1,552 Capital One balance in 2010, eight years after he
stopped making payments. He argued that Capital One's card
agreement made Virginia the legal state of the debt, where the debt
clock had run out years before. The U.S. District Court that heard
his case disagreed in a June 2012 ruling, saying Rhode Island's
10-year statute should apply, leaving Fiorenzano on the hook for
But in another Rhode Island case that also involved a Capital
One card, Teri Martin got the opposite result. In a December, 2012
ruling in federal court, that judge decided that Virginia's shorter
statute should apply, using a different legal theory to arrive at
his decision than the Fiorenzano case.
"If you look at any chart, it says in Rhode Island they have 10
years to sue you, and we're saying, 'not necessarily,'" said
consumer attorney John Longo, who worked on both cases.
Where is my debt?
The choice of which state's law to use comes up because of language
in card agreements. In recent
card agreements filed with federal regulators
, several major card issuers say that the law in their home state
should govern the agreement. The court hearing the case is not
bound by the language in those agreements, however, especially
after the debt has been passed from a bank to a debt buyer. Courts
most frequently apply the law of their own state.
"If you're coming into Massachusetts (for example) and suing a
Massachusetts resident, it's pretty unusual that that the resident
wouldn't get the protection of Massachusetts laws," said Stuart
Rossman, director of litigation at the National Consumer Law
Home state protection can cut both ways. In 2010, Ohio resident
Todd Childs appealed an $8,708 award to debt buyer Unifund CCR
Partners over his Citi card balance that had gone unpaid since
2004. He argued that Citibank's card agreement makes the debt
subject to South Dakota's debt clock, not the six-year period in
Ohio. The appeals court disagreed, saying Ohio law overruled the
card agreement. (The court also said Childs was wrong about South
Dakota having a shorter expiration period than Ohio.)
But Florida resident Steven Pincus got a different result when
he faced off against Capital One over an $804 debt in small claims
court, according to court papers. In a 2008 ruling, a judge in Palm
Beach County ruled that the debt had expired under Virginia's
three-year clock for unwritten contracts. As a result, the card
company was obligated to pay Pincus' six-figure legal bill.
"My feeling is we should apply the shorter (statute)," said
Scott Owens, who represented Pincus. "We're dealing with
sophisticated banks, unsophisticated consumers."
Such rulings have attracted attention, prompting Virginia's top
lawyer to weigh in. In 2011, Virginia Attorney General Kenneth
issued an opinion
saying the state's six-year debt clock for written contracts should
apply to card debt, not the three-year period for unwritten
contracts. His opinion came in response to a request from Bill
Janis, then-legislator from Glenn Allen, Va., where Capital One is
Several courts have found that card agreements do not qualify as
written contracts under Virginia's statute of limitations, because
not all of the terms are listed in the document signed by the
cardholder, Cuccinelli noted. His opinion letter disagreed with
this reasoning. The essential terms of the agreement are contained
in a series of written instruments, he said, and do not need to be
in a single document to qualify as a written agreement. That means
the six-year limit for written contracts should apply, his opinion
concluded; providing guidance for judges, not a binding
State of the states
When is a debt too old for court action? There remains a wide range
of answers, and some states are gray areas when it comes to the
legal life of a credit card balance.
Kentucky has the biggest gap between oral and written contracts,
five years to 15 years, and experts there say it is not a settled
issue in the courts which period applies to credit card debt.
Representatives of the state attorney general's office and the
Department of Financial Institutions both said they had no guidance
on the question, and did not know of rulings that have clarified
the legal status of a credit card debt older than five years.
In Illinois, however, confusion over whether card debts live for
five years or 10 is clearing up after an appeals court ruling,
experts there say. Debt buyer Portfolio Acquisitions LLC
filed the appeal of a lower court's ruling, saying that most courts
in the state have generally found that the 10-year clock for
written contracts applies to credit cards.
As part of its case, Portfolio had supplied a copy of Randy
Feltman's signed 1994 application for a GE Capital card, and
account statements showing that the last activity in the account
was in 1999, with $6,325 left unpaid. Even so, the appeals panel
found that Portfolio did not fulfill Illinois' "strict
interpretation" of what constitutes a written agreement. In the
wake of that ruling, fewer collection suits are being filed for
card debt more than five years old, legal experts said, especially
in the Chicago-area judicial district where the Feltman appeals
court has jurisdiction.
"If you've got an account more than five years delinquent, it's
so old and cold, typically they're not going to pursue it," said
Edward Halper, an attorney at Shefsky & Froelich Ltd.
Other states are more flexible about what constitutes a written
contract. In Georgia, a 2008 appeals court ruling established that
the statute of limitations of six years for written contracts
applies to credit cards, a representative of the Department of Law
said in an email response to questions. The ruling said that
Phoenix Recovery Group was entitled to collect more than $1,350 in
charges on a Best Buy card that went unpaid since 2000, under a
lawsuit it filed in 2006. Cardholder Sharadkumar Mehta had argued
-- unsuccessfully -- that the charges constituted an open account
subject to the state's four-year debt clock.
Why old claims are excluded
Consumer advocates say solid reasons exist to have relatively short
statutes of limitations. Older debt is more prone to errors because
of holes in its documentation. In fact,
a study by the Federal Trade Commission
found that debt sold off by creditors frequently lacked supporting
documents to verify the amount was correct -- or the debt was even
Credit card companies know when a default happens and can sue
immediately if they believe they have a case, Longo said,
eliminating any concerns about the debt clock running out. "People
think if they fall behind on a bill, it's going to pop up right
away," he said.
A creditor that obtains a court judgment generally has a lengthy
period to collect on it, said Rossman, enhancing their protection.
The collection period in Massachusetts, for example, is 20
"Over a period of time records disappear, witnesses disappear,"
he said. "Once you have a claim, you can't just sit on it figuring
the defendant won't be able to defend it."
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