Published March 25, 2013
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 2010.
Expiring debt should lift a burden from millions of families: Nearly 15% 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 limitation.
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 different rates.
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 repayment.
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 Center.
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 Cuccinelli 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 based.
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 determination.
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 Commissionfound that debt sold off by creditors frequently lacked supporting documents to verify the amount was correct -- or the debt was even genuine.
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 years.
"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."
See related: Wage garnishment: How it works, how to avoid it, Know your rights under the Fair Debt Collection Practices Act, Debt collection sample letters, 11 tips for dealing with debt collection, collectors