The statute of limitations refers to the time period in which a person needs to file a lawsuit. If your creditor or third-party debt buyer does not file a lawsuit against you within the applicable statute of limitations, they will be forever prohibited from doing so. This is true, even if they have all the evidence needed to prove that you owe the debt claimed.
One of the purposes behind the statute of limitations is that creditors and other debt owners should not be able to sit on their hands and take no action when they know (or should know) of their right to money owed. This is particularly true in collection actions where creditors often like to charge interest and other late fees/penalties each month the debt isn’t paid. Without a statute of limitations, creditors and collectors could wait 8 years to sue on what was a $2,000 debt that has now become $5-15,000 due to interest rates and other charges.
So what is the statute of limitations for debt collection suits? In California, the statute of limitations is four (4) years, if the Complaint states a cause(s) of actions for breach of contract, account stated, open account or book account. But be careful; depending on the claim, the statute of limitations begins to run at different times.
BREACH OF CONTRACT
If your lender sues you for breach of contract, the statute of limitations starts to run from the date you defaulted on a payment, unless you become current under the contract and your lender accepts the late payment. For credit card debts where you are sued for breaching the card member agreement, the date of default is typically the date of your first, missed minimum payment.
However, if you make a partial payment after the date of your missed payment, even if it is not enough to cover past due amounts, the statute begins to run from that partial payment. If the creditor can show that you or someone on your behalf made the payment, this will also serve as an acceptance of the debt.
Often times, collectors—and third party debt buyers, in particular—do not have your original card member agreement or contract. For this reason, they often sue for other claims like account stated, as well as open and/or closed book accounts.
For account stated causes of action, the limitations period starts running from the date of the last item in the transaction history between you and the creditor. Though “item” is not defined by statute, it typically refers to the date of the last purchase/charge by you on the account or payment made by you, whichever occurred last.
OPEN / CLOSED BOOK ACCOUNTS
For open and closed book accounts, the statute of limitations begins to run from the date of the last entry.
Book accounts exist where, rather than based on an existing contract, you and the creditor have engaged in a series of financial transactions, the creditor recorded a history of debits and credits on the account, and you still owe money on the account.
For the purposes of the statute of limitations, the term “entry” depends on whether the book account is open or closed.
An open book account is one where, at the time of filing the suit, the creditor still has an open or ongoing financial relationship with the debtor. For example, if your credit card has not yet been closed. The date of last entry for open book accounts is the date of your last payment.
On the other hand, closed book accounts are those where the financial relationship between you and your lender has been terminated due to cancellation of the account when the lawsuit is filed. For closed book account claims, the statute of limitations begins to run from the date the creditor closed the account.
As you can see, the statute of limitations starts running at different times, depending on the type of claim stated. This can get confusing, because creditors like to sue for all of these claims at once in order to see what sticks, and if you will be scared and pay-up. Because the statute of limitations is an absolute bar to recovery for the creditor, you should always hire a qualified debtors’ rights attorney who knows the law if you have been served with a collections lawsuit.
At Fitzgerald & Campbell, our attorneys have decades of experience successfully representing clients against collection claims and all other types of debtor defense cases, and we are here to help you!