A promissory note is the legal agreement between a debtor and creditor which outlines, in writing, the amount loaned and the amount of time that the debtor or payee will have to repay the loan.
Recently on our bankruptcy forum a debtor asked, “We signed a promissory note with a private lender and the note had a specific maturity date. We failed to meet the terms of the loan agreement, but we never heard from the lender. We expected them to send a demand letter but it has been eight years and we have not heard from the lender. Are they legally able to come back to us and collect the debt after all of this time?”
Statute of limitations for debt collections
State laws, referred to as the statute of limitations; determine the amount of time creditors have to collect debts owed to them. For more information about your states laws you will need to review the statutes of your state. In general, however, the statute of limitations for debt collection is between three to ten years, but it can vary for different types of debt.
Unfortunately, it may not be as simple as determining the statute of limitations. For example, you may also need to determine whether the debt was a promissory note, a credit account (which can be closed-end or open-end), or a written contract. All of these factors are important for determining the statute of limitations.
For example, an open-end account, which can include a credit card which allows you “revolving credit,” can have a longer statute of limitations than a close-end account, such as a home mortgage or car loan.
What to do if the statute of limitations has expired but the creditor sues?
If your creditor does try to file a lawsuit after the statute of limitations has expired, you can raise this as a defense against the lawsuit. If you prove the statute of limitations has expired you will not have to repay the debt. You must, however, respond to the lawsuit.
Must I pay a debt that’s considered time-barred?
Whether or not your lender tries to sue, however, if your debt is past the statute of limitations, you have several options.
- Choose not to repay the debt.
If the statute of limitations has passed you do not legally have to repay the debt, and the creditor cannot sue you. This does not mean, however, that your credit score will not be lowered for non-payment. It may also be more difficult to get a competitive interest rate for future loans.
- Choose to repay part of the debt.
The second option is to repay part of the debt. Prior to making any type of partial debt payments, however, it’s important to understand that this may restart or revive the debt, which means the statute of limitations is restarted. In some states it may also allow the creditor to can sue you to collect all of the debt. Do not make partial debt payments on old debts without understanding the consequences.
- Choose to repay all of the debt.
Some debtors may also choose to repay the debt in full, despite the fact the creditor has not come to collect. Many individuals view a loan agreement as a commitment, something they value. Just because a creditor does not come after you this may not eliminate your moral responsibility to pay debts you have agreed to pay.
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