CAN I COLLECT MY COMPANY’S DEBT IF IT IS MORE THAN FOUR YEARS OLD?
It is possible to attempt to collect a debt in some cases even if the debt is more than four years old. The concept of a statutes of limitations, as arcane as those words sound, is familiar to most people. The phrase just means how long before the right to sue expires.
This concept has existed as least as far back as the 13th century. The English cleric and jurist, Henry of Bracton, wrote De Legibus et Consuetudinibus Angliae (“On the Laws and Customs of England”) in 1250. This treatise dealt with the whether the king or the sovereign entity could enforce certain rights beyond the normal statute of limitations that would apply to the average citizen. He concluded that the king was not subject to the same limitations as the commoner and was entitled to sue many years after the statute had expired. His writings on the law were revolutionary at the time and set the foundation for legal writing for the centuries to come.
For the business owner today, the intricacies of English law are not important. Let’s leave that to the law professors. What he or she cares about is whether they can still collect the funds they worked so hard for. Obviously, the earlier the creditor tries to collect her funds, the better off she is. Studies show that the percentage of successful collection drops dramatically over time as the months and certainly the years pass beyond the original due date. However, we all have situations where things fall by the wayside and we direct our attention elsewhere. The file sits on the office manager’s desk with no successful results for months and then before you know it, years have passed.
There are two main types of cases that have statute of limitations. While there are many complexities, these can be summarized as follows: the first is related
to physical actions by an individual which harm another, called torts. The second relates to failures by an individual to live up to their obligations under a written agreement, called a breach of contract. Most states have different laws that apply to each of these types of legal matters. For our purposes, we are discussing the statutes of limitations relating to breach of contract. Within this subject, there are two main areas: 1) Open, oral or unwritten agreements; and 2) written contracts. There is a third category that is a subset of written contracts, that of promissory notes, typically to a banking institution.
In the United States, the variation between the states is almost shocking. Some states allow only 3 years to sue a debtor after he breaches a written contract. Other states allow FIVE times that long-in those states the limit is an amazing fifteen years. My personal opinion is that if a creditor waits fifteen years that is really just too long because, in most cases, the evidence will be gone. Witnesses disappear or if they can be found, forget. Even banks only have to keep records for 7 years. The creditor will not be able to obtain the records he needs from other businesses or experts and the debtor will not be able to prove he paid or not for the same reason. Kentucky amazingly allows 15 years to sue on a breach of a promissory note. In a testament to how quirky legislatures can be, the same state senators and representatives in Kentucky who passed the 15 year rule for promissory notes put in place a 1 year limit on being able to sue for bodily injury. Louisiana also adopted this extremely short time frame for suing on injuries caused by another, as did Tennessee. Illinois, Indiana, Iowa, Rhode Island, South Carolina, West Virginia and Wyoming all have 10 year Statute of Limitations for promissory notes.
Another short statute of limitation exists in California, where a creditor only has 2 years to sue for a breach of an oral agreement. There are even shorter statute of limitations in certain situations, for example, the 1 year limit in Kentucky for bodily injury and the one year limit on libel or slander in California. The Fair Debt Collection Practices Act allows only one year to bring certain actions as well. In Texas, where my firm is based, the general limit for filing suit is four years. This four-year rule applies to oral agreements, written agreements, promissory notes, and credit cards. Tort or bodily injury actions are two years typically.
What does this mean to you? If you are reading this blog, someone probably didn’t pay your invoice or invoices. You want to know what you can do about it and how long you have to do something about it. If you have a client or customer who owes your business money based on a written contract or invoice, then typically you have four years in Texas to file a lawsuit against the client or customer. This is generally from the due date on the invoice or agreement. This can be extended in certain situations such as when the customer has not made a payment in a year, but then does make a payment. The act of making a payment in most cases will extend or restart the 4 year statute of limitations. There are many other nuances to these rules that can affect your situation.