When is an auto loan too old to be collected?

Clock on money
There is a time limit for auto loan debts on when they can no longer be legally collected.

Debt collectors and lenders cannot sue a borrower once the financing in question has been statute-barred. A statute of limitations is the deadline for filing a lawsuit.

But it can be difficult for borrowers to rid themselves of the burden. The time it takes for a debt to become statute-barred depends on the type of debt and the state in which it originated.

Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling, said that due to the varying statue regulations “making a blanket answer [is] difficult.”

Cunningham said people often get this confused with how long a collection can show on the report, which is not the same, although just as difficult to figure out.

The time for statute-barred debts is measured from when the last payment was made towards a debt, when a debt was acknowledged in writing, or when a lender contacted the borrower and/or took action about the debt.

In the case of an auto loan, most lenders will try to collect the payments owed, repossess the vehicle, or turn the case over to a debt collection agency.

David Leibowitz, founder and managing member of Illinois-based law firm, Lakelaw, said time-barred debt is often referred to as zombie debt because “it somehow springs back to life.”

Leibowitz said statutes of limitations are affirmative defenses.

“If the defendant does not raise them, then the defense is waived,” he said.

The statute of limitations for credit cards is usually shorter than limitations for other versions of debt such as auto loans.

Leibowitz said debt on a written contract, in Illinois, has a 10-year statute of limitation. Auto loans fall under this category. In the same state, general claims last five years and credit card debts last for four years.

Not all states are as extreme though. For example, in both Texas and California, written contracts on auto loans have a four year limitation.

But there is a loophole that creditors take to renew their time to collect the debts.

“Once a debtor pays even a small payment on an otherwise time barred debt, then the statute of limitation is revived and starts all over again,” he said. “Debt collectors often try to ‘refresh’ stale debt by getting a consumer to pay even a small payment on it.”

In addition to statute of limitations, Leibowitz warns of auto loan collection deficiency rules.

When auto loans are not paid on time, lenders auction the car off to try to reclaim their lost profit. What is received at auction is deducted from what is still owed on the auto loan. This becomes the deficiency balance. These balances are often sold to debt buyers, then collectors, which can be later used in a judgment against a borrower.

Deficiency balances are yet another area of debt that needs to be considered when auto loan payments are not met, further complicating the auto lending industry.

“Because cars are so pervasive to our society, most states have statutes for cars,” Leibowitz said.

Since each state varies, it is best for borrowers to check a state’s government website for up-to-date limitations.

If that poses a difficulty, it is best to seek legal counsel to navigate the complicated rules. Leibowitz said that statute of limitations, state-by-state, are available but that consumers should get specific details from a local lawyer due to the potential for differing claims.

“A retail installment sale contract for automobiles may have a different statute of limitation since it is governed typically by the automobile or motor vehicle code in each state — and each state is different,” he said. “This is not an area of uniform law.”