Month: October 2009

The Statute of Limitations for collecting a debt is the period of time for a creditor to use the courts to force a debtor to pay an obligation. The Statute of limitations is a sort of an expiration date on debt collection. .

This period of time to legally collect a debt varies from State to State. It also varies depending on whether it is a written or an oral agreement. The Statute of limitations on oral debts, for example, in California is 2 years, in New York is 6 years while in Nevada is 4 years. On the other hand, for written obligations, the statute in California is 4 years, 6 years in New York, and, also 6 years in Nevada.   

So, why would you be interested in the statute of limitations?        

Not too long ago, it was mostly people who had failed to pay their debts who were interested in knowing about the legal limitations on old debt collections. If you are in this category, you would be interested to know what the statute of limitations are in your state so you have a legal defense in case of debt collection. Likewise, if you were a creditor, you would also like to know what the statute is so you can legally sue in court and try to collect before the statute runs out.  

There is, however, also a certain category of people who may benefit from the statute of limitations even though they may not owe a debt. Nowadays, it is not unusual for debts to get sold from one company to another; and, from one collection agency to the next.  These debts, which are sold from one company to another, may not be so accurate and records of payments may not have been recorded or may no longer be complete.  

Maria, for example, got a call from a collection agency that bought old debts from a company that had closed.  Maria was unable to pay that debt initially and it was sent for collection. She was eventually able to pay it off after a period of time.  For one reason or another, however, her records with the company were never updated. Her debt got sold to a collection agency that is now trying to collect those old debts. She has since lost all her records regarding this account.  If she were covered by the statute of limitations, even if she no longer has a record of her payments, those old debts can no longer be collected from her.

Another example is Pedro who had his credit card stolen which was used to make purchases at a store costing about $900. The credit card company removed the charge and reissued him a new credit card. However, the store had turned over the debt to a collection agency that is now trying to collect from after a couple of years had passed by. Of course, Pedro can dispute the debt and show but that his card was stolen, but it would just be a lot easier and need less legwork and paperwork to claim a defense from collection by alleging the statute of limitations.           

So, if a creditor comes to you with an old debt and you are not aware of the debt or are unsure if the debt is still valid, do not pay agree to anything. You need to verify that it is indeed a debt you owe and you are aware of the statute of limitations in your state. A debt that has expired can be revived if you make any payment, even a very minimal payment, and open the door for the creditor to seek judgment against you for the full amount.

Some people may also confuse the statute of limitations on credit reporting (7 to 10 years) with the statute of limitations for enforcing a debt. They are NOT.  Thus, a creditor may no longer be able to enforce a judgment against a debtor in court after the statute of limitations has run out. However, the unpaid obligation may still remain in debtor’s credit history for a 7 to 10 year period.

(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old.  Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com.)

Our office received the following email:  

“What is the best action to take with an upside-down house? My wife and I bought a house in Vegas and plan on retiring there early. We are in our mid 50s. It is a second home or vacation house for us. We own a house in the Southern California area. We are seriously considering letting go of our second house in Vegas due to our low interest only payment will expire in June of 1010 and the house is almost 60% less than the original price.

What if we decide to stop payment on the house and just let it go? What will be the consequences for this action? Can we be sued by the lender? What other options do we have?     

If the homeowner abandons the house and the lender then sells the property in a foreclosure sale for less than the loan amount, there arises the possibility of a “deficiency” judgment against the homeowner. Rules regarding deficiency judgments differ from State to State; hence, individuals in the same situation may have different options or consequences depending on which State their property is located. In.  For the State of Nevada, however, lenders do have the right to a deficiency judgment. Thus, abandoning you house may not necessarily clear you of all liability.

The good news for this homeowner, however, is that not all lenders may decide to sue the homeowner for a deficiency judgment. Some lenders do. Some lenders don’t.  Some lenders may decide not to come after you with a deficiency judgment as they may decide that additional expense of collecting the deficiency from a homeowner would not be justified by what, if any, they would be able to collect from the homeowner.

The bad news, however, is that even when the lender decides not to enforce a deficiency judgment the homeowner may still not be completely free from liability. In these deficiency cases, the lender may instead issue the homeowner an IRS form 1099 for the deficiency.  This means that the deficiency was considered as a “loss” by the lender but is to be considered as an “income” to the homeowner. The net result is that you will now have a taxable income that you will owe Uncle Sam. This may not sound fair as you got nothing out of the transaction, but that is indeed a taxable income under IRS rules.    

To be completely relieved of liability, the filing of a bankruptcy petition may or may not be an option depending on the equity the homeowner has on his primary home in Southern California, the homeowner’s family income, his other assets (if any) and other financial factors.  Other than that, the homeowner may be stuck with a deficiency judgment or a tax bill. Neither one sounds like a nice result.  

Readers should, however, be aware that deficiency judgment rules differ from State to State. In California, for example, extra judicial foreclosure of properties (which is the faster and preferred way to foreclose by most lenders) does not give rise to a deficiency judgment.  Likewise, the facts given by our homeowner refers to a second home (and, not a primary home).  Taxation rules may differ when a primary home is involved as the Mortgage Forgiveness Debt Relief Act (valid until 2012) makes foreclosure deficiency non-taxable as regards purchase money loans on primary homes.  

(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old.  Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com.)