Glossary
Statute of Limitations
A statute of limitations is a law setting the maximum time a creditor has to file a lawsuit to collect a debt, after which the debtor can usually have the claim dismissed.
Every state has statutes of limitations that limit how long a creditor can wait before suing. Once the period runs, the debtor can raise the statute as a defense and usually defeat the claim, even if the money is still owed. The clock generally starts when the claim accrues, which for an unpaid invoice is often the date payment was due or the date of the last payment, depending on the state and the type of claim.
The length of the period depends on the state and the type of claim. Written contracts, oral contracts, open accounts, promissory notes, and claims on guarantees can each have different periods. For sales of goods, many states follow Article 2 of the Uniform Commercial Code, which generally sets a four-year period and allows parties to shorten it by agreement to no less than one year. Contract clauses choosing another state's law can also affect which period applies. Because of these variables, creditors should confirm the deadline for a specific claim with counsel.
Some events can restart or extend the period. In many states a partial payment or a written acknowledgment of the debt restarts the clock, although some states require the acknowledgment to be in writing and signed. For example, a fictional concrete supplier, Granite Mix Co., has an unpaid $15,000 account from four years ago. The customer signed a letter acknowledging the balance two years ago. Depending on the governing state's law, that letter may mean Granite Mix still has time to sue.
The statute of limitations matters to a creditor because waiting too long can turn a valid claim into one that cannot be enforced in court. Old accounts should be reviewed for limitation dates before they are placed, and creditors should not let negotiations drag on past a deadline without either filing suit or getting a written agreement that protects their rights.
Example
Granite Mix Co.'s $15,000 claim is four years old, but the customer signed a written acknowledgment two years ago. Under many states' rules, that may restart the limitation period.