What is statute-barred debt?

When you borrow money, you know you're responsible for making sure it gets repaid - but did you know that you're not the only one? Your lender also has a responsibility to make sure it doesn't get forgotten.

Two phrases you'll hear a lot if you look into this are 'statute-barred debt' and 'The Limitation Act 1980'. So what do they mean? And how might they apply to you?

What does 'statute-barred debt' actually mean?

'If a lender allows time to pass without receiving any payment an action for recovery may become barred.'
HM Revenue & Customs

Basically, if a lender doesn't contact you about the money you owe them - and you don't make any payments or contact them about it either - the debt may become unenforceable, meaning the lender is no longer allowed to do anything to try and recover the money.

If a borrower simply ignores their lender's phone calls and letters, that won't qualify. It's only possible for a debt to become unenforceable if the lender doesn't do anything about the debt and the borrower doesn't pay some of it off / contact the lender about it.

It's all in the Limitation Act 1980, which lays down the rules about when a debt can be considered 'statute barred'.

How long does it take before a debt is statute barred?

If you've taken on some kind of unsecured debt, the limit will be 6 years, but this increases to 12 years for a mortgage or secured loan.

However, that time limit will 'reset' if you make a payment towards that debt or if you acknowledge in writing that you owe the money.

Once a debt has become statute barred, lenders aren't allowed to 'push' for payments if you've already cited the Limitation Act and 'disputed' the debt. They're also not allowed to tell you the debt is legally recoverable if it isn't.

So a borrower would need to show the OFT that a debt collector has 'threatened legal action' or 'continued to press for payment after debtor has stated they will not be paying because debt is statute barred'.

A few points about statute-barred debts

The rules are different for different types of debt. We've already mentioned that the Statute of Limitations doesn't come into effect for 6 years for unsecured debts and 12 years for mortgages / secured loans. What about other money you owe?

VAT / Income Tax . If you owe money to HMRC, there's no time limit.

Council Tax . As with unsecured debts, Council Tax debts fall into the '6 year' category. If more than 6 years have passed since anything happened with the debt, the council won't be able to apply for a Liability Order, which would let it take the debt out of someone's wages / benefits.

CCJ (County Court Judgment) . If the court grants permission, a CCJ debt can still be enforceable if more than 6 years have passed. But if the CCJ itself was granted after the debt had become statute barred, the borrower can ask the court to set it aside.

It's a complicated subject, so if you're wondering whether anything here could help you, it's vital you get some professional advice before you jump to any conclusions.

Image © iStockPhotos / Lane Erickson

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