Debts on credit cards, mortgages, auto loans, and student loans are all on the rise in Michigan.
Although Michiganders’ total debt levels are still below the national average, this is largely because Michigan residents are more than 25% more likely to file for bankruptcy to clear their debts than residents of other states.
Few people would disagree if we said our state is struggling with a debt crisis.
The fundamental law that governs how these debts are handled is the Michigan Collection Practices Act and the statute of limitations. Both are poorly understood, but extremely important for debtors and creditors.
This article reviews the statute of limitations for debt in Michigan, exactly what debts can be collected by creditors, what protections debtors have, and how bankruptcy is handled for businesses and individuals. There are many legal protections for debtors in Michigan, but contrary to popular belief, creditors also have significant rights to collect their dues under the Michigan Collection Practices Act.
What’s a Statute of Limitations?
In debt, the statute of limitations refers to when the creditor or collector can take legal action against money owed.
Before the expiration of the statute of limitations, you can sue for a judgment. A judgment allows for the involuntary collection of money through wage garnishments and seizures of bank accounts. It also extends the timeline that the creditor can collect the debt.
How Long Can Creditors Debt Collectors Pursue a Debt in Michigan?
It is a misconception that creditors can’t attempt to collect debt beyond the six-year statute of limitations.
Once the statute of limitations expires, you can no longer legally claim the debt, but if you’ve already received a judgment, you can still take collection action to recover the debt.
After entry, a judgment lasts for ten years and is renewable for another ten years. It can take patience and perseverance on the part of the creditor, but recovering money lost on bad debts can make a difference to the bottom line of a business.
Resetting the Debt “Clock”
Certain activities by the debtor can also reset the clock on the statute of limitations. Some of these activities include:
- Use of the account, such as making a new charge to a credit card or revolving debt
- Full or partial payments rendered by the debtor
- The debtor makes or accepts a settlement offer
- Communication from the debtor to the creditor
- Otherwise acknowledging the debt
The beginning of the six-year “count-down” can also change. If payment is never received, the timeline starts from when the contract was entered. If payment is received, in any form, the timeline is typically “renewed” from the date that the last payment was rendered.
There are exceptions to every case, and you should consult a Michigan debt collection attorney to most accurately determine the statute of limitations that apply to your claim.
The Michigan Statute Of Limitations on Debt
According to Michigan law, creditors have up to 6 years to collect on a debt, or to receive a judgment. When a creditor receives a judgment from a court, there is effectively no time limit. They can collect that debt forever so long as they follow the proper legal requirements.
When you successfully receive a judgment, you can pursue various means of collection, including garnishment, indefinitely as long as you renew the judgment every ten years. Keeping the judgment active means the statute of limitations does not apply.
Until a debt goes “dormant,” which means the period for judgment has passed and judgment was not obtained or renewed, the debt can legally be collected through any of the traditional means. Even dormant debts are still sometimes collectible, so long as the Collection Practices Act is abided by.
Creditors may be missing out on recovering significant income if they are not pursuing debt still owed to them.
How the Type of Contract Impacts the Debt Agreement in Michigan
Different contracts, and actions taken on them, affect the time period that a debt is collectible.
These are debts based on a verbal agreement to repay the money, but there is no written agreement to back them up.
Under Michigan law MCL § 440.2201, contracts for the sale of goods above $1,000 must be in writing to be enforceable. For commissions, services, and other types of goods, oral agreements are not bound by the same $1,000 limit.
What is considered “in writing?” That’s often up for debate, and the focus of many legal battles surrounding debt owed to businesses and contractors. Writing that constitutes agreement or understanding of a contract can sometimes be enough to be considered an “agreement,” and contracts are not always necessary.
If you and a debtor sign a contract, even if it’s written on a napkin, it counts as a written contract. What matters is that the loan terms and conditions are in writing.
A written contract must contain the following to be fully enforceable:
- The ability of each party to give consent, such as being over 18, of sound mind, and not under threat or duress
- The contract cannot violate public policy or statutory law
- The terms of the contract, such as the loan amount and the monthly payment
- Documented acceptance of the terms by both parties (usually, signatures)
What Are Promissory Notes?
A promissory note is the most informal written agreement that is considered legally binding. Essentially, it’s only a written promise to pay the money back by a certain time.
Still, that’s often enough to be considered a legally bound debt.
If the collateral is used to secure the loan, that might be included as well. Essentially, this is a formal “IOU.”
Auto loans, mortgage accounts, and personal loans might all be promissory notes. Promissory notes are also often used when one private party makes a loan to another party, such as loans between friends or family members.
These accounts have a variable balance that a debtor can pay back and borrow again. A credit card, line of credit, or an in-store credit account are all open-ended accounts.
Can You Sue or Send Someone To Jail for Debt in Michigan?
The Fair Debt Collection Practices Act (FDCPA) is a federal law regulating how creditors can and cannot behave in collecting debts.
Adhering to the FDCPA is crucial for creditors to protect their rights to recover a debt.
These federal laws protect debtors from harassment or abuse from creditors or debt collectors. A similar set of rules under state law applies to debt collectors in Michigan.
Creditors are entitled to sue to obtain a judgment for the money owed to them.
Often, civil actions end with a default judgment. The creditor sues, the debtor fails to respond, and the creditor can then enter a judgment against them. After winning a judgment, the judgment creditor can seize assets, garnish wages, and pursue further legal remedies to track down debtors and enforce the debt collection.
Sometimes, debtors are not compliant. For example, they may be called for a debtor’s exam which requires them to appear in court, or a designated law office, to disclose their assets and income after a judgment has been entered against them.
Should the debtor fail to appear, a bench warrant can be issued for their arrest. An arrest warrant would be based on contempt or failure to appear charges.
A creditor has no right, under the FDCPA, to file criminal charges against a debtor unless a distinct criminal act has been committed.
How Do Different Types of Debt Impact Debt Collection?
Landlords and Property Managers: Rent
A landlord or property manager can claim the amount of the rent due if the tenant has not paid for several months.
In most cases, back rent claims are easy to handle. But what if the breach occurs after the tenant moves out two years into a five-year lease? In Michigan, a commercial lease is viewed as a contract and interpreted as such.
Therefore, the landlord may sue the former tenant in hopes of collecting all rent due, including back rent and future rent.
A landlord claiming contract damages must prove that a tenant’s lease violation caused the damages to claim. There can be confusing and conflicting rules governing commercial leases.
Learn more about Landlord-Tenant Legal Services, or seek assistance in getting back the money you are owed.
Contractors and businesses often experience losses when they can’t collect account receivables from another business or customer. Other times, they cannot recover goods because of a supplier or vendor bankruptcy. Business losses are fully collectible debts, and can include:
- One party does not honor its contract with another
- Refusal to pay suppliers
- Rejecting a rightful request for return of goods
- Financial burden to a supplier during a bankruptcy restructuring
- Not seeking permission to change its agreement with its supplier
- Rejecting a prepayment plan with a supplier during bankruptcy
- Assuring that the supplier can perform under its contract during bankruptcy
Business to Business, Loans, and Other Notes
Commercial debt collection often deals with businesses paying each other debts.
The process for collecting commercial debt is less regulated than collecting consumer debt, mainly because businesses are assumed to be more sophisticated than the average consumer.
We believe that swift collection is necessary, with litigation ideally initiated within 30 days of account forwarding since companies form and disappear rapidly.
What Happens If a Debtor Files For Bankruptcy Protection In Michigan?
After a client files bankruptcy, as a creditor, you will receive a notification about what “chapter” of the Bankruptcy Code the case falls under.
For businesses, bankruptcy will be Chapter 7 or Chapter 11, or for certain small businesses, Chapter 5.
With liquidating companies, chapter 7 is more common.
An organization that is trying to reorganize will file for Chapter 11 protection. For individual clients, they may file a Chapter 7 or Chapter 13 case for repayment plans.
Understanding your rights and remedies as a creditor is critical.
Knowing what type of bankruptcy the debtor has filed is vital because you will have different options for each circumstance. Chapter 7 cases do not allow you to recover money for unsecured creditors because you cannot file a proof of claim unless collateral secures your claim. If the debtor is still in possession of its assets in a Chapter 11 case, more options may be available to you.
Consumer debt bankruptcy revolves mostly around a Chapter 7 bankruptcy, and whether that consumer is eligible for debt to be wiped out under Chapter 7.
An experienced attorney can help you improve your chances of recovery for both business or consumer debt by taking strategic steps before and during bankruptcy proceedings.
Get Your Money Back: Michigan Statute of Limitations Can Work For You
If Hanna & Jarbo accepts a past-due or charged-off account, we are very likely to collect it. We have a more than 85% success rate for all the accounts we have under collections.
Our experienced attorneys represent a wide variety of creditors in their pursuit of collections of past-due and other debts.
We often collect the total amount of the past-due balance, plus all associated costs and attorney fees.
The best part of all? We don’t collect a single dollar from your pocket. We only get paid if we get you your money.