How To Avoid the Statute of Limitations In Collections

In New Jersey, the Statute of Limitations is generally 4 years to collect for a sale of goods and 6 years for services.  Yet missing it should never be an issue.  This article will discuss how to avoid the SOL pitfall in accounts receivable collections.

Make Early Decisions About Whether To Sue 

No collection case ever sneaks up on you.  The truth is you’ll know early on if you need a lawsuit. 

Once a customer’s a few weeks late, you should nip it in the bud.  Reach out to the customer and try to resolve the matter.  Maybe it’ll lead to payment or settlement.  But if not, the decision to sue should occur within weeks, not years after the customer fails to pay you.

Apply Payments To The Oldest Charges

Through your sales terms, you can specify that payments received will apply to the oldest open charges, not necessarily to the invoices your customer intended.  This aids collections by paying off the charges already affected or most threatened by the SOL.

Apply Payments To Open Accounts 

An open (or running) account refers to a running tab where the customer never pays off what it owes, but makes payments here and there to lower its balance while it continues to incur charges.

The “open account doctrine” provides that if a customer intends a payment to reduce its overall balance, it will restart the clock on the whole balance, including charges outside the SOL.  It’s really just an extension of the general principle that partial payments, with an indication of intent to pay the rest, will restart the SOL on a given debt.

However, the customer must indicate this intent, otherwise there’s no presumption that it’s paying down a larger debt. So when you have a running account, ask the customer to confirm you’re applying payment against its total balance.  Then paper it with an email.  Doing so will restart the clock on all the charges in the account, including the older ones.

While it’s important to know what the SOL is on your receivables, it should never be an issue in practice. Making early litigation decisions and applying payments smartly will eliminate the practical impact of the Statute of Limitations.

For more information on accounts receivable collections, or if you’d like to discuss a specific collection issue, call me at 856-667-1669 or contact me here.

This material is for informational purposes only and should not be construed as legal advice.  No person should rely on this information without seeking the advice of an attorney.