A statute of limitations is a law that prevents a creditor from pursuing a cause of action, such as debt collection, if the creditor waits too long to file a lawsuit against the borrower. In Texas, the statute of limitations for many types of debt is four years. Basically, after a borrower stops making payments to a creditor for a debt, a clock starts ticking. Once four years has passed since the last payment to the creditor, the statute of limitations has run, and the borrower is no longer liable to the creditor for the debt. If they do file a lawsuit then the borrower can assert the statute of limitations as a defense to the suit. However, if the borrower makes any payments during the four year time period then the clock starts over. Making a payment after the four years has passed can also create liability for the debt.
This creates an interesting scenario in Chapter 13 bankruptcy cases. These types of cases can last up to five years. During that time period creditors are unable to collect from the borrower due to the bankruptcy automatic stay. At first glance this seems to put the creditors at a disadvantage when one considers the statute of limitations. A borrower could file Chapter 13 bankruptcy, stay in the case for four years, allow it to dismiss, and then assert the statute of limitations. However, legal proceedings that prevent collection of debt, such as the automatic stay in a bankruptcy case, toll the running of the statute of limitations on debt collection. Basically, the clock stops ticking while the stay is in place and starts ticking again at the time of the dismissal. As a result, you cannot file bankruptcy simply to delay collection proceedings while you wait for the statute of limitations to run.