Although I most frequently write about mechanics liens, mechanics lien law, and lawsuits to foreclose on mechanics liens, I also have an interest in the law surrounding credit management. This law is different in every state; there are different statutes of limitations, different maximum interest rates lenders can charge, and different licenses parties must obtain. One specific, and interesting, area of credit management law is the law of open accounts.
What is an Open Account?
An open account is an account with an unpaid balance that is kept open with the expectation of future purchases. Anyone with a credit card has an open account: Even though the credit card holder owns the credit card company for purchases they’ve already made but not yet paid for, the credit card company wants to keep the account “open” to encourage the cardholder to make more purchases. An open account, therefore, is the extension of credit from a lender to a lendee.
Credit card accounts are the most common, or at least the most commonly recognized, form of open accounts.
Although credit card accounts are the most common, or at least the most commonly recognized, form of open accounts, open accounts can exist in a variety of contexts. In the construction context, a supplier might extend a subcontractor or contractor credit in the form of a steady stream of supplies that for which the contractor has not yet paid.
There are a few features that unite all open accounts. First, the terms of the open account are a contractual agreement; however, the terms of the agreement may be modified. Second, so long as the account remains open, the lendee does not need further permission from the lender or to provide further security to use more credit. Third, all states have at least some laws governing collections on open accounts.
Features of Open Account Law Across the Country
1. Interest Rates
While not all states have statutes setting forth the interest rates that accrue on unpaid accounts, many states do specify the rates at which lenders in any context may charge interest on an open account. Colorado’s, for example, is set at:
8% per annum compounded annually for all moneys or the value of all property after they are wrongfully withheld or after they become due to the date of payment or to the date judgment is entered, whichever first occurs.
Connecticut, however, is slightly more generous and allows lenders to charge 12% per annum.
As a final note on interest rates, not all states set caps on interest rates. In these states, interest rates on open accounts may be governed by federal law, since state law does not exist.
2. Statutes of Limitations
One of the basic features about any legal dispute is that a party does not have an unlimited period of time in which to file a claim. Whether the claim is for breach of contract, tort, or statutory violation, the law describes different periods of time in between when the events occurred giving rise to the claim and when a party must file a lawsuit based on events.
Statutes of limitations similarly exist in nearly all states for lawsuits to recover debts on unpaid accounts
Statutes of limitations similarly exist in nearly all states for lawsuits to recover debts on unpaid accounts. In Florida, a lender has four years to file an action on a “contract, obligation, or liability not founded on a written instrument” such as an open account. Georgia similarly specifies that all actions on open accounts must be brought within four years. In Illinois, a lender has five years. In Delaware, however, a party must file an action to recover damages under an open account debt within three years.
Delaware, additionally, is one of the few states that provides citizens with an actual legal definition of when the statute of limitations clock starts ticking. Under that state’s law, the statute of limitation begins to run as soon as the account ceases to be “open.” In real-life terms, the date on which a party is supposed to have voided their debts but doesn’t is the day the clock starts ticking for the lender to sue to recover those debts. If the lender doesn’t sue, in Delaware at least, within three years of the debt becoming due for payment, the ability to sue to recover that debt is extinguished.
3. Attorney Fees
While most states do not specify whether a party can recover attorney fees in a lawsuit to recover unpaid debts on an open account, some states incorporate that issue into more general statutes. For example, Georgia specifies that although costs of litigation (attorney fees) may not be included in damages, a good faith motion for attorney fees may be granted by the jury.
Idaho is one of the few states that discusses attorney fees specifically in open account actions
Idaho is one of the few states that discusses attorney fees specifically in open account actions. In that state, the “prevailing party” may recover “reasonable attorney’s fees set by the court.”
4. Assignment of Open Account Debts
Some states specify whether a lender in an open account may assign the sums of money due on that account. For example, Iowa simply states that “an open account of sums of money due on contract may be assigned.” If such an assignment occurs in Iowa, the assignee may file in his own name to sue to foreclose on the open account’s debts. In Florida, assignees may force any person who is in possession of property or assets that are due to satisfy the open account debts to turn over those assets to the assignee or the assignee’s representative.
5. Other Features of Open Account Statutes
As I mentioned earlier, each state varies wildly in terms of the quantity and specificity of the state’s open account law. Kansas, for example, has an extensive section on what requirements the lender must satisfy in order to change the terms of an open account. Louisiana law specifies that open accounts may exist for debts on services as well, such as legal and medical services. Maine law mandates that although a party may not specify which items are contained in the open account that party must be able to provide such a list, if requested, within five days of the request. Ohio law contains statutory limits; if the balance on an open account is less than $15,000 in that state, than the claimant may sue in county court.
Since each state has its own completely unique set of statutes related to open accounts, any person that requires more information on how an open account is defined in a particular state, when the statute of limitations starts ticking and for how long it runs, and what sort of interest can be charged upon the balance in an open account, should consult the relevant state’s own current law.
Each state has its own completely unique set of statutes related to open accounts.
While many states share common threads between their open account statutes, it’s also extremely important to investigate whether a state adds additional requirements on open accounts or lawsuits relating to them.