What is California’s Statute of Limitations for Debt?
As we mentioned previously, the statute of limitations plays an important role in determining the time period after which a creditor or lender must stop trying to collect on a debt and/or sue you in court in order to collect.
Unlike other states which have a single time limit for all types of causes of action (including suits on written contracts), California imposes different time limits for filing lawsuits upon different forms of debt. In essence, California divides it debts into three categories:
- Written Contracts
- Oral Contracts
- Open Book Account
The time period (or "Statute of Limitations") for each of these types of debts means that once that period expires, the creditor’s or lender’s right to sue to collect on that debt becomes time-barred and that creditor/lender is unable to collect upon the debt through a civil suit .
In the case of California, the Statutes of Limitations for a suit on these various forms of debt are as follows:
- Written Contracts: 4 years from the date of breach;
- Oral Contracts: 2 years from the date of breach; and
- Open Book Account: 4 years from the date of breach.
As a result it is important to note the date of breach, since that determines the date upon which the time period for collection of a debt begins to run and the statute of limitations expires.
The Importance of California’s Statute of Limitations When Collecting on Debt
The significance of the statute of limitations is plainly apparent when a creditor files a debt collection lawsuit on a debt, or when a consumer receives a 10-day notice of an impending debt collection lawsuit from a creditor.
For consumers, the statute of limitations, combined with the sometimes elaborate rules governing the expiration of the statute without the filing of a lawsuit or the commencement of a formal action, can mean that a debt is arbitrarily wiped out through the creditor’s failure to take the necessary legal action within the time limit. At most, a creditor may only recover on those debts for which a lawsuit was timely commenced. The limits imposed by the statute of limitations have likely prevented numerous debt collection lawsuits against individual citizens in California, and perhaps some individuals from being erroneously arrested.
The statute of limitations also has significant implications for creditors who assume that old debts that have not been taken to judgment in court can still be recovered easily. Often, debtors are able to file pleadings free of cost, and are somewhat difficult to locate. Sometimes the initial collection action is abandoned by creditors without prejudice if the debtor appears in court and the creditor is faced with an attorney for the debtor. In any event, old debts often mean records that are misplaced or discarded, and witnesses to the transactions are more difficult to contact.
Different Types of Debt Subject to California Law Statute of Limitations
The statute of limitations that California imposes on debt collection lawsuits, and therefore on debts in general, covers a wide variety of consumer-oriented contracts and financial agreements. One of the most common types of debt that debt collection law offices in California handle are credit card debt, incurred for both business and personal purposes. Typically, if a credit card is used for personal purchases, the obligation on the account falls under Code of Civil Procedure Section 337(a), whereas if the credit card is used by an individual for a business purpose, then the obligation likely falls under Section 337(1). The reason for the distinction is because of the longer statute of limitations on written contracts than the statute of limitations on essentially verbal contracts or contracts which are implied from the conduct of the parties.
Other types of debts which might be affected by the statute of limitations include personal loans between friends and family members, loan agreements with auto dealers and banks for auto loans, mortgages and home equity lines of credit, and possibly other personal loans such as for school tuition or medical bills. For loans between friends and family, while some may be based in a verbal agreement with a vague understanding of terms, many are likely documented by a written agreement. As a result, there is some uncertainty as to the statute of limitations on a personal loan, without knowing any of the specific factual details of that agreement. Unless the personal loan falls within Code of Civil Procedure Section 339(1), which is a statute of limitations on oral agreements, the applicable statute of limitations is likely four years.
For personally guaranteed commercial debt, the applicable statute of limitations depends on the type of commercial debt. If the debt is secured by a written agreement, such as a formal business loan with a large financial institution, the statute of limitations is four years and will be governed by Code of Civil Procedure Section 337(1). If, however, the debt for the business loan was not secured by a formal agreement, the statute of limitations may be only two years and should be governed by Code of Civil Procedure Section 339(1) (implied or unwritten contracts). Other possible types of business debt might include business credit cards, bank loans secured by an unsecured agreement, loans for machinery or other equipment, and even loans for inventory.
California’s Statute of Limitations on Debt Exceptions
Exceptions To The Statute Of Limitations On Debt Collection
In some cases, a paused statute of limitations may work to extend or reset the time limit for filing a debt collection lawsuit. A pause occurs in the following situations: If you sign an acknowledgment of a debt before the statute of limitations runs out, the courts will look at that acknowledgment and determine that you understand the amount you owe on a debt. In this case, the statute of limitations starts again as of the date of your written acknowledgment. There is no specific wording required on the acknowledgment. A challenge to a lawsuit may also reset the statute of limitations. If a creditor files a legal action against you, how you respond may affect the statute of limitations. If you resolve the creditor’s lawsuit by defending it in court, the courts may allow the statute of limitations to restart. Another way a defense could affect the statute of limitations resetting is if you counter-claim against a creditor. If you make a partial payment on an open debt, the statute of limitations may reset in most situations. As of the date of the payment, the statute of limitations on the entire balance will start over. Some states have exceptions to this rule, allowing the statute of limitations to remain unchanged if the creditor accepts a partial payment. Making a partial payment on a previously charged-off debt may also restart the statute of limitations. If the creditor provides documentation, such as a Notice of Fees or the Terms of a Payment Arrangements, the statute of limitations will start over. If a creditor agrees to forbearance for your debt then the statute of limitations may run out. The statute of limitations may also run out if you enter into a repayment plan (forbearance agreement) and you end up defaulting on your payments. When you sign the forbearance agreement, the creditor may extend the statute of limitations. In this case, a creditor cannot generally pursue collection on the debt during the statutory period. After the statute of limitations time-frame for filing a lawsuit on your debt ends, the creditor cannot sue you. Although there are exceptions to the statutes of limitations, a creditor cannot take action toward a debt while the statute of limitations is in effect. All creditors must follow the statute of limitations. This means that creditors can’t take legal action for at least a certain period of time. The creditor can’t sue the debtor for an amount they don’t owe. A creditor can’t contact a consumer if a certain amount of time has gone by without contacting the debt. In addition, creditors can’t take a consumer to court regarding a debt that is past time. The consumer does not have to repay the debt amount. The creditor must comply with these laws.
The Consequences of Ignoring California’s Statute of Limitations
Both debtors and creditors can face significant legal and financial repercussions for pushing forward on a debt or an unpaid balance after the statute of limitations has passed. Arguments that the statute of limitations no longer applies or has been tolled can be put forth to continue attempting to collect on a non-enforceable debt . For debtors, this means an inability to avoid further financial hardship related to repaying the debt. For creditors, if enforcement of the debt is not possible, the added costs of litigating such collection attempts can be significant.
How to Figure Out Whether Your Debt is Time-Barred Under California Law
Determining the Amount of Time Version: Creditors
The statute of limitations does not start over every time one pays or acknowledges the debt. A payment or acknowledgment resets the statute of limitations clock for unpaid debts only in limited circumstances. A payment must be substantial. Writing "payment made under protest" or "payment made to avoid further collection action" on the check is not a substantial payment. The general rule in California is that one must pay the whole amount owed to the creditor. The exception to this is if the creditor has accepted the partial payment and has agreed that the full amount will not be paid. This can sometimes be implied from the actions of both parties. In addition, small payments may be substantial due to the importance of the debt.
An acknowledgment is an admission of the debt. An express acknowledgment is an admission by a debtor made after the statutory period expires. A debtor’s express agreement to payment terms on a collection letter may be an acknowledgment. It is recommended that one seek a legal opinion as to whether a debt is timely.
Consumers
A consumer should review their credit report periodically to check if any debts are still being shown that have expired under the statute of limitations. If a debt is being reported that has expired, the consumer should ask the reporting agency to remove the debt.
When speaking with creditors, a consumer should mention the statute of limitations. If they are willing to listen, the consumer can explain that California has set a time limit on creditor’s rights for that type of debt. If the creditor refuses, or the consumer believes the creditor is not being honest about the amount of the debt, the consumer should consult a lawyer. In no case should a consumer agree to pay any money before consulting an attorney. Doing so may extend the time period for the statute of limitations.
Creditors
California is a progressive state when it comes to the creditor’s right to collect a debt after a certain period of time. The creditor can seek repayment through other means after the statute of limitations has passed. If the debt is not repaid voluntarily, the creditor cannot force the debtor to pay it.
A creditor can still collect on a debt that has expired. If the creditor believes it can get payment voluntarily, then the creditor can sue to obtain a judgment against the debtor. The statute of limitations will be determined by the date that the debt was incurred, not when the creditor brings the case. It is therefore important to keep track of when debts were incurred.
Legal Remedies Available for Time Barred Debt
A creditor seeking to collect on an expired debt may not, if the statute of limitations has run, sue to collect and obtain a judgment on that debt. Should the creditor attempt to do so anyway, the debtor will be able to raise the statute of limitations as an affirmative defense. If the creditor is able to obtain a judgment, the debtor will be able to set it aside. The debtor must raise the statute of limitations as an affirmative defense by including the defense in their answer to the creditor’s complaint within four months of filing their answer and must expressly set out the statute being relied upon. If the creditor has obtained a judgment on a time-barred debt, the debtor will have to ask the court that issued the judgment to set it aside within 2 years of the entry of judgment. In both cases, it is important that the debtor act quickly in order to avoid the risk of waiver that can be associated with lapse of time.
A creditor seeking to collect on an expired debt may, however, sue to collect and obtain a judgment on the debt if the debtor acknowledges owing the debt or makes, while the statute is still running, a part payment on the debt. A debtor will be deemed to have acknowledged the debt if the debtor admits the debt in writing, brings up the debt in response to a request for information unrelated to the debt, or otherwise acknowledges the debt in writing. A debtor will be deemed to have made a part payment on the debt if the debtor makes, while the statute is running, a written acknowledgement of the debt or a partial payment on the debt.
Actions Consumers Can Take
One way in which consumers can protect themselves is to keep careful track of their debt – dates and amounts – and how often they hear from debt collectors. There are a number of ways for consumers to use the internet to search for company and contact information for debt collectors; some are listed in Step 1 of the previous section. It is advisable that as soon as consumers have a belief that there is a potential problem with a debt, they should make telephone calls to the creditor or the debt collector to request the information about the alleged debt. If they are not satisfied with the response or promises made, or sense that the information may not be as promised, they should start recording calls. Phone records can be extremely important in accuracy and content when piecing together the full story. They should also follow up by sending letters to the creditor and/or the debt collector and request that they return the credit reporting score(s) – these can often be obtained for free if you are trying to reconcile an account, but only if by contacting the creditors directly . If there still appears to be a problem, send a letter demanding verification of the alleged debt. A template letter for this purpose can be downloaded here. Any information/debt sent should be verified by method of obtaining a credit report and/or by checking back with his/her original creditors for the account. For a sample letter demanding verification of the debt click here. It is then in the debt collector’s hands. They must supply verification within 30 days, or they can not collect on the debt. Even when they do, as in the case of a verification that the consumer owes the same sum of money, they still cannot collect if the time has passed under the statutes of limitations. In California, this period is four years for credit cards and 6 years for promissory notes and court judgments (CCP §337, CCP §337 6, CCP §683). Follow up with the creditor and/or the debt collector by written letter to let them know that you expect them to cease all attempts at collection (telephone calls, letters, emails), and remind them that they cannot do so after the statute of limitations has passed. A sample letter can be downloaded here.