Statutes of limitations for debt are often misunderstood. It is common for people to mix together the timelines for charging off a debt, the credit report reporting period for delinquent debt, and a state’s statute of limitations into one concept. My answer here will describe each of these, with a focus on California’s statute of limitations rules. Let us start with the statute of limitations.
Statute of Limitations For Debt in General
When a borrower fails to repay a debt, this is considered a breach of contract. A contract can be written or spoken. A breach of contract may give the harmed party a cause of action, which is a legal reason to file a lawsuit against the other party.
A statute of limitations for contract breach is, at its heart, a state's policy decision. It is an attempt by the state legislature to set the amount of time people and organizations in that state have to use the courts to resolve contract breaches. Some legislatures like Ohio set long statutes of limitations, and others like California, set short limits.
A statute of limitations for debt is an affirmative defense a defendant can use if the time for filing an action (a lawsuit) has exceeded what the state allows. In all but a few states, the passing of a statute of limitations does not prevent a plaintiff (a collection agent or original creditor) from filing an action. If the statute of limitations has passed, the defendant (the debtor or consumer) must raise this defense before the conclusion of the trial. The court will dismiss the case if it accepts the statute of limitations defense.
A statute of limitations for debt does not:
- Prevent the filing of a lawsuit (in most states)
- Set how long a debt can appear on a credit report
- Allow you to ignore a court’s summons
- Bar collection agents from attempting the collect the debt (except in Wisconsin and North Carolina)
If you determine your state’s statute of limitations for breach of contract has passed, the likelihood of the creditor attempting to file an action to enforce the debt is low. A creditor filing an action indicates either he or she believes the statute of limitations has not expired, or he or she believes the defendant will not raise this defense.
California Statute of Limitation for a Contract
According to California Code of Civil Procedure § 337(1), the statute of limitations for a written contract is four years. Under § 339(1), the limit for an oral contract is two years. See the Bills.com resource Collection Laws and the Statute of Limitations for the rules in other states. See also How to Tell Which Statute of Limitations Applies to Your Situation.
The California statute of limitations does not apply to a collection agent telephoning or sending letters in an attempt to collect a debt. Under California law, the passing of the statute of limitations for a breach of contract relating to a consumer debt does not mean a creditor cannot file an action, or that collection agents are barred from collecting the debt. In California, the statute of limitations is a defense used in a trial only.
California courts allow contracting parties to modify the length of the otherwise applicable California statute of limitations, whether the contract has extended or shortened the limitations period. Extending the length must take place at the time of contract, and cannot be done retroactively.
Clock Starting & Stopping
When does the clock on a statute of limitations for a contract begin to run? In earlier versions of this answer, my writing was unclear on this subject. Under California CCP § 312, “Civil actions, without exception, can only be commenced within the periods prescribed in this title, after the cause of action shall have accrued, unless where, in special cases, a different limitation is prescribed by statute.” What does this mean?
Courts interpret and refine vague statutes. A 1992 case, Spear v. Cal. State Automobile Ass’n, is a recent decision on this matter. The California Supreme Court decided, “A contract cause of action does not accrue until the contract has been breached.” In the 1996 case Angeles Chem. Co. v. Spencer & Jones, the same court decided, “The claim accrues when the plaintiff discovers, or could have discovered through reasonable diligence, the injury and its cause.”
These cases mean that in California, the clock starts when the moment the borrower defaults on their payments. If, for example, a payment is due on June 1 and it does not arrive by that date, the statute of limitations clock starts running on June 2. Similarly, if a payment of — for the sake of argument — $100 is due on July 1 and the borrower pays less than $100, the borrower is in breach of contract at that point.
Tolling & Statutes of Limitations
Tolling stops the statute of limitations clock. These events can toll a statute of limitations in California:
- Defendant absent from the state (CCP § 351)
- The plaintiff was a minor (CCP § 352(a); Family Code § 6500 and 7050(e)(4))
- Plaintiff was mentally disabled or incompetent (CCP § 352(a))
- Plaintiff was incarcerated in prison (CCP § 352.1(a))
- The defendant has a restitution order in place (CCP § 352.5)
- The plaintiff or defendant die (CCP § 366.1 and 366.2)
- State Bar takes over the attorney’s law practice (CCP § 353.1 )
- War prevents access to the court (CCP § 354)
- Bankruptcy, injunction or statutory prohibition (CCP § 356)
- Voluntary agreement between the parties (CCP § 360.5)
- Defendant’s felony conviction (CCP § 340.3(a))
- Military service (50 U.S.C. App. § 526)
- Delayed discovery, when plaintiff suspects or should have suspected injury
- Various equitable tolling circumstances, including impossibility due to circumstances, interference, fraud and so on
Consult with an attorney licensed to practice in California to discuss the specifics of your situation and to help you determine if tolling applies.
Credit Report, Charge-Off & Statute of Limitations
The amount of time that derogatory comment on an account in a credit report is set by federal law called the Fair Credit Reporting Act. The federal credit report rules and the California civil procedure rules regarding the statutes of limitations have only one tiny connection: The length of time a judgment may appear on a credit credit report is either 7 years or the life of the judgment, whichever is longer. A California judgment is valid for 10 years, and can be renewed. Therefore, a California judgment will appear on a person's credit report for 10 years.
See the Bills.com resource Charge-Off & Credit Report to learn more about the relationship between statutes of limitations and credit reports.
You mentioned you reside in California, your last payment was due in 2003, and you received a summons from a lawyer. You also mentioned copies of your credit reports. Be sure to check in with providers of debt consolidation in California such as this linked provider to get an evaluation.
Review your credit reports to see if the date of first delinquency is mentioned. If you stopped making payments and never restarted, this date of first delinquency is clue to the date of contract breach. Ignore the charge-off and first reported dates, as those are not significant for learning your date of breach. It is likely the statute of limitations has run its course, unless you fit into one of the tolling exceptions listed above. However, as we discuss above, a California plaintiff is not barred from filing an action if the statute of limitations has expired. Consult with a California lawyer who has civil litigation or consumer law experience to discuss how to file an answer that includes a motion for dismissal based on a statute of limitations defense.
For more information about negotiating with your creditors, visit our debt settlement information page.
For further information regarding options available to consumers struggling with debt, I invite you to visit the Bills.com debt help resources page. I hope the information I have provided will help you Find. Learn. Save.