Key Takeaways:

  • Promissory Note Basics: A legally binding document that outlines the repayment terms between a borrower and a lender.
  • Statute of Limitations Definition: The time limit within which a lender can take legal action to recover unpaid debts.
  • Types of Agreements: Promissory notes can be oral, written, or open-ended, affecting how statutes of limitations apply.
  • State-Specific Statutes: The time limit varies by state, generally ranging from 3 to 15 years.
  • Time-Barred Debts: Debts beyond the statute of limitations cannot be legally enforced in court.
  • Impact of Payments: Making even a partial payment or acknowledging the debt in writing can reset the statute of limitations in many jurisdictions.
  • Deficiency Judgments: Some promissory notes, particularly those tied to secured loans like mortgages, may result in deficiency balances.
  • Legal Enforcement: Creditors may use legal tools such as lawsuits and wage garnishment to recover debts within the statute of limitations.

A statute of limitations promissory note refers to the amount of time a lender has to take legal action against a debtor who is not paying back the amount they owe or has breached the contract in some way.

What Is a Promissory Note?

A promissory note is a legal agreement in the form of a written contract that states that a borrower, also called a debtor or promissor, agrees to repay the lender, or promisee, the amount that was lent to them and any accumulated interest. The original amount of money loaned is called the principal amount. Most promissory notes detail a schedule for repayment and include a provision that allows the promisee to demand full repayment in the event that a promissor misses a scheduled payment.

If there is a breach of contract, the promissor will be notified of the breach in writing and the repercussions of that breach. Being late on a payment is a way to breach contract, even though it may not seem like a big deal.

There are a few common types of promissory notes, including:

  • Student loans
  • Mortgages

What Is a Statute of Limitations?

Statute of limitations is a specified amount of time that an individual has to pursue legal action regarding an event. In the case of debts and repayment, the statute of limitations refers to how long the lender has to take the debtor to court to be legally forced to repay the debt. A statute of limitation isn't tracked by the court system, rather it's the responsibility of the lender to know when the debt is past the statute of limitation so they can pursue a suit.

The statute of limitations varies depending on the state, but an average length is around five years. Some states have limitations as long as 15 years.

How State Laws Affect the Statute of Limitations on Promissory Notes

The statute of limitations for promissory notes varies by state, generally ranging from 3 to 15 years. Some states categorize promissory notes under written contracts, while others apply specific rules for negotiable instruments under the Uniform Commercial Code (UCC).

Here’s a breakdown of how state laws can affect enforceability:

  • Oral vs. Written Contracts: If a promissory note is considered a verbal agreement, the statute of limitations is often shorter.
  • Negotiable Instruments: Under UCC § 3-118, the statute of limitations for enforcing a negotiable promissory note is typically six years from the due date or the date of the last payment.
  • Secured vs. Unsecured Loans: If a promissory note is tied to a secured asset (e.g., a mortgage or auto loan), different time limits may apply for foreclosure or deficiency judgments.

Before taking legal action, lenders must determine the applicable state laws to avoid filing a claim after the deadline.

Agreement Types

There are a few different types of lending agreements, but the three most common types are oral agreements, written contracts, and open-ended accounts. When a debt is based on an oral agreement, nothing is in writing. This means that the borrower only agreed to pay the lender back through a verbal agreement. These agreement types can be difficult to uphold in court. It's always best to get lending agreements down in writing.

Anytime an agreement is written down on a piece of paper (or even a restaurant napkin) and signed by both parties, it is considered a written agreement. Written contracts must include the following:

  • Loan amount
  • Monthly payment amount
  • Date that principal amount was given to borrower
  • Signature of borrower
  • Signature of lender

These are also called the terms and conditions of the contract. Medical debts are common written lending contracts.

An open-ended account is a lending agreement that allows the borrower to repay the borrowed amount and then borrow again. This is essentially what any credit card account is. Lines of credit and in-store credit are other common forms of open-ended accounts.

Statute of Limitations With a Promissory Note

A promissory note will need to be analyzed in order to figure out the statute of limitations on the note. If the promissory note can be viewed as negotiable or if the status of the note is in doubt, the lending party would need to file a lawsuit within four years from when the lender discovers that the note isn't being paid on time or at all. If the note is non-negotiable, the statute of limitations applies, and that is determined by the state.

What Resets the Statute of Limitations on a Promissory Note?

In many states, certain actions by the borrower can restart the statute of limitations, allowing the lender to take legal action even after the original deadline has passed. These actions include:

  • Making a Partial Payment: Even a small payment toward the debt can restart the clock.
  • Acknowledging the Debt in Writing: If the borrower signs a written confirmation of the debt, the limitation period may reset.
  • Entering a New Agreement: Renegotiating or modifying the repayment terms can establish a new obligation.
  • Court Judgments: If a lender obtains a court judgment on a promissory note, the statute of limitations for collecting the judgment can extend significantly—sometimes up to 20 years.

Lenders and borrowers should carefully assess whether any of these actions have taken place before assuming a debt is time-barred.

What Is a Time-Barred Debt?

Any time a debt has passed the time of the statute of limitation, it is called a time-barred debt. Even if a borrower's debt has become a time-barred debt, they still owe the money. This means that a lender cannot get the court to judge against the borrower if the borrower can prove that the debt is passed its statute of limitation.

There are a few easy ways to prove the age of a debt. Personal checks used for payment and any records of communication between the borrower and lender are great ways to show how old a debt is. If a plaintiff attempts to take legal action against a time-barred debt, they risk the court dismissing their case.

Deficiency Balances and Promissory Notes

A deficiency balance occurs when a borrower defaults on a secured promissory note (e.g., a mortgage or auto loan) and the collateral is sold, but the sale proceeds do not cover the full debt amount.

Key considerations include:

  • State Laws on Deficiency Judgments: Some states prohibit lenders from pursuing deficiency judgments, while others allow legal action within a set timeframe.
  • Statute of Limitations on Deficiency Balances: This can differ from the statute of limitations on promissory notes, sometimes extending beyond the original debt timeframe.
  • Impact on Credit: A deficiency balance can negatively affect a borrower's credit report for up to seven years.

If a lender attempts to collect a deficiency balance, borrowers may have legal defenses if the debt is past the statute of limitations.

Frequently Asked Questions

1. What happens if the statute of limitations expires on a promissory note?

If the statute of limitations expires, the lender can no longer sue the borrower in court to enforce the debt. However, the borrower still technically owes the money and may receive collection attempts.

2. Can a lender still collect on a time-barred promissory note?

Yes, but only through voluntary payments. The lender cannot use legal action, such as wage garnishment or lawsuits, to force payment if the debt is past the statute of limitations.

3. Does bankruptcy erase promissory note debt?

It depends. Chapter 7 bankruptcy can discharge most unsecured promissory notes, while Chapter 13 bankruptcy may include them in a repayment plan.

4. How can a borrower prove a promissory note is past the statute of limitations?

Borrowers can provide:

  • Loan records showing the last payment date.
  • A copy of the original promissory note with the due date.
  • Communication records indicating no payments or acknowledgments were made within the statutory period.

5. Can a lender restart the statute of limitations without the borrower's consent?

No. The statute of limitations resets only if the borrower voluntarily makes a payment, acknowledges the debt in writing, or enters a new agreement.

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