San Jose Business Lawyers Blog
Much of California’s civil justice system revolves around contractual obligations and the enforcement and collection of debts. Keep in mind that if someone owes you money–or you owe them money–the law only allows the creditor a certain amount of time to take action. This is known as the statute of limitations. If you need advice from a California debtor and creditor rights lawyer, contact the legal team at Structure Law Group, LLP.
When Does the Clock Start Running in California?
The exact length of California’s statute of limitations depends on whether the debt is based on a written contract or oral promise. In the case of a written contract, the statute of limitations is four years. But if it is an oral promise, the limitation period is just two years.
Most business debts, however, involve some form of written agreement. So we are typically dealing with the four-year statute of limitations, which is spelled out in Section 337 of the California Code of Civil Procedure. But the question for the creditor then becomes, “When does the four-year clock actually begin?” The answer may be more complicated than you think.
The basic rule is that the limitations period starts to run from the time the debtor misses a payment. So to give a simple example, Jane Smith agrees to pay Acme, Inc., $100 per month every month to pay off a debt from a previous purchase. The written agreement states that payment must be made on the first day of each month. If Jane stops paying just before the June 1, 2022, payment is due, then that is when the four-year statute of limitations clock starts to run. Acme then has until June 1, 2026, to sue Jane to enforce its debt.
So what happens if Jane makes a partial payment during this time? In that case, the four-year clock starts to run from “zero.” In other words, any payment that effectively acknowledges the validity of the debt gives the creditor a fresh four-year period to take action for further non-payment. Similarly, if Acme offered Jane a new payment plan and she accepted, that too would restart the clock.
What Happens After the Statute of Limitations Expires?
There is a common misconception that a debt is no longer valid after the statute of limitations runs its course and the creditor has not filed a lawsuit. However, this is not the case and the debt remains valid. All the expiration of the statute of limitations does is prevent the creditor from obtaining a court order to enforce the debt.
It is also important to note that certain debts are not subject to California’s four-year statute of limitations. This includes debts related to federally backed student loans, child support obligations, and unpaid taxes. And if the creditor files for bankruptcy, that can toll or “stop the clock” on California’s four-year limitations period until the bankruptcy case is concluded.
If you have further questions about creditor lawsuits and need legal advice from an experienced California debtor and creditor rights lawyer, call SLG today at (408) 441-7500 or contact us online to schedule a consultation.