The Fundamentals of California Debt Collection Law
Debt Collection Laws in California are primarily derived from the California Rosenthal Fair Debt Collection Practices Act, Health and Safety Code Section 1310, and business and professions code section 17500 (the Unfair Competition Law). Each of these statutes has exceptions. In general, it is unlawful in California for to call someone repeatedly about an alleged debt. It is also unlawful to make repeated calls to consumers’ employers. The laws also prohibit other types of collection abuses such as making false threats, impersonating an attorney or law enforcement officer, using deceptive collection letters and telephone calls, making repeated calls, with the intent to annoy and harass, and using profane language. The purpose of the debt collection statutes is to prohibit tactics that embarrass , intimidate and harass consumers. California debt collection laws are designed to eliminate abusive practices related to debt collection. The laws were enacted to "prevent abusive, unfair and deceptive debt collection practices by professional or commercial debt collectors, as well as other persons who collect consumer debts for others…" They also were designed to "provide common understanding and greater protection for all consumer Californians regardless of their physical location within the State, in terms of making the laws applicable within California enforced uniformly throughout California, thereby removing the inequities created by the present variation in the application of the law to all consumers and collection agents throughout California…."
Defining the Statute of Limitations
The statute of limitations is the legal deadline for bringing a lawsuit in court. In other words, the statute of limitations describes the period after which you can no longer sue someone. If you have been served with a lawsuit, you should immediately check to review the statute of limitations. If the statute of limitations has expired, this can be used as a defense, and you may be able to force the plaintiff to withdraw the complaint.
A statute of limitations exists for most (if not all) actions at law, from lawsuits over oral contracts to lawsuits alleging fraud and breach of fiduciary duty. The applicable statute of limitations depends on the type of cause of action at issue. For example, the statute of limitations for breach of a written contract is four years (Code of Civil Procedure section 337), while the statute of limitations for fraud is three years (Code of Civil Procedure section 338(d)). It is important to be aware of what statute(s) of limitation applies in your situation. If you are unsure, be sure to talk to an attorney, as proven defendants have won based on the statute of limitation.
In debt collection actions brought by a private creditor or debt collector, the creditor or debt collector must file the lawsuit within four years after the date the debt was incurred. This is similar to the time limit for filing a breach of contract action. This statute does not apply to debts incurred in the last 90 days of your payment period as a high-wage earner (like a salesperson or commission-based employee).
This filing deadline is important, because you are potentially vulnerable until that debt is paid or discharged in bankruptcy. This means that the creditor or debt collector could sue you, which may result in severe problems if a judgment is entered. If you were sued when the statute of limitations had expired or barred the collection of the debt, you could win the case without ever having to try the case in court. If a judgment is obtained against you at the end of the suit, it would be valid for most purposes unless you can find a legal basis to vacate it. This is much easier (and cheaper) than trying to set it aside once it is entered against you.
Time Limits for Different Types of Debt Cases
Debt-related cases in California fall under the broad purview of the statute of limitations. The timing of one’s final payment determines which statute of limitations applies to a particular case and a case filed after the statute of limitations runs will be dismissed if the debtor raises the issue.
Three basic types of debt situations exist that are covered by the various statutes of limitations. Written contracts, which include such documents as promissory notes and credit card agreements, fall under the purview of California Code of Civil Procedure Section 337. The time limit for written contracts is four years from the default of payment. The time periods are four years for an installment contract like an auto loan, but 10 years if they’re paying on time and you calculate from the final payment even if only one of the payments has not yet cleared.
Oral agreements, such those pertaining to verbal credit arrangements, are covered by Section 339 of the California Code of Civil Procedure. The time limit is two years from the default. The same time period applies to promissory notes without a specified due date.
Finally, open-ended accounts, such as credit card accounts, fall under Section 337 of the Code of Civil Procedure. The time limit is four years from the date of default.
Consequences of a Lapsed Statute of Limitations
The most important impact of the expiration of the statute of limitations on a personal debt is that it estops the debt collector from using legal means of collecting on the debt. This means that the creditor will have to give up any hope of collecting on the debt through litigation or other forcible actions. However, "voluntary" collections over the phone are still legal, and creditors can harass debtors for decades over debts that are beyond the statute of limitations.
But there is one other major legal impact of the expiration of the statute of limitations on a personal debt. That is: as previously mentioned, too late is not necessarily too late; the creditor may require the debtor to repay the debt, but only through voluntary and non-coercive means. For example, a bank may legally ask you to pay an expired credit card account, but if it tries to sue you or threaten a lawsuit over the debt, its actions would be illegal.
In addition, the debtor can use expiration of the statute of limitations as a legal defense if the creditor attempts to renew the debt by suing the debtor in court. If the creditor attempts to sue the debtor to collect an expired debt, then the debtor can use expiration of the statute as a legal defense against collection by providing evidence of the expiration and of the creditor’s efforts to collect on the expired account.
Threatening to collect on expired or soon-to-expire debts when the creditor has not given the debtor proper notification that the debt is expired is highly unethical and often illegal. If a debt collector or lender has failed to properly notify the debtor when the debt has expired, it can be sued for violating the Fair Debt Collection Practices Act (for third-party debt collectors) or the Fair Credit Reporting Act (for lenders), and for making misrepresentation.
Exceptions and Nuances
Exceptions and Complications to the Statute of Limitations for Debt Collection in California
There are some exceptions to the general 4-year statute of limitations on debt collection. In the scenario below, the 4-year statute of limitations does not apply. At the same time, the couple’s conduct shows the importance of avoiding "acknowledging" the debt.
In 2000, a couple took out a home equity line of credit from the defendant, Wells Fargo. They did not make a payment on the home equity line of credit after 2004. In 2008, Wells Fargo transferred its account rights to a financial institution that did not file a credit card claims. In 2012, the couple made a $1.7 million payment to the financial institution.
After the couple failed to pay the $3.3 million balance remaining on the line of credit in 2014, Wells Fargo sued the couple in the California Superior Court for negligence and breach of contract. The couple argued that both of those claims were barred because the statute of limitations had lapsed and, alternatively, the chapter 11 bankruptcy plan did not allow for debtors to incur additional debt or restrict the pursuit of that future debt.
The California Court of Appeal found in favor of the couple, concluding that an oral agreement to postpone or suspend interest on the balance was a offer that failed to become a contract because there was no acceptance. The court further concluded that the 4 year statute of limitations under California Code of Civil Procedure section 337 barred all negligence and breach of contract claims in this case .
Wells Fargo went on to argue that the statute of limitations was tolled or paused by the couple’s conduct. In particular, Wells Fargo asserted that the couple’s conduct in (1) endorsing monthly payments to Wells Fargo for more than 18 months and (2) using the line of credit after the date that the kitchen cabinets were replaced with new ones in 1996 amounted to "acknowledging" the debt and reviving the statute of limitations. The Court of Appeal, however, found that the 18-month payment was not sufficiently clear and unequivocal to alleviate the 4-year statute of limitations because it expressly stated that it was being made "without prejudice." The Court of Appeal declined to adopt a new rule to revitalize an expired statute of limitations through the repeated endorsement of or tender of a payment. The court also held that the couple did not acknowledge the debt by replacing the kitchen cabinets because it should not have such a broad interpretation. The court clarified that "[w]hen parties enter a written agreement setting forth the specific collateral for the loan, the scope of rights with respect to that collateral are controlled by the terms of that agreement" and that further "[t]here cannot be an acknowledgment of a debt when the debt is unrelated to the collateral for which that debt is more specifically defined."
For these reasons, the Court of Appeal held that the 4-year statute of limitations barred Wells Fargo’s lawsuit.
Legal Remedies and Consumer Protections
If a consumer is sued on a time-barred debt, they may have an additional claim against the creditor or debt collector. A violation of Sobel v. Hertz Corp., 114 Cal. App. 4th 1, 7-9 (2003) may be available to consumers who have been sued on a time-barred debt. In Sobel, a federal court wrongly granted a summary judgment to a creditor on a time-barred debt. The California Court of Appeals reversed the judgment and included in its findings "the defendant’s conduct in erroneously obtaining the judgment on the time-barred debt, although not itself a basis for reversal, respondent should be required to bear the additional cost and burden attributable to its litigation of a meritless claim." (Sobell, supra, 114 Cal. App. 4th at 9; see also CGS Corp. v. Federal Ins. Co., 31 Cal. App. 4th 1307, 1326 (1995). Had the creditor’s counsel fulfilled its ethical duty by dismissing the time-barred claim, the debt collector could have instead billed its client more than $ 5,000.00 in legal fees instead of the consumer.
California Civil Code Section 1788.30(b) gives an aggrieved consumer the right to bring an affirmative civil action for all of the following: (i) actual damages, (ii) punitive damages, (iii) reasonable attorney’s fees and costs, and (iv) any other relief the court deems proper.
Securing Legal Help
It is very important to speak with a qualified attorney if facing a debt collection lawsuit. With the statute of limitations being such a hotly litigated issue, if the defense of time-barred debt is not raised by a qualified attorney in a timely manner, you may be stuck paying the debt that has otherwise expired. A qualified attorney will also be able to properly evaluate other defenses that may be available to you.
In California , there are many options for finding qualified legal assistance. The Telephone Consumer Protection Act (TCPA) website offers a searchable database of attorneys that they have qualified as being well versed in the area of Telephone Consumer Protection Act and Fair Debt Collection Practices Act cases.
The California State Bar also offers search databases for clients and attorneys, and information on finding a lawyer, including free and low-cost services, and how to hire a lawyer.