Loan not paid according to note. What are the lenders rights to collect?

Recently on our legal forum a user asked, “If we had a loan from a private lender with a promissory note that had the terms of payment but we failed to make payment according to the terms of the loan, how long does the lender have to collect? What if they did not send a demand letter at the time the note was due?”

What is a promissory note?

A promissory note outlines the legal terms for a loan, including the amount the lender allowed you to borrow, the amount of time you had to repay the loan, and the interest charged. Generally, the lender will also provide information about their options for collecting the debt.

Generally, lenders who are not paid according to the terms of the loan can take several actions to collect the debt. First, they might start with a demand letter which asks for payment. If you do not respond with payment, they may increase their contact with multiple phone calls and collection letters.

If the loan was collateralized or secured with an asset, such as a car, they may have the legal right to come and repossess the car, sell it, and sue you for any remaining deficiency. If they win their lawsuit against you they may have additional legal collection actions such as wage garnishments, property repossession, liens, or bank account levies.

Statute of limitations for debt collections

At issue, however, is how long the lender can continue their collection efforts, which are referred to as the statute of limitations for debt collection. The good news is that all states have established a timeframe for debt collection. Unfortunately, however, the time will vary based on the type of debt and your state’s laws.

For example, money could be loaned via oral contract, written contract, promissory note, or an open-ended account (i.e., credit card). If you live in California the statute of limitations for oral contracts is two years but for written contracts, promissory notes, or open-ended accounts it is four years. Other states, such as Ohio, however, allow collection for debts from a promissory note for up to 15 years!

Lender has not contacted me in eight years

You mentioned the lender has not contacted you in eight years. In some states this would be past the statute of limitations for promissory notes. In other states, however, such as Illinois, Indiana, Kentucky, and Louisiana, the lender may have several years to make contact or sue you for non-payment.

If the lender sues for nonpayment and it is past the statute of limitations, you can raise this as a defense against the lawsuit. If you prove the statute of limitations has expired, you will not have to repay the debt.

If it is not past the statute of limitations you can pay the debt, negotiate a settlement, or fight the suit. You will, however, need to respond. If you fail to respond to the lawsuit the court will issue a default judgment in the lender’s favor.

What if the debt is time-barred?

Now, just because the statute of limitations may have passed this does not mean that you should not pay the debt. Although you may not legally be required to pay the debt, morally it may be the right step for you.

You may also legally choose not to pay the debt in which case the lender will have no legal recourse to collect the debt. Your credit score may, however, be lowered for non-payment, and it may be reported to the collection agencies.

Your third option is to pay part of the debt. Before making this choice, however, you need to understand the laws in your state. In some states a partial payment may revive the debt, restarting the statute of limitations for debt collection.

Bottom Line:

In most states the statute of limitations is less than eight years for a promissory note, but this is not true for every state. Review your state’s laws for more information. If your lender contacts you or files a lawsuit make sure you respond.