If you’ve fallen behind on a private student loan, the possibility of being sued can be terrifying. Every knock at the door causes anxiety, causing you to wonder whether you’re being dragged into court.
It’s natural to fear a private student loan lawsuit. The court system can be confusing, with exacting procedural rules and severe penalties for stepping over the line. Losing a lawsuit involves the prospect of wage garnishments, bank account levies, and additional costs that can wreck you financially.
The system is designed to scare you – and it succeeds. In spite of that fact, there’s good news to be had.
Private student loans have a limited time to sue you.
When it comes to federal student loans, you can be subjected to legal proceedings until the loan is satisfied – or until you die. Not only can the government file a lawsuit against you, but also to take administrative steps to force you to pay without using the court system.
Private student loans, however, aren’t covered by federal student loan laws. The only way you can be forced to pay a defaulted private student loan is through the lender’s use of the court system. The lender can’t use administrative wage garnishment, tax refund offset, or Social Security offset to force you to pay the debt.
More important is that the lender is subject to a strict time limit called a statute of limitations – during which they can use the court system to force you to pay. If the student loan company doesn’t file a lawsuit within the time specified by law, they can never force you to pay the debt.
Understanding the statute of limitations may make the difference between payment and getting off free and clear.
Here’s the rule on the statute of limitations for people who live in California.
What is California’s statute of limitations?
For written contracts such as private student loans, California law sets a statute of limitations of four (4) years from the date the claim accrues.
The claim accrues when the contract for payment is breached – in other words, once the first payment is not made under the contract.
If the promissory note is a negotiable instrument, however, the law sets the statute of limitations at six years of each individual payment due date. Once the loan is in default and the entire balance is accelerated, a new six-year statute of limitations takes over.
This means each monthly payment represents a new beginning to the six-year clock. If you’ve got a 30 year Note, theoretically the lender may be able to sue you for 36 years (for at least the last payment due, that is).
The saving grace, however, is in the acceleration portion of the law. If the private student loan lender calls the entire debt due, they get six years from that date as the applicable statute of limitations.
Does the California statute of limitations apply?
California courts consider the statute of limitations to be a procedural matter, so California law will typically apply.
An exception is when the promissory note applies a different state’s statute of limitations; in that case, the court will apply the other state’s law if it is shorter.
In this way, the courts recognize the need to protect their state’s citizens from overreaching lenders.
Beware actions that may pause the statute of limitations
You may think you’re home free when it comes to a lawsuit only to find that the statute of limitations hasn’t expired. In fact, specific actions may pause the clock and extend the time for a private student loan holder to sue you; this is known as “tolling” the statute of limitations.
Under California law, the statute of limitations may toll under certain conditions:
- when you are out of state;
- when you are in bankruptcy and the automatic stay is in effect;
- during periods of incompetence due to mental or physical reasons;
- if you die with less than six months left on the statute of limitations, it will be extended for six months after your death;
- if you die with more than six months left on the statute of limitations, it will be extended for one year after your death;
- if you are in jail, it is extended for two years or until you’re released, whichever comes first;
- if you are in the military, the statute of limitations pauses until you are no longer serving – even if you are serving during peacetime or as a career.
Resetting or reviving the statute of limitations
Debt collectors will call or send notices about old private student loans, some of which are close to or beyond the statute of limitations. It’s easy to get tripped up and make the mistake of extending, or even reviving, the statute of limitations.
Specific actions may reset or revive the statute of limitations, giving the private student loan holder additional time to file a lawsuit. This is one of those situations when you need to be very careful about the words and actions you take when dealing with collectors.
A statute of limitations may be extended or revived when you:
- acknowledge the debt in writing; or
- make a payment; or
- agree in writing to a new repayment schedule.
To prevent one of these “zombie debt” situations, make sure to double-check your records and your credit report before talking to a collector about an old private student loan.