I have been asked many times over the years about the statute of limitations applicable to mortgages and credit card debt. The statute of limitations is a legal term that determines how loan may a bank due a debtor for missing a mortgage payment of defaulting on payments under a credit card agreement. The most common issue for these types of debts is when does the statute of limitations begin to run and does the lender ever get to restart the statute of limitations clock.
The statute of limitation analyses is different for credit cards and mortgages. A credit card debt is established by a card agreement that states that payment is due in full a certain number of days after the card is used, but that the cardholder may opt pay the balance in monthly installments with interest. If and when the cardholder misses a monthly payment the cardholder is in default. The missed monthly payment starts the lender’s statute of limitations. The statute of limitations says the lender has five years to sue after the cardholders default. If the cardholder makes a payment of any amount after a default within the five years, the lender may restart the clock.
Mortgages are different. A mortgage note is a contract to pay a fixed amount each month over many years. The agreement month is a separate, specified obligation. If a homeowner stops paying the mortgage each month he creates a new default, and each month starts a new statute of limitation clock. Also, each default triggers a separate right to accelerate the obligation of the full mortgage balance.
Here is an example to illustrate the consequences of the different limitations analysis. Suppose a homeowner defaults on both a credit card and mortgage to the same lender. Two years later the lender sues for foreclosure and for collection of the credit card debt. Both law suits are dismissed based upon legal technicalities. The borrower still makes no more payments. Five years and a day later the lender may not sue for the credit card default (unless the borrower tendered a payment during that period), but the lender could sue for foreclosure because each missed monthly payment default during the five years created a new right to acceleration and started a new statute of limitations clock.