July 27, 2016 Client Alert

A Reminder on Calculating the Statute of Limitations for Consumer Loans Properly

Statutes of limitations in consumer transactions are important because a suit to collect on a loan in default after the statute of limitations expires may violate the Wisconsin Consumer Act. Collection activities by banks acting as third-party loan servicers when no claim exists may also violate the federal Fair Debt Practices Collection Act. See Hartman v. Meridian Fin. Servs., 191 F. Supp. 2d 1031 (W.D. Wis 2002) (separate in-house collection service of a lender could be considered a third-party “debt-collector” under the Consumer Act). Specific limitations periods for negotiable instruments are found in Ch. 403.118 of the statutes.

There are three dates relevant to a statute of limitation analysis: the date the statute starts running; the tolling period, if any; and the expiration date. The statute begins to run when the debt first comes due. See Wis. Stat. § 403.118(1) (“an action to enforce the obligation of a party to pay a note payable at a definite time shall be commenced within six years after the due date…”). Any grace period in the loan agreement should also be considered if it effectively extends the payment due date (as opposed to extending the imposition of a late payment fee).

The statute of limitations may then be tolled by operation of Section 893.23 of the statutes that provides as follows: 

When the commencement of an action is stayed by injunction or statutory prohibition the time of the continuance of the injunction or prohibition is not part of the time limited for the commencement of the action.

See Wis. Stat. § 893.23. Loan forbearance or a bankruptcy may, for example, toll the statute. The online docket in a bankruptcy case allows us to identify the tolling period precisely. The automatic stay provision of the Bankruptcy Code will be in effect from the filing date through the effective date of the discharge. See 28 U.S.C. § 362(c) (the automatic stay provision of the Code). That is the tolling period.

There is then an important distinction in Section 403.118. The statute of limitations to sue to collect past due amounts expires six years after the debt came due. See Wis. Stat. § 403.118(1) (“Six years after the due date…”). The analysis does not end there however. When a note is accelerated (a demand that the entire note be paid -- past and future payments), the statute of limitations runs “six years after the accelerated due date.” See Wis. Stat. § 403.118(1) (“if a due date is accelerated [an action shall be commenced] within six years after the accelerated due date.”). Simply applying a general six year statute of limitations under § 893.43 for contract breaches may yield an incorrect result and risk subjecting a lender or servicer to unintended liability. 

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