By Jones Osborn II

Sometimes the holder of a note does not sue when the note goes into default. If the note is secured by a deed of trust or mortgage, sometimes the holder chooses not to foreclose. The reasons are varied--perhaps the holder of the note wants to give the debtor more time, perhaps the holder is doubtful about his ability to collect and does not want to incur the expense of suit, or perhaps the holder just never gets around to doing anything about the default. Strange as it may seem, it happens all the time.

Whatever the reason, at some point the right to enforce the note is barred by the statute of limitations. When this occurs, the note becomes unenforceable and any mortgage or deed of trust securing it must be released.

The question is, exactly when does the statute bar enforcement?

If the note is a single payment note, the answer is simple-- enforcement is normally barred six years after default, or in other words, six years after the maturity of the note, unless suit is filed in the meantime.

The question is a little more complicated where an installment note is concerned. Does the entire note become unenforceable six years after the first payment is missed? Or do the missed payments become individually unenforceable six years after their respective due dates?

In Arizona and most other states, the answer is, "it depends."

First, a little background. Most installment notes provide that the holder may accelerate the note if a payment is missed. This means that the entire unpaid balance can be called immediately due and payable at the option of the holder. Without such a provision, the holder would have to wait for each payment to become due before action could be taken to collect that payment. Obviously, this would be a cumbersome and unsatisfactory procedure, so a right of acceleration is a customary provision in an installment note. Notice, however, that an acceleration clause is not automatic--it requires some action by the holder of the note to accelerate, such as written notice to the maker of the note.

For an installment note, there are two rules that govern how the statute of limitations applies. First, if the note is not accelerated, the statute begins to run individually with respect to each installment as of its individual due date. Thus, it is possible after a period of time to have some defaulted payments that are barred (those more than six years in arrears), and some that are still enforceable (those less than six years in arrears). Payments not yet due--that is, future payments--continue to be enforceable, but only when they become due, at least until such time as the note is accelerated.

Second, if the note is accelerated, the statute begins to run on all future installments as of the date of acceleration, because acceleration makes all the future payments immediately due and payable. However, if any prior installments have previously been missed and remain unpaid as of the date of acceleration, the statute of limitations will have begun to run at the time those payments were missed with respect to those payments only.

There is one further complication. The statute is tolled-- that is, it temporarily ceases to run--during any period of time that the holder cannot sue because he is under 18 years of age or is of unsound mind, or while the debtor is residing out of the state. For example, if the debtor resided out of state for two years after a default and then returned, the statute would be extended to a total of eight years.

Conclusion. If you take an installment note, be sure it has an acceleration clause. If it goes into default, be careful not to let the statute of limitations run if you ever intend to enforce it, even if it is secured by a mortgage or deed of trust. If you are buying property subject to an old mortgage or deed of trust, investigate thoroughly before you rely on assurances that it has been released or that enforcement has been barred. Finally, do not accelerate an installment note until you are ready to file suit or foreclose, because acceleration triggers the running of the statute of limitations as to future payments, and you may as well give yourself as much time as possible if no immediate action is contemplated.