California law on debt collection finally has teeth.
Under new California law, a creditor must allege that the statute of limitations has not run when it files a lawsuit.
No more suing on long-dead debt and winning unless the consumer files an answer and pleads the statute of limitations.
No more collectors relying on consumers being broke, scared, or ignorant of the legal facts about the timeliness of a lawsuit.
The timeliness of the lawsuit has gone from being matter of defense to an element of the cause of action.
Score one for consumers.
California statute of limitations on debt
The law on when you can sue someone on a contract, like a credit card, a medical bill, or a personal loan, lives in the Code of Civil Procedure.
AB 1526 added to the statute of limitations in § 337 the following:
(d) When the period in which an action must be commenced under this section has run, a person shall not bring suit or initiate an arbitration or other legal proceeding to collect the debt. The period in which an action may be commenced under this section shall only be extended pursuant to Section 360.
Before the 2019 change
Used to be, a creditor was free to sue on a debt, even if the creditor knew that the four year California statute of limitations was long past.
The burden to assert the statute was on the defendant to raise the statute as an affirmative defense.
An affirmative defense operates to say, in the pleadings, that even if everything you claim is true, you don’t win because….
As a result, the issue of whether a debt was too old to be enforced through the courts was seldom considered by the judge because the consumer-defendant never filed an answer.
If no answer is filed, the judge effectively never considers the merits of the lawsuit. The system assumes that if a lawsuit is defective, the defendant being sued will answer and point it out.
But that’s not how most collection actions go. The overwhelming number of collection actions go to judgment by default, because the defendant never spoke up.
Now, collectors must swear that the suit is timely to prevail by default.
New law in action
As of now, there don’t seem to be reported cases applying the new rule.
Over time, it will be worth looking at whether the number of collection actions goes down. That may be hard to discern if we hit a period of further economic distress.