How can I prevent my loan from being time-barred?

Full question:

All parties described herein are California residents and all of the following transaction occurred in California.On April 25, 2006, I lent a substantial sum of money to an individual (the 'borrower') with whom I've done business for many years. On the same date, the borrower executed a promissory note in which he agreed to repay the amount in 60 equal payments over five years at 15% interest per annum. This note was secured by a second deed of trust on real property owned by the borrower.On March 19, 2007, borrower defaulted on the payment of the aforesaid debt, and has not made any payment since that date.Due to the economic downturn, the borrower has lost all of his assets and is essentially 'judgment proof' at this time. There is a four-year statute of limitations on actions on a promissory note as described above under Section 337 of the California Code of Civil Procedure (the 'Code'). I believe the limitations period began to run on the date of default (although I have read one editorial explanation that the limitations period began on the date the note was executed). My question: Given the fact that an action to enforce the terms of the aforesaid note and recover the balance of the debt owed to me would, at this time, be futile, how best can I assure that a future action to do so does not become time-barred under the statute of limitations?The aforesaid loan was a recourse loan and, because I did not seek to foreclose on the second trust deed or otherwise seek to enforce my security interest, said loan was not transformed into a non-recourse loan under Section 580(b) of the Code. The borrower has agreed to execute another promissory note for the balance at this time.

• Category: Debts and Credit
• Subcategory: Promissory Notes
• Date: 04/07/2025
• State: California

Answer:

The best way to avoid a statute of limitations issue is to consult an attorney promptly. A tolling agreement can be used to waive the right to claim that a lawsuit should be dismissed due to the expiration of the statute of limitations. This agreement allows more time to evaluate the claims and damages without needing to file a lawsuit immediately. During this period, both parties agree to suspend any defenses based on the statute of limitations.

When entering into a tolling agreement, ensure it does not void any liability insurance. The agreement should clearly state that it only tolls the statute of limitations and does not revive any claims that are already time-barred. It should also avoid any admissions of wrongdoing unless that is part of the agreement.

A promissory note can be secured or unsecured. A secured note means that the lender can take possession of specific collateral if the borrower defaults. If the borrower files for bankruptcy, the lender may recover the loan's value through the collateral rather than receiving only a share of the borrower's remaining assets.

Both parties must sign the loan agreement, and a notary should witness the signatures. The contract may include a choice of law clause, specifying which jurisdiction's laws apply in case of a dispute. The loan document should be recorded in the county recorder's office where the property is located.

Promissory notes can require payments in installments or as a lump sum. They may also include provisions for smaller payments at the beginning and a larger balloon payment at the end. Additionally, a confessed judgment agreement, also known as a cognovit note, may be included. This requires the borrower to waive defenses and agree to a judgment if they fail to pay and the matter goes to court.