Under California, a promissory note is a written promise to repay a loan according to certain conditions, such as a payment schedule and interest rate. California Civil Code Section 337 states that all lawsuits based on an "instrument in writing" must be filed within four years. As a rule, the four-year limitation begins to run from the date a payment due under the promissory note is not paid.
Limitation Period -- Exception
Civil Code Section 337 provides an exception to the four-year rule for promissory notes that are secured by a mortgage or deed of trust with the power of sale on real property. This is a situation where the creditor has the option of enforcing the debt by private foreclosure sale instead of filing a lawsuit. Depending on the economics affecting the situation, sometimes a foreclosure sale may result in less money to the creditor than owed on the promissory note. If the creditor wants to sue the debtor for the balance after the foreclosure sale, Civil Code Section 337 states that the lawsuit must be filed within three months after the sale.
Although the statute of limitations has expired on a promissory note, the creditor is not automatically prevented from filing a lawsuit to collect the debt. The statute of limitations is a defense that must be asserted in court. If the debtor fails to respond to a lawsuit regarding a debt subject to the statute of limitations, the debtor will have effectively waived his right to assert the defense and a judgment may be made against him.
Promissory notes secured by real property are often the subject of a "short sale" -- that is, a sale of the real property that does not completely pay the balance due on the note, but the lender releases the property so that the sale is completed. Such a situation has no effect on the statute of limitations for the balance due on the note. If the debtor fails to pay the lender the balance, the lender will have four years from the date payments were stopped to file a lawsuit. To avoid this situation, the debtor must obtain a full release of the promissory note -- not just the mortgage or deed of trust -- from the lender as part of any short sale agreement.