11 June 2008

Statute of Limitations On Debt Clarified

The Colorado Supreme Court on Monday, in a technical but important decision, clarified the statute of limitations in the state for collecting debts and determinable amounts of money due.

Debts of the kind discussed almost always arise out of contractual agreements. The usual statute of limitations for breaches of contract in Colorado is three years from the date that a breach of contact is discovered.

But a different rule applies when the suit is to collect a liquidated debt or determinable amount of money due under a contract (e.g. under a promissory note, credit card agreement, or royalty payment agreement). The Colorado Supreme Court held that in this situation, the statute of limitations is six years from the date the debt was due, whether or not the person to whom it was owed knew that the debtor failed to pay.

Prior to this ruling it had been unclear whether or not a creditor's knowledge of the non-payment was relevant.

This practical effect of the ruling is to draw a very clear line, that requires no meaningful witness testimony to evaluate in most cases, in the single most common type of civil action in Colorado's courts.

The ruling favors debtors over creditors on the merits, but shutting down suits for late discovered underpayments. But creditors will appreciated the outcome procedurally in big dollar cases, because it narrows the scope of the evidence that is relevant in this kind of litigation. The ruling fits well with record retention practices of businesses, allowing them to evaluate what records can be thrown away on the face of their business records, and also fits well with the time periods in which credit records are maintained.

The unanimous ruling on a question of law that could have gone either way (the Colorado Court of Appeals reached the opposite holding) was a well reasoned analysis and resolution of a fuzzy gray area in the law.

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