Bankruptcy Doesn’t Automatically Accelerate a Mortgage, State Supreme Court Says

The chapter 7 discharge of someone’s personal liability on a mortgage does not start the clock ticking on the statute of limitations governing the time within which a lender must commence foreclosure, according to the Colorado Supreme Court.

A borrower took down a second mortgage in 2006 and received a chapter 7 discharge in 2012. The borrower stopped paying the mortgage before discharge and made no payments after discharge.

When the lender threatened foreclosure in 2019, the borrower responded with a lawsuit to declare that the mortgage was extinguished because the lender had not begun foreclosure before the six-year statute of limitations expired.

The state trial dismissed the suit, but the state appellate court reversed. The appellate court reasoned that the mortgage became due and the statute of limitations began to run when the owner received a bankruptcy discharge.

In a unanimous, en banc opinion on April 24 by Justice William W. Hood, III, the Colorado Supreme Court reversed the appellate court. Judge Hood said that the outcome was governed by the dates on which the lender’s claims accrued.

No Acceleration

Judge Hood explained that the relevant statute begins to run “six years after the cause of action accrues.” In turn, the claim accrues on the date when the debt comes due. When the debt becomes due is a matter of contract.

In the case on appeal, the mortgage had no automatic acceleration on default. Payments were due monthly. Judge Hood said that a separate cause of action arises each month when a payment comes due but is not paid. In fact, the statute runs separately as to each monthly payment. Therefore, the statute may have run with regard to some payments but not others.

Judge Hood explained that an acceleration “triggers” the statute for all payments, including those not yet due.

In substance, the appellate court believed that the bankruptcy discharge triggered an acceleration. However, Judge Hood said that Colorado law requires a clear, unequivocal affirmative act indicating an intention to accelerate. Furthermore, the borrower has no capacity to accelerate the debt unilaterally.

In the case on appeal, Judge Hood said there was no evidence that the lender had demanded payment for the entire mortgage on the heels of the debtor’s bankruptcy or the debtor’s default on the mortgage. There having been no acceleration, the statute had not begun to run.

The opinion by Judge Hood stands for the proposition that bankruptcy did not effect an acceleration. Because the statute had not begun to run, the lender could accelerate and initiate foreclosure based on any missed payment within the preceding six years.

The Law in Other States

Judge Hood cited Arizona and New York as states with the same rule. Curiously, a federal district court in Washington State was upheld by the Ninth Circuit in a nonprecedential opinion. Those federal courts held that the statute began to run in Washington State from the last payment due before bankruptcy.

However, Judge Hood said a Washington State appellate court last year differed with the federal courts by holding that a bankruptcy discharge does not accelerate the debt.

Judge Hood ended his opinion by pointing out the disadvantages stemming from the principle espoused by the homeowner. If the claim were to accrue automatically on discharge, the lender could foreclose on the homeowner even if the mortgage were current. The rule sought by the homeowner, he said, “would have the perverse result of making it more difficult for individuals in bankruptcy proceedings to keep their homes.”