Arizona Court of Appeals Division One holds that a bankruptcy discharge does not trigger the statute of limitations for a debt action.

A borrower used a deed of trust on his property to secure a promissory note.  The note was to be paid in installments, with the balance due January 1, 2031.  The deed gave the lender the option to accelerate the note upon the borrower’s default.  The borrower defaulted, but the lender did not accelerate the debt.

The borrower filed for bankruptcy and received a discharge.  When the lender declined the borrower’s request to release the lien on the property, the borrower sued, arguing the statute of limitations had run on the lender’s ability to exercise its remedies.

In granting the lender’s motion to dismiss, the superior court held that because discharge does not maturate a note, it cannot commence the limitations period.  The Court of Appeals affirmed.

A bankruptcy discharge does not extinguish an entire debt.  A discharge extinguishes the debtor’s personal liability, thereby barring an action in personam against him.  It does not, however, extinguish a valid lien or security agreement—a lender may still initiate an action in rem to, for example, foreclose on a deed of trust.  

But the lender must initiate the action within the statutory six-year statute of limitations period for debts based in contract, which begins to run on the debt’s maturity date.

The maturity date is when the debt is due.  If, as here, an installment contract contains an optional acceleration clause, a lender can require the borrower to immediately pay the balance of unmatured future installments.  A lender’s affirmative steps to exercise the acceleration clause will trigger the statute of limitations.  If, however, the lender chooses not to accelerate the debt, the maturity date (and thus the commencement of the limitations period) remains the date the balance is due.

Here, the debtor argued the limitations period began to run when he received the bankruptcy discharge because the discharge automatically triggered the lender’s optional acceleration clause, thereby making the discharge date the maturation date.

The court disagreed, holding that a bankruptcy discharge cannot automatically trigger an acceleration clause.  The lender (or its predecessors-in-interest or other authorized party) must affirmatively initiate acceleration of the debt.  Because the lender here took no such action, the note’s maturation date is January 1, 2031, when the balance is due.

Judge Brown authored the opinion of the Court, in which Judges Howe and Furuya joined.