Colorado just became the latest state to recognize that a borrower’s bankruptcy discharge does not accelerate secured installment debt or trigger the final statute of limitations period to recover the debt.

On April 24, the Colorado Supreme Court issued a highly anticipated decision, available here. The state supreme court reviewed the court of appeals’ holding that Colorado’s six-year statute of limitations to enforce the borrower’s mortgage loan debt began running upon the borrower’s bankruptcy discharge in 2012. Because six years lapsed since the purported statute of limitations commencement date, the court of appeals determined the lender was barred from enforcing the debt in any manner. However, the Colorado Supreme Court reversed the appellate court’s decision, holding a bankruptcy discharge cannot trigger acceleration or the running of the statute of limitations for installment payments that have not come due.

In reaching the decision, the state supreme court explained that in Colorado, a payment under a security agreement comes due on the date specified in the underlying contract — typically the promissory note and deed of trust. Accordingly, the statute of limitations period to collect the payment does not commence until the borrower misses the periodic payment. Security agreements with optional acceleration clauses allow the lender to accelerate any future payments’ due date, but the lender “must perform some clear, unequivocal affirmative act evidencing [its] intention to take advantage of the acceleration provision.” When the lender triggers the acceleration provision, all remaining payments become immediately due and the lender’s cause of action for the entire debt accrues. The lender then has six years to enforce the debt before the statute of limitations period runs.

Significantly, the Colorado Supreme Court determined that a borrower’s bankruptcy discharge does not constitute a clear, unequivocal affirmative act evidencing the lender’s intent to accelerate. It reasoned that “by allowing [the borrower] to unilaterally accelerate the due date of his payments through bankruptcy, the [court of appeals] effectively grafted a new provision onto the contract.” The supreme court also explained that, although the bankruptcy discharge extinguished the lender’s ability to enforce the debt against the borrower, it left intact the lender’s ability to collect the debt in rem through foreclosure. Therefore, a mortgage debt survives bankruptcy, and the lender can enforce the deed of trust through foreclosure within six years after it accelerates through a clear, unequivocal affirmative act or the loan matures according to the contract’s terms.

This opinion is another in a line of cases from various states — including Arizona, Washington, and New York — holding bankruptcy discharge does not trigger the statute of limitations for installment debt. Troutman Pepper attorneys have been instrumental in developing important statute of limitations case law and defending against statute of limitations claims throughout the country.