In April, we discussed how Colorado’s state supreme court issued its highly anticipated decision confirming a borrower’s bankruptcy discharge does not accelerate secured installment debt or trigger the final statute of limitations period to recover the debt. Now, Washington’s high court has rendered its decisions on the topic, joining the handful of states to address this trending issue.
On July 20, 2023, the Washington Supreme Court issued two companion opinions in Copper Creek (Marysville) Homeowners Association v. Kurtz and Merritt v. USAA Federal Savings Bank. Like Arizona and Colorado, Washington agreed a bankruptcy discharge does not trigger the statute of limitations to enforce a deed of trust.
The Washington Supreme Court explained that the six-year statute of limitations period to collect a missed payment on installment debt begins to run on the date the borrower misses the payment. The final statute of limitations period to collect the debt in any manner does not begin to run until six years after the lender accelerates the debt or the debt fully matures.
When a borrower files for bankruptcy and receives a discharge, the borrower is relieved of personal liability on the debt. However, the Washington Supreme Court agreed that a discharge does not extinguish the underlying debt. The discharge likewise has no effect on the deed of trust recorded against the real property as security, and a creditor’s right to foreclose on the deed of trust passes through the bankruptcy unimpaired. Moreover, a bankruptcy discharge does not void or modify the contractual terms a borrower agreed to prior to bankruptcy.
Accordingly, the Washington Supreme Court confirmed that, after discharge, each installment payment for the debt continues to come due according to the contractual terms. A bankruptcy discharge does not trigger the final installment payment’s due date or accelerate the debt prematurely.
In reaching its conclusion, the court disavowed a prior Washington court of appeal’s case dicta suggesting a different outcome. Specifically, any implication that the statute of limitations stops accruing on missed payments due under an installment contract following a bankruptcy discharge is not the law in Washington.