Notes on Stale Notes

What is a stale note? A stale note is a promissory note—evidence of having made a loan—on which the lender has never demanded payment by the borrower.

You might ask, why would a lender not demand performance of the note? Isn’t that the whole point of the note? And you would be right. But there are two factors that often lead to stale notes.

The first is that lenders are too nice. They know the borrower can’t pay and so they don’t make her pay. If the note is secured by a deed of trust with real property, many lenders feel safe giving the borrower a break—what lawyers call “forbearance.”

The other is circumstances; in particular, the Great Recession of 2008. Because so many borrowers were unable to perform on their loans during the decade-long recession, many lenders—even ones that were not-so-nice—had no real choice. They either had to forbear or foreclose on an underwater property they didn’t really want. As a result, a lot of notes went stale.

OK. So what? The Recession is over. The note is in default. Why not just start collecting on the note? The problem is that if the note has been in default for more than six years, it is illegal to bring any action to collect. A.R.S. Sec. 12-548. The borrower still owes the money—and she can pay it back if she wants to—but you can’t force her. As the leading Arizona case put it, after six years “the debt is not extinguished; rather, the remedy for an action on the debt is merely barred.” De Anza Land and Leisure Corp. v. Raineri, 669 P.2d 1339, 1343 (Ariz. App. 1st Div. 1983).

If you think that’s a lot of legal mumbo-jumbo, hang on, it gets worse. You may think, “OK. I won’t sue on the note. I’ll just foreclose the deed of trust and take the property. The Recession is over. The property is now worth something.” But foreclosure is an “action on the debt.” You can’t foreclose, even though you still have a deed of trust recorded against the property securing the note.

What does the law want you to do? Tear up the note? No, the note is still valid. Release the deed of trust? No, the deed of trust does not have to be released until the latter of two things happens (A.R.S. Sec. 33-714):

1. If the final maturity date or the last date fixed for payment of the debt or performance of the obligation is ascertainable from the county recorder's records, you can maintain the deed of trust until ten years after that date.

2. If the final maturity date or the last date fixed for payment of the debt or performance of the obligation is not ascertainable from the county recorder's records or if there is no final maturity date or last date fixed for payment of the debt or performance of the obligation, then you can maintain the deed of trust until 50 years after the date the mortgage or deed of trust was recorded.

With respect to situation (1), it is each separate payment on the note that is subject to the six-year statute of limitations. So, if the note requires a typical monthly payment of principal and interest, then it is only monthly payments that are more than six years in default on which you cannot collect. The remaining payments can still be collected by foreclosure or by suing on the note.

Also important is whether the borrower made any payments that would restart the six-year clock or if the debtor has done anything in writing to acknowledge or reaffirm debt. Before you jump into that water, you should probably talk to a lawyer.

If this sounds like the recurring nightmare where you try to run as fast as you can but you just stay rooted in place, it basically is. But then you wake up and things get better. Same with stale notes. If the deed of trust can stay recorded for ten or even 50 years, then there is a decent chance that the owner/debtor will want to refinance their property or sell it during that time. If so, your deed of trust is still sitting there and has to be paid off before any closing. Your options to collect go from active to passive, but you may still eventually get your money.