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Should I Make Partial Payment on My Debt?

At Least One Reason to Say No/Pay With Reservation

By: Laura Day DelCotto

We deal every day with borrowers who are behind in their monthly payments. Most often, we work with borrowers to attempt to restructure their payments. This would be done outside of any court process like state court litigation or bankruptcy. This will save on attorney fees and it’s sometimes easier to cut a deal without any lawyers getting involved. 

This Sixth Circuit case out of Michigan was a reminder of at least one thing to consider: when and how is a statute of limitations tolled during these kinds of negotiations?  

Debt Obligations Don’t Disappear

In the 2020 opinion of PNC Bank v Legal Advocacy, both the borrower law firm and its principal had no real defenses that the firm owed $1.5 million. They owed this amount to PNC Bank under a promissory note which had been personally guaranteed by the firm owner. A number of default notices, emails, letters and calls followed. While under ongoing discussions of forbearance, the firm sent its normal “interest-only” payment, “without any declaration that [borrower] was disclaiming liability for the entirety of the outstanding debt.” 

Years went by (this happens more than you might expect). However, the lender usually doesn’t disappear. PNC sent an “updated demand” about 5 years later….The firm declined to pay.

Statute of Limitations and Partial Payments

The Sixth Circuit affirmed the lower court holding that the six year Michigan statute of limitations had not run. Normally, the suit would have been barred, since the lawsuit was filed beyond six years from the date the contract was breached. However, in this case, the “interest-only” payments got in the way. The Court held that it is “well-established” that a partial payment on a loan serves to restart the statute of limitations. This type of payment “’operates as an acknowledgment of the continued existence of the demand and as a waiver of any right to take advantage by plea of limitations of any such lapse of time as may have occurred previous to the payment being made.’”

The exception to Michigan’s partial-payment doctrine is that a partial payment may not restart the running of the limitation period. This is the case if “’accompanied by a declaration or circumstance that rebuts the implication to that the debtor by partial payment admits the full obligation.’”

Contractual Attorney Fees

Always remember: all loan instruments contain attorney fee clauses. This borrower ran up another $165,000 in legal fees owed to PNC. When you choose to litigate and fight it could be costly. Not only are you paying your own lawyer, but if you lose, you are paying the bank lawyer as well. This make battles like this one cost-prohibitive to most people.  

When making partial payments during workout negotiations, if you want to retain defenses always send a written statement. Be sure to send the written statement along with the payment as well. By making the payment, you are not admitting to the validity of the obligation. Better safe than sorry on this point. 

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email info@dlgfirm.com or reach us on our contact page.

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