Statute of Limitations for Charged-Off Debt & Home Equity Loans

If a lender charges off your home equity loan, that action has no effect on your obligation to repay the debt. All three of the most common home equity loan types -- equity loan, a home equity line-of-credit and cash-out refinance -- are governed by your state's statutes of limitation on written contracts.

Statutes of limitation determine how long after making a legal agreement the parties are bound by it. How long you have to sue for violation of the agreement depends almost exclusively on two things: whether the agreement is written or oral and which state's statute governs that agreement. If you sell a house in California, for example, and promise the buyer you'll remedy some defect in the house but fail to do so, the buyer has two years to sue if your agreement was oral. If the contract was written, which is more often the case, she has four.

The period of limitation varies considerably from state to state. A written contract in Kentucky can be contested for 15 years, the longest statutory time period in the 50 states. Statutes in seven states run for 10 years and statutes in seven others run for only three, with statutes in the remaining states running from four years to eight.

Almost without exception, real estate contracts are in writing. All three kinds of common home equity agreements are written contracts. Your rights depend on your particular agreement. The agreement types differ in other ways as well. The interest rates charged for HELOCs, for example, usually are lower than for second mortgages. But with respect to the statute of limitations governing them, they are identical.

If you're in default on a home equity loan, at some point your lender may send you a notice stating that your loan has been charged off. This signals that the loan is no longer an asset on the bank's books, but a liability. It is a significant event for the bank's general accounting purposes because it affects the bank's federally mandated liquidity ratios. However, it has no effect on your legal obligation to repay the debt, which is undiminished, nor on the bank's right to sue or foreclose. In most cases, the charge-off notice results from a delinquency on your home equity loan. In other cases, it occurs because the holder of the first mortgage has taken some action against you related to delinquency on that loan.

Once the bank has sent the charge-off notice, it puts your loan into collection. At that point you have four options:

• You can make the required payments to bring the loan current. Optionally, you can pay off the home equity loan in full. Until this occurs, the collection agency may sue for repayment.

• You can come to some compromise agreement with the lender. For example, the lender may accept less than the full amount owed if you pay the remainder immediately.

• You can file for bankruptcy. Filing for bankruptcy can be a viable option, but your rights vary from state to state. Whether or not you lose your house depends upon several factors, including the response of the first mortgage holder. Before considering this option, it's a good idea to consult a real estate attorney.

• Do nothing and wait to be sued. This generally is not a good option. Your wages may be garnished or a levy may be placed on your bank account.