The saying “nothing lasts forever” also applies to financial debts. Creditors can collect on most financial obligations for only a few years. This is referred to as a “statute of limitations.” The amount of time a creditor has to collect varies from state to state, and also depends on the type of debt.

Congress has stated that nonbankruptcy statutes of limitations may be extended for creditors when a debtor files for bankruptcy protection. Section 108(c) of the Bankruptcy Code provides that a statute of limitations that expires during a debtor’s bankruptcy case is automatically extended for thirty days after the termination of the automatic stay. Additionally, if the statute of limitations is set to expire within thirty days of the termination of the automatic stay, the statute of limitations is extended for thirty days after the termination of the automatic stay (so either way the creditor gets at least thirty days to collect after the automatic stay terminates). If the statute of limitations does not expire until thirty days after the termination of the automatic stay, the bankruptcy has no effect.

What does this mean to the average debtor? Not much. Most debts are discharged during bankruptcy and the statute of limitations never comes into play. However, Section 108 has a large impact on bankruptcy cases that are dismissed and on debts that are excluded from discharge. In these circumstances the debtor must recalculate the statute of limitations in order to determine when the creditor’s opportunity to take legal action will expire.

The statute of limitations is tolled differently for income tax debts to the federal government. Here it is important to first review the five basic requirements for discharging federal income taxes during Chapter 7 bankruptcy:

1. The Three Year Rule – The bankruptcy must be filed more than three years after the due date for filing the return. Any extension changes the due date.
2. The Two Year Rule – The bankruptcy must be filed more than two years after the date that you filed your tax return.
3. The 240 Day Rule – The bankruptcy must be filed more than 240 days after the taxes were assessed.
4. The Debtor Has Not Evaded Taxes – Your taxes will not be discharged if you “willfully attempt in any manner to evade or defeat such tax.”
5. The Debtor Has Not Filed a Fraudulent Return – Your taxes will not be discharged if you file a fraudulent return.

 
The time limitations for these periods may be tolled during bankruptcy. When a debtor files bankruptcy, the Three Year Rule is tolled, or suspended, for the time the debtor is in bankruptcy. After the bankruptcy protection ends, the time period again resumes, plus an extra 90 days is added. The 240 day period is also tolled by bankruptcy in the same manner as the three year period. The Two Year Rule is not tolled by a bankruptcy filing.

If you have older debts that will not be included in your bankruptcy discharge, speak with your attorney about the applicable statute of limitations. In most cases the bankruptcy protection will help you either discharge your debts or may eat up the statute of limitation period.