How Bankruptcy Works

• Individuals (and businesses) can petition for federal bankruptcy protection under Chapter 7 or 13 (individuals) and Chapter 7 or 11 (businesses). Chapter 7 provides that all assets be liquidated and the proceeds be distributed to all named creditors. Chapter 13 (wage earner plan) allows individuals to pay a portion of their total debt over time, while Chapter 11 permits businesses to reorganize their operations to make arrangements with current creditors and, it is hoped, to continue operating in the future.
  
  

How a Statute of Limitations Works

• Except for the crime of murder, most legal situations have a statute of limitations (SOL) requiring that certain actions or remedies must be filed or requested in a specified period of time. Should the allowable time frame pass, most potential plaintiffs will be barred from making a claim. Along with criminal infractions, many other claims, including insurance, personal injury, negligence, tax and debt issues, must be initiated within the time specified by the federal or state statute of limitations. Regardless of the evidence of or indisputable data regarding civil or criminal harm, should a government, individual or business fail to start the process prior to the SOL expiration, the case will not be heard by the court system.
  
  

Bankruptcy and Debts Not Subject to SOL

• Some debts are not subject to the standard SOL and cannot be discharged in bankruptcy. The most common debts that cannot be discharged and are not subject to a standard debt-related SOL are federal student loans, past-due child support and taxes (federal and state).
  
  Be aware that, making any payments before or after a running SOL period expires may "re-start" the timing issues, with the SOL clock returning to zero. States have different rules and SOLs for debt collection. Filing a bankruptcy petition may not automatically stop or erase the collection clock. Even federal taxes have their own SOL so the debtor still has some protection, but the SOL is typically extended, protecting the government, too.
  
  

Bankruptcy and SOL

• The relationship between bankruptcy and the SOL has been a contentious, sometimes volatile, subject for many years. The SOL is designed to offer some protection to the debtors, helping them to look forward, not toward the past. Curiously, until the mid-1990s, companies in Chapter 11 (reorganization) received more preferential treatment than individuals in Chapter 7 (liquidation) bankruptcy.
  
  The federal bankruptcy statute states that claims must be filed no later the "earlier of two years after the appointment of a trustee or before the case is closed or dismissed." However, state statutes varied widely and generated much confusion.
  
  In 1993, the U.S. Court of Appeals finally adopted an attitude of "fairness" and reduced some of the confusion. Multiple courts held that the federal two-year SOL applied to a debtor-in-possession regardless of whether a trustee had been appointed. In cases of outstanding taxes, the IRS has extended SOL protection for the term of the bankruptcy (from filing to discharge) plus six months, since this debt is non-dischargeable.
  
  Finally, there is no statute of limitations that applies to filing a Chapter 7 bankruptcy. However, one may not file another bankruptcy petition (Chapter 7) for eight years after a discharge. Always consult an experienced bankruptcy attorney or expert when questioning how an SOL affects a particular case.