Bankruptcy Statute of Limitations

There may be instances when a debtor who had written off an old debt is approached by a debt collector demanding payment of the same. Since there is no law that prevents the creditor from filing a charge for a very old debt, to protect the interests of the debtors, the law has come up with the concept of statute of limitations. The statute of limitations defines the maximum time frame after an event that any legal proceedings can be initiated with regard to this event. The underlying intention behind the statute of limitation is to safeguard the interests of the debtors who might otherwise be forced to live under the constant fear of charges from creditors for older defaults and to provide him with the opportunity to present before the court fresh and relevant evidence related to the case for a better outcome.

The statute of limitations with regard to bankruptcy proceedings is two years. But, before April 13, 1994, the statute of limitation was treated differently between bankruptcy under Chapter 11 and Chapter 7 bankruptcy. The credit managers were constantly placed under the threat of bankruptcy preference litigation as various courts upheld different statute of limitations to a debtor-in-possession. A creditor who was provided with preferential treatment by the debtor during his journey to bankruptcy can be brought under the scrutiny of the law to safeguard the interests of other creditors. The law generally entertains an action for preference and other bankruptcy related litigation's for two years after the appointment of a trustee or the time the case is closed or dismissed. But, with the debtor-in-possession not treated as a “trustee” by many courts of that period, it became necessary to bring in a uniform ruling to protect a debtor from stale claims. On April 13, 1994, the U.S. Court of Appeals for the Second Circuit joined the other circuits and introduced a uniform statute of limitation of bankruptcy code bringing the debtor-in-possession under the two year time frame.

However, there may arise circumstances in which the statute of limitation under bankruptcy can be tolled or extended by the Court of law.