There’s only so long that a creditor can sue you for a past due debt. In California, you can’t use bankruptcy to let that time run out.
One of the tactics student loan lawyers and debt collection defense attorneys use fairly regularly is to defend based on the expiration of a statute of limitations.
Sue too late, and you’re out of luck. It’s one of the reasons, I think, that we’re starting to see so many lawsuits for past due private student loan debt – the clock is ticking down, and creditors are jockeying for position.
Given the fact that private student loan debt is so large, my fellow student loan lawyers have been debating whether putting someone into a bankruptcy would give us a leg up over creditors such as National Collegiate Student Loan Trust.
The thinking among our little band of student loan advocates has been that if we could somehow cause the statute of limitations to run out, our clients could wipe out some of their student loan debt at the end of the bankruptcy.
In California, at least, that doesn’t work. Here’s why.
Effects Of Bankruptcy On The Statute Of Limitations
When you file for bankruptcy, an automatic stay goes into effect. With limited exceptions, nobody can sue you while you’re in bankruptcy.
At the same time, Section 108 of the U.S. Bankruptcy Code holds that if a lawsuit hasn’t been stated when the bankruptcy case has been filed, and if the statute of limitations for doing so hasn’t expired before the date of the filing of the petition, then such period does not expire until the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the automatic stay.
Looking at that part of the U.S. Bankruptcy Code alone, it would seem as if the tactic of filing for bankruptcy would make sense as a way to get the statute of limitations to run out.
Let’s say you’ve got a 4-year statute of limitations to collect a debt (remember, the statute of limitations on a promissory note such as for private student loans is 6 years, not 4). You’re 3 years past due, so you file a Chapter 13 bankruptcy figuring that you can sit there until the time limit runs.
Once you’re out, you’ve got to wait 31 days before you’re home free.
But you’ve forgotten one piece of the puzzle.
Does Bankruptcy Toll The Statute of Limitations?
The issue of a statute of limitation is one of state law, not federal.
Under California law, a creditor has four years to file a lawsuit against you. For promissory notes such as private student loans, the time is extended to six years.
Other states have their own time limits.
Beyond that, many states have laws that stop the statute of limitations from running under certain circumstances.
Bankruptcy Stops The Clock
California Code of Procedure § 356, for example, states the following:
When the commencement of an action is stayed by injunction or statutory prohibition, the time of the continuance of the injunction or prohibition is not part of the time limited for the commencement of the action.
A line of California cases has interpreted CCP § 356 held that the automatic stay in bankruptcy stops the clock on the statute of limitations. Some of those cases are:
- Scuhmacher v. Worcester, 55 Cal.App.4th 376 (1997)
- Inco Development Corp. v. Superior Court of San Bernardino, Case No. E036800 (Cal. Ct. App. 2005)
- Lewow v. Surfside III Condominium Owners Assn., Inc., 203 Cal. App. 4th 128 (2012)
The Solution Of Bankruptcy May Create Problems
If you’ve got a debt – student loan or otherwise – and are watching the clock tick down, filing for bankruptcy may end up putting you in a worse situation.
If the debt’s dischargeable, you’ve got nothing to fear. But if you’re dealing with a private student loan debt that won’t be wiped out at the end of the bankruptcy case, you may be unwittingly extending the time for the creditor to sue you.
It’s just another reason why the analysis involved in resolving your bill problems is best left to an attorney who understands all the angles.