August 25, 2020
In most bankruptcy situations, creditors need not worry about applicable statute of limitations on their claims as Chapter 7 proceedings which are resolved fairly expeditiously. And for most debtors, seeking to substantively benefit by a lapsing of the statute of limitations is a forethought. However, other chapters of the bankruptcy code are not always successful which can often lead to dismissal. If dismissed, pre-petition creditors can try to collect which can include litigation. This raises the issue of whether the state statute of limitations is tolled during the pendency of a bankruptcy. This is especially important in today’s environment where economic stress during the pandemic has resulted in millions of unemployed workers who are unable to make their Chapter 13 plan payments often resulting in dismissals.
Unfortunately for debtors in Arizona, the answer is that Arizona’s six year statute of limitations on contractual debts is tolled during the pendency of a bankruptcy. Therefore, debtors of failed repayment plans cannot benefit of the passage of time during the pendency of a bankruptcy case.
A bankruptcy proceeding creates the “automatic stay” in Section 362(a) which prohibits collection activities and judgment enforcement during pendency of a bankruptcy. This means that state law statute of limitations can often lapse during the pendency of a bankruptcy proceeding while the automatic stay prohibits collection activities. The bankruptcy code extends certain time limitations for civil actions on a debt. Specifically, Section 108(c) provides:
“If applicable non-bankruptcy law … fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, … and such period has not expired before the date of the filing of the petition then 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 stay under section 362 … of this title … with respect to such claim.”
The bankruptcy code only extends the expiration of the statute of limitations for 30 days after the expiration of the stay unless state law provides a greater period to extend the deadline. However, the Arizona Supreme Court has held that that a bankruptcy stay tolls day-for-day statutory limitations periods. In re Smith, 101 P.3d 637 (Ariz. 2004). This has been followed in other cases. Mlynarczyk v. Wilmington Sav. Fund Soc’y FSB, No. CV-15-08235-PCT-SPL, 2016 WL 3524329, at *4-5 (D. Ariz. Apr. 29, 2016). Other unreported Arizona decision permit tolling based on these cases.
In addition, state and federal courts can apply the doctrine of equitable tolling. This is rarely addressed in Arizona due to the day-for-day tolling applicable under Smith. Yet is remains a backup argument in other states to avoid the lapsing of the statute of limitations. The best debtors can hope for in Arizona is that unsophisticated collection agencies are unaware of the tolling provisions such that they can convince a collection agency that claims are time barred.