Effect on Statute of Limitations
Sometimes it happens that there is a statute of limitations that will expire in a set number of years. Like an attachment, which expires in six years. What happens if, before the limitation period runs, the party against whom the lien was recorded files for bankruptcy?
Bankruptcy Code (11 U.S.C.) sec. 108(c) provides:
Except as provided in section 524 of this title, if applicable nonbankruptcy 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 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 stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim
The case of In re Paul, 67 B.R. 342 (Bkrtcy.D.Mass. 1986) is instructive on the point. In that case, the federal court held that the filing of a bankruptcy would toll, or "freeze," the running of the statute that would otherwise cause the lien of an attachment to lapse.
[S]ecured creditors . . . are faced with a dilemma when a petition is filed as short time before their interests lapse. The automatic stay prevents them from taking further action to perfect their lien, but the same stay may not stem the advance of time which threatens to extinguish the perfection of their security interests existing at the time of the petition.
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The Second Circuit has held that the effect of filing a petition is a two way street for creditors and debtors: "[I]n general no creditors' liens acquire validity after the filing of the petition . . . . It should equally follow, we believe, that liens good at this time do not lose their validity."
The court in In re Paul held that the attachments perfected as of the date of the filing of the bankruptcy petition would not lose their perfection while the bankruptcy proceedings were ongoing.