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Be aware of "SOLs" on credit card debt in Chapter 13 bankruptcy

Kentucky residents may be aware of the concept of Statutes of Limitations, also known as "SOLs," based upon common knowledge of criminal or civil legal concepts. In short, SOLs are restrictions that legislatures place on the time a person or the state has to pursue some legal action. The idea is that after a certain period of time, witnesses or evidence may no longer be available, and also that at some point the potential parties to an action need to have certainty that the matter is closed. Some people may be surprised to learn that SOLs may apply to certain bankruptcy cases as well.

SOLs most commonly come into play regarding credit card debt. Because most states, Kentucky included, put time restrictions on how long a creditor can wait to enforce an unpaid debt, some very old debts may end up being unenforceable. This often occurs when a debt has been sold to a collection company and that company has taken no action on it for a long period of time. This means that it is possible that when an individual declares bankruptcy, some of the debts owed may be unenforceable. A new U.S. Supreme Court decision, however, makes it clear that it is filers who need to beware of these zombie debts.

The case arose out of a credit card debt that was filed with a proof of claim in a Chapter 13 bankruptcy proceeding. This claim was very obviously time-barred, as all parties admitted. However, the Supreme Court found that simply filing a proof of claim for a debt it knew was legally unenforceable was not a violation of the federal Fair Debt Collection Practices Act. The court ruled that it was up to the debtor to object to the debt due to it being legally barred.

This decision, which affects the entire country, places the onus on the filer of a bankruptcy case to take action with regard to debts that may be time-barred. And, while the case before the Supreme Court may have been "obvious," in Kentucky there are reasons to think that whether a SOL has run on a debt may not be so easy to determine. First is deciding whose debt SOL applies, as Kentucky law requires that the bankruptcy court use the shorter of the two SOLs if the cause of action accrued outside of the state. Further, there may be questions on when the SOL begins to "run," i.e. when the clock begins on the SOL being used.

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