Customer Filed Bankruptcy? Here’s How to Get in Front of It – and Collect

If one of your customers files for bankruptcy the week before your statute of limitations runs, do you actually get extra time to sue – or are you out of luck?

The key point for North Carolina business owners is this: the bankruptcy automatic stay blocks collection activity, but it usually does not stop the clock on North Carolina statutes of limitation, so you must manage deadlines proactively even while you are stayed.

Customer Filed Bankruptcy? Here’s How to Get in Front of It – and Collect

Don't Assume Bankruptcy Buys More Time

A North Carolina Court of Appeals decision, East Bay Company Ltd. v. Baxley (Nov. 19, 2024), shows how easily a creditor can lose substantial rights by assuming bankruptcy buys more time. In that case, the creditor had obtained a judgment in 2010 and later tried to renew it to keep it enforceable. The debtor filed Chapter 7 bankruptcy in 2018. The bankruptcy court eventually denied the debtor’s discharge and lifted the automatic stay in June 2020. The creditor waited until June 2022 to file its renewal action. By then, more than ten years had passed from the original judgment, and the court dismissed the case as time-barred.

To understand why the creditor lost, it helps to separate two concepts that often get blurred together: the automatic stay and the statute of limitations. When someone files bankruptcy, federal law immediately stops most collection efforts. You generally cannot file a lawsuit, continue an existing case, enforce a judgment, garnish wages, or seize assets without court permission. That protection is broad, and violating it can expose you to penalties.

Stopping Collection Activity Not The Same As Stopping Time

But stopping collection activity is not the same as stopping time. North Carolina law sets firm deadlines for bringing claims. For example, most breach of contract claims must be filed within three years. Many tort claims, such as negligence or fraud, are also subject to a three-year deadline. Claims under North Carolina’s Unfair and Deceptive Trade Practices Act, N.C. Gen. Stat. § 75-1.1, must be filed within four years. Once those periods expire, the claim is generally lost.

The Bankruptcy Code does contain a provision that can extend a deadline in limited circumstances, but it is narrower than many people assume. Under 11 U.S.C. § 108(c), if your filing deadline would otherwise expire while the bankruptcy stay is in place, you typically get at least 30 days after notice that the stay has ended to file your lawsuit. What you do not get is a full “pause” for the entire length of the bankruptcy case. The law does not automatically add months or years to your deadline simply because the debtor filed bankruptcy.

That distinction was decisive in East Bay. North Carolina allows a judgment to be enforced for ten years and renewed once within that ten-year window. The creditor argued that the bankruptcy filing should toll – or suspend – the 10-year renewal period. The Court of Appeals disagreed. Because the 10-year deadline had not actually expired while the stay was in effect, the creditor did not receive a reset. When the creditor waited too long after the stay was lifted, the renewal action was dismissed.

The court also rejected the argument that a North Carolina tolling statute automatically saved the claim simply because the creditor was legally prohibited from suing during the stay. The takeaway for business owners is that courts will read tolling rules narrowly. You should not assume that bankruptcy automatically protects your claim from expiring.

Disciplined Deadline Management

From a business perspective, the practical lesson is disciplined deadline management. If a customer, vendor, or former partner files bankruptcy, immediately identify what claims you may have and determine the applicable North Carolina statute of limitations. Treat those deadlines as real and approaching, even if you cannot take action right away because of the stay.

You should also monitor the bankruptcy case rather than waiting passively for it to conclude. In many Chapter 7 cases, the stay ends when the case is closed, dismissed, or when a discharge is granted or denied. Once the stay is lifted, you may have a short window – sometimes only 30 days – to file your lawsuit before your claim becomes time-barred.

In some situations, it may make sense to ask the bankruptcy court for permission to proceed with a lawsuit for the limited purpose of establishing liability or preserving your claim. That is a strategic decision to make with counsel, particularly if a key deadline is approaching and the bankruptcy case appears likely to drag on.

Conclusion

Finally, remember that protecting your legal rights and actually collecting money are two separate issues. You may need to file a proof of claim in the bankruptcy case to share in any distribution, and you may also need to preserve your right to sue after the stay ends. Missing either deadline can eliminate meaningful recovery.

The central lesson from East Bay is not complicated but it is critical: bankruptcy can slow down your ability to collect, but it does not automatically extend North Carolina’s statutes of limitation. If you rely on the bankruptcy filing as a safety net, you may discover too late that the clock never stopped running.

---

DYE CULIK is a business/corporate law firm based in Charlotte, NC and representing clients in NC, SC, MA, and MI. If you are facing a business dispute, business litigation, or collection issue with one of your clients, connect with us and mention this article for a complimentary consultation.