Alerts and Updates

Filing Stale Proof of Claim in Bankruptcy Does Not Violate the Fair Debt Collection Practices Act

May 19, 2017

This decision is significant to debt collectors and debt buyers who, according to the dissent, “have ‘deluge[d]’ the bankruptcy courts with claims ‘on debts deemed unenforceable under state statutes of limitations.’”

On May 15, 2017, the United States Supreme Court, in a 5-3 majority, sided with the majority of U.S. Courts of Appeals and held that the filing in bankruptcy court of a proof of claim that is obviously time barred is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act (FDCPA).  Midland Funding, LLC v. Johnson, No. 16-348, 2017 WL 2039159 (U.S. May 15, 2017).  In doing so, the Supreme Court reversed the contrary decision of the 11th Circuit Court of Appeals.  Federal circuit and district courts have uniformly held that a debt collector’s threatening to sue on a time-barred debt and/or filing a time-barred suit in state court to recover that debt violates the FDCPA; this decision makes the distinction for bankruptcy proof of claim filings, and holds there is no similar violation for filing proofs of claim.

Although the dissent had a great deal of difficulty with the business model of purchasing time-barred debts and trying to collect them, the majority pointed out that many states’ statutes of limitations provide that a creditor has the right to payment of a debt even after the limitations period has expired. 

The Supreme Court said that because the Bankruptcy Code defines the term “claim” broadly to mean a “right to payment,” and does not specify that it must be an “enforceable” claim, a time-barred debt still constitutes a right to payment and therefore a claim that the holder may file under the Bankruptcy Code.  The law has long treated unenforceability of a claim (due to the expiration of the limitations period) as an affirmative defense, and there is nothing misleading or deceptive in the filing of a proof of claim that follows the Code's similar system.

The Supreme Court reasoned that the context of a civil suit against an unsophisticated consumer differs significantly from a Chapter 13 bankruptcy proceeding, which “significantly diminish” the risks when:

  • the consumer initiates the proceeding;
  • a knowledgeable trustee is available;
  • procedural rules more directly guide the evaluation of claims; and
  • the claims resolution process is “generally a more streamlined and less unnerving prospect for a debtor than facing a collection lawsuit

“These features of a Chapter 13 bankruptcy proceeding make it considerably more likely that an effort to collect upon a stale claim in bankruptcy will be met with resistance, objection, and disallowance.” Because the determination of “whether a statement is misleading normally ‘requires consideration of the legal sophistication of its audience,’” the protections available in a bankruptcy proceeding minimize the risk to the debtor. The court further stated, “the assertion of even a stale claim can benefit a debtor. Its filing and disallowance ‘discharge[s]’ the debt. 11 U.S.C. §1328(a). And that discharge means that the debt (even if unenforceable) will not remain on a credit report potentially affecting an individual's ability to borrow money, buy a home, and perhaps secure employment.”

Because of its holding that the FDCPA was not violated, although the issue was briefed and argued, the majority did not determine that the Bankruptcy Code altogether preempts the FDCPA. The U.S. Courts of Appeals remain split on that question.

This decision is significant to debt collectors and debt buyers who, according to the dissent, “have ‘deluge[d]’ the bankruptcy courts with claims ‘on debts deemed unenforceable under state statutes of limitations.’”

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