CLOSE X
RSS Feed LinkedIn Twitter Facebook
Search:
FMG Law Blog Line

Repaying Old Debts – The Supreme Court Limits FDCPA Liability for Scheduling Time-Barred Claims in Bankruptcy

Posted on: October 9th, 2017

By: Matthew M. Weiss

Earlier this year, the Supreme Court handed a victory to debt collectors when it held that the scheduling of a time-barred claim in bankruptcy was not a violation of the Fair Debt Collection Practices Act (FDCPA).

In Midland Funding, LLC v. Johnson, Aleida Johnson filed for personal bankruptcy under Chapter 13 of the Bankruptcy Code in the Southern District of Alabama. Midland Funding, LLC (Midland) filed a proof of claim asserting a credit card debt of $1,879.71. Johnson’s last charge on the account was in 2003, more than 10 years before Johnson’s bankruptcy filing, even though Alabama’s statute of limitations on the collection of debts was six years. Johnson objected to the claim and it was disallowed. Johnson then brought suit against Midland seeking actual damages, statutory damages, attorneys’ fees, and costs for a violation of the FDCPA, 15 U.S.C. § 1692k. After the district court determined that the FDCPA was inapplicable and dismissed the lawsuit, the Eleventh Circuit Court of Appeals reversed the decision, and Midland appealed to the Supreme Court.

In a 5-3 decision (with Justice Gorsuch abstaining), Justice Breyer, writing for the majority, first determined that a claim under the Bankruptcy Code was a “right of payment”, and that a creditor has the right to payment of a debt even after the limitations period expires. The Court also noted that a claim does not automatically have to be enforceable. Further, the definition of claim under the Bankruptcy Code provided that the claim could be “contingent” or “disputed”. Additionally, the Court found that the running of the statute of limitations was meant to be asserted as an affirmative defense by the debtor after the creditor asserted a claim.

Turning to whether the filing of a time-barred claim was “unfair” or “unconscionable” under the FDCPA, the court distinguished bankruptcy from civil cases in which creditors were subject to FDCPA liability for bringing suit on time-barred claims because “a consumer might unwittingly repay a time-barred debt” in a civil case. The Court reasoned that unlike civil cases, the consumer initiates bankruptcy proceedings, and are unlikely to pay a stale claim just to avoid going to court. Additionally, the Court said that the presence of knowledgeable trustees and procedural rules provided additional protection to debtors. The Court also noted that by filing a stale claim that was subsequently disallowed, that claim would be forever discharged, removing the debt from the debtor’s credit report and “potentially affecting an individual’s ability to borrow money, buy a home, and perhaps secure employment.” For all of these reasons, the Court concluded that the filing of a stale claim in bankruptcy was not “unfair” or “unconscionable” under the FDCPA.

The Supreme Court’s decision in Midland Funding legitimizes a major tool of debt collectors, who now can freely assert time-barred claims in bankruptcy proceedings with the hope that both the debtor and the bankruptcy trustee fail to assert a statute of limitations defense. As Justice Sotomayor wrote in her dissent, because debt buyers assume that a certain percentage of old debt will be written off as uncollectible, the Supreme Court’s decision will likely make consumer debt a more valuable commodity based on the assumption that a greater percentage of that debt will be collected in bankruptcy proceedings. Sotomayor had specifically predicted that “debtor collectors may file claims in bankruptcy proceedings for stale debts and hope that no one notices that they are too old to be enforced.”

In light of the Supreme Court’s decision, bankruptcy debtors should be extra vigilant about reviewing claims filed in their bankruptcy cases to determine whether a statute of limitations affirmative defense can be asserted. Conversely, creditors should not become too comfortable because, even though the Supreme Court’s decision precludes FDCPA liability for filing time-barred bankruptcy claims, the Supreme Court expressly declined to extend its holding to creditors who assert time-barred claims outside of bankruptcy.

If you have any questions or would like more information, please contact Matthew Weiss at [email protected].

 

Tags: , , , ,

Comments are closed.