An opinion was issued by the Supreme Court of the United States last week in a case that bankruptcy lawyers, trustees and judges had been anxiously following. The question was whether the act of a creditor filing a ‘stale’ proof of claim in a Chapter 13 bankruptcy violated the Fair Debt Collection Practices Act (FDCPA). A ‘stale’ claim means that the dates on the proof of claims show that the applicable state statute of limitations had run before the Chapter 13 was filed. The complete opinion can be viewed here.
There are creditors in the business of buying and selling debts in bulk, and sometimes these debts may be past the statute of limitations. A couple of the largest nationwide debt buyers have been sanctioned recently over the practice of filing lawsuits in state courts over debts that have passed the statute of limitations and hoping to win by default judgment (that the Defendant never files a response). As an example, the Consumer Finance Protection Bureau sanctioned two debt buyers in 2015.
Bankruptcy practitioners wondered how the Court would rule. Creditor lawyers wanted a holding stating that bankruptcy law precluded the FDCPA, meaning an FDCPA claim could not be brought against a creditor for filing a stale claim in a Chapter 13 bankruptcy. Debtor lawyers wanted a ruling that said not only did the FDCPA apply, but that filing a stale claim was a clear violation of the FDCPA.
The issued ruling is largely creditor–friendly with a few caveats. The Court held that “the filing 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.” The Court analyzed the different statutory features of the FDCPA and the Bankruptcy code and how the two sets of laws intersect and interact in reaching their decision.
The dissent (Judge Sotomayor with Ginsburg and Kagan) wrote that the practice of knowingly filing time–barred debts in hopes that no one will notice and the creditor will collect payments, is both “unfair” and “unconscionable.”
The majority explained that they thought Chapter 13 bankruptcy trustees would object to stale claims, but I believe this opinion leaves the burden on the Debtor to continue objecting to these stale claims. I read the opinion to say that Debtors may still bring FDCPA claims in a Chapter 13 bankruptcy, but that the mere act of filing a stale claim is not itself a violation of the FDCPA.
The biggest question left unanswered (though mentioned in the opinion) is whether a debt buyer filing a lawsuit for a stale debt violates the FDCPA. In light of the decision in this case, one wonders whether that question may be more heavily litigated by creditors in an attempt to percolate the issue in the hope that the SCOTUS may hear the issue and make a pro-creditor ruling.
Another question remaining unanswered in the wake of the ruling is whether Debtors can bring an action against creditors under state debt collection laws for the practice of filing a stale claim in a Chapter 13 bankruptcy.
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