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Uncontrollable Debt and Stress

July 26, 2019

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DOES THE FILING OF A TIME BARRED DEBT IN A CHAPTER 13 BANKRUPTCY VIOLATE THE FAIR DEBT COLLECTIONS PRACTICE ACT?

The U.S. Supreme Court addressed an issue that arose in a chapter 13 case of whether the filing of a proof of claim that is 'obviously time barred debt' violates the Fair Debt Collections Practice Act.  In a slip opinion cited as Midland Funding, LLC v. Johnson, 581 U.S. ____ (2017), the Court held that the debt collector's mere filing of a proof of claim on a stale debt is not a 'false,  deceptive, misleading, unfair, or unconscionable debt collection practice within the meanings of the Fair Debt Collection Practices Act' (i.e. FDCPA). 

 

Michigan law has a statute of limitations on debt collections via lawsuit that is six years MCL 600.5807(8) .  In a chapter 13 proceeding, if a creditor files a stale claim on a debt that is more than 6 years old, and the creditor has not obtained a payment nor obtained judgment on that debt, a debtor can file an objection on that stale debt under the affirmative defense of statute of limitations has been exhausted to seek to disallow that claim.  What about a debtor seeking any type of compensatory remedies under the FDCPA?  

 

In Midland Funding, LLC v Johnson, the Debtor's bankruptcy attorney objected to a stale claim based on Alabama's 6 year statute of limitations affirmative defense and the claim was disallowed. The attorney subsequently filed a lawsuit against Midland Funding seeking a monetary award for violation of the FDCPA.  The District Court decided that the FDCPA does not apply and dismissed the case, but on appeal the Eleventh Circuit Court held that the act did apply and reversed the District Court's decision.  

 

The question presented to the U. S. Supreme Court was whether the filing of a proof of claim that is 'obviously time barred debt' violates the FDCPA. 

 

Under the FDCPA, a debt collector is prohibited from making any 'false, deceptive, or misleading representation or using any unfair or unconscionable means to collect or attempt to collect, a debt'. Page.1

 

The Court first looked at a written statement filed by the creditor, which clearly stated that the 6 year statute of limitations on collection of that debt has run since the debt was more than 10 years old and concluded that the claim on its face was 'not false, deceptive or misleading'.  Page 3   Secondly, the Court looked at the Bankruptcy Code's definition of claim as a 'right to payment' under section 101(5)(A) of the bankruptcy code.  The Court stated that you look to relevant state law to determine whether a creditor has a right to payment even if the statute of limitations has run. Page 3.  Under Michigan case law '(t)he running of the statute of limitations does not cancel the debt, it merely prevents a creditor from enforcing his claim'.  See DeVries v. Secretary of State, 329 Mich. 68, 75, 44 N.W. 2nd 872, 876 (1950).  Thirdly, the Court determined that Congress defined 'claim' in the broadest sense, not only to enforceable claims.  Page 4.

 

The Court reasoned that under section 502(b)(1), a Trustee could always object to any unenforceable debt; moreover, under the definition of 'claim' it is a right to payment even if disputed.  Page. 4  The Court further noted that in a bankruptcy proceeding the Trustee as gatekeeper, would have the 'legal sophistication' to not be deceived or mislead by the filing of the stale debt and object to the claim under the affirmative defense of statute of limitations has run. Page 5.

 

The Court went on to state that the FDCPA 'seeks to help consumers . . .by preventing bankruptcies in the first place'; by contrast, the Bankruptcy Code seeks to create and maintain 'the delicate balance of a debtor's protections and obligations'.  page 9.  Thus, the Court reasoned that the 'delicate balance' needs to be preserved, the Bankruptcy Code already has remedies available to address the staleness of a claim, and the Trustee is legally sophisticated to not be deceived by stale claims.  Page 9.  Finally, the Court pointed out that Bankruptcy Rule 9011 is potentially available to utilize against a creditor who fails to 'ensure the accuracy of the information provided' on their filed claim.  Page 10.       

 

Thus, the Court held that the filing a obviously time barred proof of claim in a chapter 13 proceeding 'is not false, deceptive, misleading, unfair or unconscionable within the meaning' of the FDCPA.  Page 11.

  

 

 

 

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