A few months ago, the U.S. Supreme Court chose to hear a case deciding whether a chapter 13 bankruptcy debtor could sue a debt collector for violating the Fair Debt Collections Practices Act (FDCPA) for filing a proof of claim on an expired debt. For New York bankruptcy debtors, the answer already is no, but there was hope that the Supreme Court would side with debtors in these circumstances. The Court’s decision in Midland Funding, LLC v. Johnson puts that to rest.
Here are the facts. Midland Funding purchased Aleida Johnson’s $1,879.71 credit-card debt, which last appeared on Johnson’s account in May 2003. Alabama, where the case originated, gives creditors a six-year statute of limitations to collect on a debt. Johnson filed chapter 13 bankruptcy in March 2014. Unquestionably, the statute of limitations had long run out. Nevertheless, Midland Funding filed a proof of claim for the debt in Johnson’s case. Johnson objected to the claim, and the bankruptcy court disallowed it. Then, Johnson sued Midland Funding for violating the FDCPA by filing the proof of claim. The district court sided with Midland Funding, but the Eleventh Circuit Court of Appeals reversed. Midland Funding appealed to the Supreme Court, pointing to split decisions among the federal circuit courts.
The issues in the case boil down to whether a proof of claim on a stale debt is “false,” “deceptive,” “misleading,” “unconscionable,” or “unfair,” under the FDCPA, or if the Bankruptcy Code supersedes the FDCPA in this circumstance. The Court interpreted the term “claim” to mean merely a “right to payment,” and creditors’ rights to payment exist even if the statute of limitations on enforcing them has expired.
Johnson responded that the “claim” in “proofs of claim” must be enforceable, and Midland Funding’s claim was not. The Court rejected this claim because the word “enforceable” does not appear in the Bankruptcy Code, and in section 502(b)(1) it states that if a claim is “unenforceable” it will be disallowed instead of saying that an unenforceable claim isn’t a claim at all.
The opinion in Midland Funding v. Johnson is here (pdf).
Debtors might be concerned that debt collectors will deliberately buy up bad debts in the hope that debtors or trustees will not notice that the claims should be disallowed. Fortunately, debtors are not powerless: They can ask the bankruptcy court to issue sanctions against debt collectors for abusing the bankruptcy process this way.
Midland Funding doesn’t change anything for New York bankruptcy debtors, but it does close a path toward holding debt collectors accountable. If your case has old debts, then the best defense against creditors filing bad proofs of claim on those debts is hiring an experienced New York bankruptcy lawyer to handle your case.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
