It’s a question that came up in 2015, and the answer isn’t favorable to debtors in New York bankruptcy. When debtors file in chapter 13, creditors file proofs of claim because they usually expect to receive disbursements from the bankruptcy estate. In New York, it’s almost certain.
The rub, though, is that sometimes creditors file proofs of claim even though the debts they hold are past the statute of limitations for debt collection. Outside the bankruptcy context, if they did this, the debtor would certainly have a federal Fair Debt Collection Practices Act (FDCPA) claim against them, but it’s unclear whether FDCPA claims against creditors are allowed by bankruptcy debtors because federal circuit courts of appeal differ as to whether the Bankruptcy Code supersedes the FDCPA. The Second Circuit, which includes New York, sides with the creditors and bars the FDCPA claims; in other circuits, the FDCPA claim can go through.
The U.S. Supreme Court nearly answered the question in 2015, but the Court rejected the case because among other reasons the creditor-appellant waived the bankruptcy issue in the lower courts. However, a new case has come along that could change that, captioned, Midland Funding LLC v. Johnson. According to the parties’ briefs to the Supreme Court, Aleida Johnson owed $1,869.71 on a debt that she had not paid since 2003. Midland Funding LLC purchased the debt, and Johnson filed chapter 13 bankruptcy in 2014. The relevant state statute of limitations (Alabama) is only six years. Midland Funding filed a proof of claim, which Johnson objected to, and three days later she sued Midland Funding in federal court under the FDCPA, alleging the proof of claim was an illegal debt collection attempt.
Interestingly, the Alabama federal district court sided with Midland Funding, holding that while filing the proof of claim violated the FDCPA, the appellate court had not concluded that the Bankruptcy Code supersedes the FDCPA. The issue here is whether the FDCPA and the more recent Bankruptcy Code conflict—and whether that conflict can be resolved. The Eleventh Circuit Court of Appeals believed it can, and it reversed the district court’s decision, holding that the Bankruptcy Code establishes the right to file a proof of claim, and the FDCPA addresses the subsequent consequences of doing so. In New York, the federal courts have held that the Bankruptcy Code sufficiently protects debtors’ rights, so the FDCPA is not required.
Midland Funding LLC v. Johnson may appear more a matter about legal principles than an opportunity to help a distressed debtor, but the stakes are pretty high for debt collectors that hope debtors don’t notice their debts are expired.
More information on Midland Funding LLC v. Johnson can be found here.
If debt collectors are chasing you down, whether their debts are stale or not, talking to an experienced New York bankruptcy lawyer can help you assess your options.
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.
