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FDCPA Claims Against Creditors in Bankruptcy Not Allowed in New York

Many lawyers enjoy this time of year not for the nice weather like they should be but for the the U.S. Supreme Court rulings. I recently discussed one case in which the Court held that a chapter 13 debtor could not appeal a denial of confirmation of his or her repayment plan. However, there’s one situation that sometimes affects people in New York bankruptcy that the Court chose not to decide: Whether a debtor in bankruptcy can sue a creditor under the Fair Debt Collections Practices Act (FDCPA) for filing a “stale” proof of claim.

Arguably, the FDCPA complements the Bankruptcy Code. Bankruptcy shields debtors from creditors while the FDCPA allows debtors to take the offensive against debt collectors that are harassing them. Sometimes, debtors can win statutory damages of $1,000 per violation and reasonable attorneys’ fees.

In a bankruptcy case in the Eleventh Circuit Court of Appeals (Fla., Ga., and Ala.), a debt collector filed a proof for a debt that was older than the statute of limitations for collections. Outside of bankruptcy, enforcing an old debt is a violation of the FDCPA. Thus, the debtor filed a suit against the debt collector. The Eleventh Circuit agreed, stating that the FDCPA is designed to protect the “least-sophisticated consumer” from collectors. The creditor appealed, but the case was not taken up by the Supreme Court this year. The Eleventh Circuit case was Crawford v. LVNV Funding LLC (pdf).

For the debtor this isn’t bad news as the precedent in the Eleventh Circuit is favorable. For debtors in New York bankruptcy, on the other hand, it’s not such a good deal: The Second Circuit takes the opposite position from the court in Crawford. In a 2010 case, Simmons v. Roundup Funding, LLC, the debtors alleged that debt collector Roundup filed an inflated proof of claim. They sued under the FDCPA, but the federal district court dismissed their claim.

The Second Circuit Court of Appeals provided a contrary justification for upholding the dismissal of the Simmons’ claims. In one case it cited, a court in a similar situation wrote, “[T]he Bankruptcy Code itself contemplates a creditor filing a proof of claim on a time-barred debt and the Bankruptcy Court disallowing such claim after objection from the debtor.” Overall, the court argued that debtors in bankruptcy do not require the special protection the FDCPA provides. Simmons can be found here.

By not hearing the Eleventh Circuit case, the Supreme Court may have deprived New York debtors of the ability of using the FDCPA against creditors that try to secure a distribution from the bankruptcy estate to which they are not entitled. On the other hand, the Court might have ruled in the opposite direction. As the law stands, because unscrupulous debt collectors might face fewer hurdles enforcing debts unfairly, it’s important for debtors to hire an experienced New York bankruptcy lawyer to ensure creditors don’t have stale or inflated claims.

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 business bankruptcy lawyer Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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