The Bankruptcy Code (“Code”) permits creditors to file proof(s) of claim(s) in bankruptcy proceedings. This is a statement of the amount the creditor claims to be owed by the filer. The Fair Debt Collections Practices Act (FDCPA) prohibits debt collectors from “using any false, deceptive, or misleading misrepresentation or means in connection with the collection of any debt.”
Courts have used this provision to hold that filing time-barred lawsuits violates the FDCPA. See, e.g., Phillips v. Asset Acceptance, LLC, 736 F.3d 1076 (7th Cir. 2013)(Posner, J.); McCollough v. Johnson, Rodenberg & Lauinger, 610 F. Supp. 2d 1247 (D. Mont. 2009); Pincus v. Law Offices of Erskine & Fleisher, 617 F. Supp. 2d 1265 (S.D. Fla. 2009); Boon v. Prof’l Collection Consultants, 978 F. Supp. 2d 1157 (S.D. Cal. 2013).
Because the Code permits debt collectors to file proofs of claims in bankruptcy court, but a violation of the FDCPA occurs when debt collectors file time-barred lawsuits, there have been a flood of FDCPA lawsuits filed in bankruptcy courts after debt collectors filed time-barred proofs of claims. Unfortunately, the federal appeals courts cannot seem to come to agreement if a FDCPA violation occurs when a debt collector files a time-barred claim in bankruptcy court.
The United States Supreme Court will likely have to decide this very important issue.
In Crawford v. LVNV Funding, LLC, the Eleventh Circuit Court of Appeals (Alabama, Florida, and Georgia), in finding that a debt collector violated the FDCPA when it filed a claim in bankruptcy court over a time-barred debt, found that “a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt.” 758 F.3d 1254, 1257-58 (11th Cir. 2014).
The 11th Circuit again addressed this issue in May 2016 after a district court held that there was a conflict with the Code and FDCPA after a debt collector filed a time-barred FDCPA claim in bankruptcy court. Johnson v. Midland Funding, LLC, 823 F.3d 1334, 1335 (11th Cir. 2016).
The Court, in reaching its decision, held that: “This dispute reveals no irreconcilable conflict between the Bankruptcy Code and the FDCPA. A creditor may file a proof of claim in a Chapter 13 bankruptcy proceeding under the Code. However, when that creditor is also a ‘debt collector’ as defined by the FDCPA, the creditor may be liable under the FDCPA for ‘misleading’ or ‘unfair’ practices when it files a proof of claim on a debt that it knows to be time-barred, and in doing so ‘creates the misleading impression to the debtor that the debt collector can legally enforce the debt.’” Id. at 1342 (quoting Crawford, 758 F.3d at 1261).
Other federal appeals courts have taken a different approach. In Dubios v. Atlas Acquisitions LLC, the Fourth Circuit Court of Appeals (Maryland, Virginia, West Virginia, North Carolina, and South Carolina) held that “filing a proof of claim in a Chapter 13 proceeding based on a debt that is time-barred does not violate the FDCPA when the statute of limitations does not extinguish the debt.” 2016 U.S. App. LEXIS 15682, *21-22 (4th Cir. Aug. 25, 2016).
The Court further noted that, “[v]arious other considerations also differentiate filing a proof of claim on a time-barred claim to filing a lawsuit to collect such debt.” Id. at *20. While not addressing the least sophisticated consumer standard set forth in the FDCPA, the Court insinuated that because a debtor is protected by a bankruptcy trustee who can object to a time-barred claim and is often represented by counsel who can also object to a time-barred claim, the FDCPA is not required to protect the least sophisticated consumer.
In Owens v. LVNV Funding, LLC, the Seventh Circuit Court of Appeals (Wisconsin, Illinois, and Indiana) found, in holding that it is not a FDCPA violation to file a time-barred claim in bankruptcy court, that “the expiration of the statute of limitations does not extinguish the underlying debt.” 2016 U.S. App. LEXIS 14706, *7 (7th Cir. Aug. 10, 2016).
In my opinion, the Owens case gets it exactly right: a debt does not extinguish itself once the statute of limitations expires and debt collectors are not required to cease collection activity if a debt is time-barred. The FDCPA only prevents debt collectors from filing time-barred lawsuits. Debt collectors can make collection calls and send letters to debtors, providing that debtors are notified that debt(s) are time-barred.
In many states, unpaid debts remain on debtors’ credit bureau reports well after the requisite statute of limitations have expired. However, if a debtor makes a voluntary payment to a debt collector on a time-barred debt, the statute of limitations begins all over again.
As a result of the conflicting opinions, it is highly advisable that debt collectors consult with legal counsel prior to filing time-barred proofs of claims in bankruptcy court. At least until the US Supreme Court provides some clarity on this very important issue.
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