Proofs of Claim Not Subject to FDCPA Damages in Magical Bankruptcy Land
Proofs of Claim for Debts Prohibited by Statute of Limitations Allowed in Chapter 13
Proofs of Claims filed by debt buyers or other collectors seeking to be paid from Chapter 13 bankruptcies for debts that are past individual states’ statute of limitation periods are not subject to penalties under the Fair Debt Collections Practices Act (“FDCPA”), says the US Supreme Court. Despite the fact that those same debts, when pursued by way of a state court collections lawsuit, have almost universally found to be FDCPA violations.
The Supreme Court issued this Alice in Wonderland-esque decision last week in a case titled Midland Funding, LLC v. Johnson. Justices Breyer, Roberts, Kennedy, Thomas, and Alito authored the decision, with Justices Sotomayor, Ginsburg, and Kagan dissenting.
What Are Proofs of Claim?
A “proof of claim” is a document that creditors must file in order to receive funds from a bankruptcy trustee. In Chapter 13 bankruptcies, creditors may file these as early as the date that the case is filed. The proof of claim must have attached documentation of various sorts to demonstrate that the debt is legitimately owed to the entity filing the document (in practice, this is rarely the case and, at least in the Eastern District of Michigan, even more rarely do Bankruptcy Judges care if it isn’t there).
Despite that crack at local ED Michigan judges, if a proof of claim is faulty in various ways, a good bankruptcy lawyer will spot the fault and file an objection—and, hopefully, have the claim disallowed so that the claim is paid nothing and is discharged in full.
A proof of claim filed for a debt that is not collectible outside of the bankruptcy process due to a statute of limitations problem is just such a fault.
This was the situation in the Supreme Court decision.
What Is a Debt Buyer?
A lot of proof of claim faults arise when a claim is filed not by the original creditor who lent the debtor the money but some entity who later purchased the debt (allegedly), usually for pennies on the dollar and sometimes for nothing at all.
There are companies who do nothing but buy up old or “bad” debt from large lenders like Citibank or Chase Bank and then proceed to attempt to collect the debt.
They regularly do this by filing proofs of claim forms in Chapter 13 bankruptcy cases. Uniformly, they attach little to no documentation to the proof of claim form to establish their legal right to collect that debt.
A terrible Federal Bankruptcy Rule of Procedure limits, now, what they are required to attach to the proof of claim form—but they still need, at least according to one decision obtained for a client by The Hilla Law Firm, to show chain of ownership and proper assignment of the debt.
And that the debt itself is valid.
What Is the Consequence for Debt Buyer Proofs of Claims Filed in Chapter 13 Banrkuptcies?
There are two responses to a proof of claim filed by a debt buyer attempting to collect a debt that is past the statute of limitations period in the state in which the bankruptcy case has been filed. (In Michigan, that is 6 years.)
One, object to the proof of claim and have it disallowed. This response is unaffected by the Supreme Court’s ruling.
Two, file an “adversary proceeding” against the creditor in bankruptcy court with a claim for damages under the Fair Debt Collections Practices Act.
This latter option is now limited, if not totally foreclosed, under the Supreme Court’s ruling.
An FDCPA suit can still be filed in state court or in Federal Court outside of Magical Bankruptcy Land—and the Supreme Court’s ruling is clear about this. But as part of a claim objection in Bankruptcy Court, the FDCPA won’t any longer provide any basis for a claim for additional damages and attorney fees and costs.
Proof of Claim for Stale Debt in Chapter 13 Bankruptcy: The Bottom Line
The bottom line with regard to a stale and invalid proof of claim filed in a Chapter 13 bankruptcy case is that it may still be disallowed and go unpaid in the bankruptcy process—but the cost of that effort will be borne by the debtor. He or she will pay attorney fees through their Plan (typically) for their lawyer’s draft and filing an objection to that proof of claim.
And anything done at an hourly rate in a Chapter 13 case must be weighed against the value for the debtor. That is, a proof of claim for an invalid debt for $100.00 may be totally objectionable—but it may cost the debtor more to pay their attorney to object to it, especially if the matter goes to hearing.
That being the case, pragmatic decisions will need to be made when confronting such claims. Some invalid debts will end up being paid, therefore—and the debt buying industry will be all the richer for it. (Those $100 proofs of claims filed by debt buyers can really add up to a large annual profit for them.)
Once again, the US Supreme Court has handed an enormous gift to the financial industry.
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