Debt collectors that filed accurate proofs of claim on
time-barred debts in consumers’ bankruptcy cases did not engage in false,
deceptive, misleading, unfair, or unconscionable debt collection practices, the
U.S. Court of Appeals for the Seventh Circuit has decided. As a result, the
debt collectors did not violate the Fair Debt Collection Practices Act by
filing their claims, the court said, even though the Seventh Circuit had previously
determined that suing on a stale claim is a violation (Owens v. LVNV Funding, LLC).
As outlined by the court, the significant facts in the three
consolidated cases were the same: debt buyers filed proofs of claim in
consumers’ bankruptcy cases. All of the filings outlined the claims in a
factually accurate manner, all of the consumers were represented by attorneys,
all of them objected to the claims under the statutes of limitations, and all
of the claims were rejected by the bankruptcy courts. All of the consumers then
sued the debt collectors, alleging that filing a time-barred proof of claim
violated the FDCPA.
What’s a “claim” in bankruptcy? The court first rejected the
consumers’ attempt to narrow the bankruptcy definition of “claim” to only
legally enforceable obligations. If that definition were correct, then filing a
proof of claim on a stale debt would automatically be an FDCPA violation, the
court conceded. However, the bankruptcy definition actually is much broader,
encompassing claims that were characterized as unmatured or contingent. This
implies that stale claims are permissible.
The Bankruptcy Code expects that claims will be filed for
unenforceable debts and that the bankruptcy court will disallow such claims,
the court said. It is true that this could result in some unenforceable debts
slipping through, the court conceded, but the requirement that a proof of claim
include details about the debt would help prevent this, including by
demonstrating the timeliness or untimeliness of the claim.
No FDCPA violation. Of course, a creditor’s ability to file
a proof of claim on a time-barred debt under the Bankruptcy Code did not mean
that doing so would not violate the FDCPA, the court continued. However, in
this case, the claims were not false, deceptive, or misleading.
The consumers conceded that the proofs of claim gave
complete and accurate information about the debts, the court pointed out. The
consumers all had attorneys and, given the information in the filings, “a
reasonably competent lawyer would have had no trouble evaluating whether the
debt was timely.”
Precedent disregarded. The court was unpersuaded that its
opinion in Phillips v. Asset Acceptance, LLC, compelled a decision that the
FDCPA had been violated. In Phillips, a different three-judge panel of the
Seventh Circuit decided that filing a collection suit on a time-barred debt
would violate the FDCPA. However, the factors that led to the Phillips ruling
were not present in the context of bankruptcy court proceedings, the court
said.
A consumer being sued might not know about the statute of
limitations or might not recall the debt at all, the court explained.
Alternatively, a consumer might choose to surrender rather than litigate a
collection suit. These concerns were not present in bankruptcy proceedings.
Dissenting opinion. Chief Judge Woods disagreed with the
other two members of the panel. According to the dissenter, Seventh Circuit
precedent makes clear that misleading a consumer about the collectability of a
debt is a violation, and a bankruptcy court proof of claim is just as
misleading as the collection suit found to be a violation in Phillips.
Contrary to the majority’s belief, an effort to collect a
time-barred debt is not a claim permitted by the bankruptcy rules, she
continued. Such a debt is neither contingent nor unmatured.
When a creditor knows that a debt is time-barred, it should
not be attempting to collect it in bankruptcy, according to the dissenting
opinion. Nearly 10 percent of recent bankruptcy cases filed in the Chicago
district were filed by consumers without attorneys, she pointed out, and these
consumers need to be protected.
Differing interpretations. U.S. appellate courts have
reached contrary conclusions on whether filing bankruptcy court proofs of claim
on stale debts violates the FDCPA. For example, the Eleventh Circuit recently
decided in Johnson v. Midland Funding, LLC that such a filing is a violation. The bankruptcy code does not
displace the FDCPA, in the Eleventh Circuit’s opinion. Creditors can file
claims on stale debts, but they are liable for the consequences if they do so.
However, the Seventh Circuit agreed with the Second and
Eighth Circuits that filing a claim is not necessarily an FDCPA violation. Most
recently, the Eighth Circuit decision in Nelson v. Midland Credit Management, Inc., found there is no violation because
bankruptcy court procedures adequately protect consumers, making the
application of the FDCPA unnecessary.
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