During a bankruptcy case, creditors are allowed to add their claims into the case if the debtor forgot to add them. For instance, if a debtor forgot about an old credit card debt, the creditor can file a proof of claim that shows that they are owed money from the debtor. The claim will set out the amount owed to the creditor as of the date of the bankruptcy, as well as the claim’s status as a priority or non-priority debt. The debtor can then accept the claim or contest it.
In late May, the Eleventh Circuit Court of Appeals addressed the debt collection industry’s practice of filing proofs of claims in bankruptcy based on old debts which are time-barred. The Eleventh Circuit covers federal bankruptcy courts in Alabama, Florida, and Georgia.
In a case called Johnson v. Midland Funding, LLC and Brock v. Resurgent Capital Services, L.P. and LVNV Funding, LLC, the debtor filed for Chapter 13 bankruptcy relief. As part of the case, a creditor filed a proof claim that stated the amount of the debt and noted that the claim was time-barred due to the statute of limitations.
After the creditor filed the proof of claim, the debtor filed a lawsuit alleging that by filing the time-barred proof of claim, the creditor had accepted in deceptive and misleading behavior under the Fair Debt Collection Practices Act (FDCPA).
The district bankruptcy court where the case was first heard dismissed the debtor’s lawsuit because of a conflict between the Bankruptcy Code and the FDCPA. Under the FDCPA, it is illegal to attempt to enforce a debt that the debt collector knows to be time barred. However, the Bankruptcy Code allows creditors to file a proof of claim for time-barred debts as long as the debt has not been completely extinguished by state law. Since the judge in the district bankruptcy court believed that the two sets of statutes were in conflict with each other, the court held that the Bankruptcy Code overruled the FDCPA.
The Eleventh Circuit Court of Appeals disagreed with the district bankruptcy court and held the opposite. In its decision, the Eleventh Circuit ruled that the FDCPA and the Bankruptcy Code are not in conflict, and stated that, “[T]he Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be time-barred.” Instead, the FDCPA adds an additional layer of protection to the Bankruptcy Code that protects debtors against certain types of creditors.
The appellate court went on to hold that when a bankruptcy creditor is also a debt collector as defined by the FDCPA, then the creditor can still be liable for misleading or unfair practices when it files a proof of claim over a debt that it knows to be time-barred. The court decided that filing the proof of claim gives a misleading impression that the creditor can still legally enforce the debt.
The Eleventh Circuit is the first federal Court of Appeals in the country to hold that time-barred debts in bankruptcy are actionable under the FDCPA. As a result of this case, bankruptcy debtors in Florida, Alabama, and Georgia will be able to file FDCPA claims if a creditor attempts to enforce an out-of-statute debt.
If you are considering filing for bankruptcy or are in an active bankruptcy case, it is important to be aware of this new ruling. People whose debt collectors continue to harass them during bankruptcy may be able to file claims seeking compensation when a creditor violates the rules of the FDCPA. To learn more about your legal rights and options, or to speak with an attorney about a bankruptcy case, schedule a free consultation at Loan Lawyers today by calling (888) FIGHT-13 (344-4813).