The U.S. Supreme Court recently ruled that debt collectors can use bankruptcy proceedings to attempt collection on debts that are so old that the statute of limitations to bring a lawsuit for payment has expired. A divided court in Midland Funding, LLC v. Johnson held that companies do not violate the federal Fair Debt Collection Practices Act (FDCPA) by filing proofs of claim in bankruptcy cases on these types of old debts. 137 S.Ct. 1407 (2017) The Court determined that filing an obviously time-barred proof of claim is not “false, deceptive, misleading, unfair, or unconscionable” debt collection practice within the meaning of the FDCPA. (Id. 1)
Facts of the Johnson Case
In March 2014, Aleida Johnson filed for Chapter 13 bankruptcy. Midland Funding, LLC filed a “proof of claim,” in Johnson’s bankruptcy case. A proof of claim is a written statement from a creditor asserting that the debtor owes the creditor and stating the claim amount owed. Midland’s proof of claim stated that Johnson owed Midland $1,879.71 for a credit card debt. The claim further stated that the last time Johnson charged anything on the credit card was more than 10 years prior to her bankruptcy filing.
The relevant statute of limitations in Alabama is six years. When a creditor is not paid on a debt it is owed, it has a limited time to bring legal action to collect on the debt. This is known as the statute of limitations. This is dictated by state law, and each state has their own statute of limitations. Once the statute of limitations passes, the creditor no longer has any legal remedy to enforce collection on the old debt.
In her Chapter 13 case, Johnson objected to Midland’s proof of claim and the Bankruptcy Court disallowed the claim. Johnson then sued Midland “seeking actual damages, statutory damages, attorney’s fees, and costs for a violation of the Fair Debt Collection Practices Act.” (Id. 2) The District Court dismissed the case deciding that the FDCPA did not apply. The Eleventh Circuit Court of Appeals reversed the District Court. Midland petitioned the Supreme Court for certiorari noting the division of opinion among the Courts of Appeals on the “question whether the conduct at issue here is “false,” “deceptive,” “misleading,” “unconscionable,” or “unfair” within the meaning of the Act.” (Id.)
The Supreme Court reversed the Eleventh Circuit Court of Appeals, holding that: “filing (in a Chapter 13 bankruptcy proceeding) a proof of claim that is obviously time-barred is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act. The judgment of the Eleventh Circuit is reversed.” (Id. 10)
What does this ruling mean for bankruptcy filers?
This ruling means that very old debts may need to be paid back, or partially paid back, in a Chapter 13 repayment plan.
The case at bar pertains to Chapter 13 bankruptcy, but conceivably this ruling may apply also to Chapter 7 cases. If so, this ruling would mean that very old debt may be paid back from the proceeds of liquidated assets in Chapter 7. Though, the majority of Chapter 7 cases are “no-asset cases,” and nothing of the debtors is taken or sold to pay back creditors. Read our articles Will I Have to Liquidate My Assets if I File for Bankruptcy?
I am struggling with debt – should I consider filing for bankruptcy protection?
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