Fair Debt Collection Practices Act Update – Time-Barred Claims in Bankruptcy

The purpose of the Fair Debt Collection Practices Act (“FDCPA”) at 15 U.S.C. § 1692 –1692p is to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses. The FDCPA is designed to protect consumers from and eliminate abusive practices concerning consumer debt collection.

Under the FDCPA, the term “debt” means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment. The FDCPA has always been broadly construed to promote the goals of the statute, but a recent Supreme Court decision indicates that there are limits on the scope and reach and protections of the FDCPA.

In Midland Funding, LLC v. Johnson, __U.S.___, 2017 WL 2039159 (May 15, 2017), the United States Supreme Court in a 5-3 decision held that the filing of a proof of claim in a consumer’s Chapter 13 bankruptcy on a time-barred debt did not violate the FDCPA. This ruling resolved a split in the circuit courts between the U.S. Court of Appeals for the 11th Circuit in Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. 2016) and the U.S. Court of Appeals for the 7th Circuit in Owens v. LVNV Funding, LLC., 832 F.3d 726 (7th Cir. 2016).

The Supreme Court opinion in Midland Funding held that unlike lawsuits filed to recover time-barred debt which have been held to violate the FDCPA, the bankruptcy code allows for “claims” to be filed and “claims” are not limited to enforceable claims. In addition, the Supreme Court held that the bankruptcy code makes statute of limitations an affirmative defense that must be raised. The Supreme Court also held that because there was a trustee who must examine proofs of claims and object to time-barred claims, filing an “accurate” proof of claim on a time barred debt was not misleading. Because of the bankruptcy trustee and his role to examine and object to time barred claims, the court opined that the debtor does not face the same pressure as he would in a lawsuit and that distinction appears to have made a big difference in the court’s holding as it did.

The Supreme Court’s holding in Midland Funding is limited to bankruptcy court. The Supreme Court’s ruling explicitly stated that it did not apply to time-barred lawsuits filed in state courts. It also preserves the many federal court decisions finding that filing a collection lawsuit on a time-barred debt is a violation of the FDCPA. It remains to be seen how the practical effect of the Midland Funding decision is on the ever increasing workload of bankruptcy trustees. It clearly adds one more burden to the trustee’s workload. The opinions in this blog are solely the author’s and any comments, suggestions, or replies can be sent to john@jrjoneslaw.com.