Can Debt Collectors Use The Bankruptcy System To Collect Expired Debt?

Bankruptcy Lawyer Bryan W. Stone answers the question: “What are the pros and cons of bankruptcy?”


Though many people may not be aware of it, the debt collection industry has exploded in recent years. In the past five to 10 years, creditors have begun selling all their old debt to debt buying firms, usually for two or three cents on the dollar. These firms then use aggressive tactics to pry money from debtors, even in cases where the debts are expired and legal claims can no longer be made to recover the money. The industry has grown to more than $13 billion in size, representing many thousands of claims against many thousands of debtors.


Expired-Meter-Charlotte-Bankruptcy-Law-Firm-300x221Interestingly, the Supreme Court has now decided to intervene and settle a question that has become of concern to those on both sides of the debt buying business. The issue revolves around the proof of claim phase of a bankruptcy case and whether debt buyers have the ability to file proof of claims for debt that they either know or should know has expired and is now time barred. So far, the different circuit appeals courts have been unable to agree, something that now requires the Supreme Court to step in and resolve the split.


The case that will be heard before the Supreme Court is called Midland Funding, LLC v. Johnson. The case involves a company that filed a proof of claim in a bankruptcy proceeding for an old debt that was time barred. The debtor then challenged not only the debt, but the ability of the creditor to file such a claim in the first place. The 11th Circuit, which eventually decided this case, found that the debt collector’s action violated the Fair Debt Collection Practices Act (FDCPA), deeming the filing of a proof of claim a misleading or deceptive practice. The Court said taking such action on a stale debt amounts to an attempt to deceive the debtor and/or the bankruptcy trustee and should thus be disallowed.


Other circuit courts have disagreed, arguing that debt buyers have the right to file these proof of claims because they are technically correct. To file a proof of claim, the bankruptcy code says that a creditor must have a right to payment under state law. The debt buyers argue they do indeed have a right to payment as the debt is authentically owed, it’s just that enough time has elapsed to prevent them from filing suit to collect it.


Consumer advocates have filed briefs with the Supreme Court arguing that the practice of debt buyers filing proof of claims for expired debt should be stopped. They argue that the debt buyers are hoping the system breaks down under the weight of too many cases and too much work and that either the trustees or the debtors themselves fail to do their homework and end up paying out time barred debts. The hope is that the Supreme Court agrees and decides that the debt buyers should be held responsible for filing claims that they know or should have known were expired. You can bet that both debtors and debt buyers will be watching the Supreme Court closely in coming months as the decision will likely have a big impact on future bankruptcies.


If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.





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