By Monette Cope, Attorney
The Eleventh Circuit Court of Appeals recently held that a creditor may be held liable for an FDCPA violation if it files a claim in a bankruptcy case on a debt that is barred by the statute of limitations. The Supreme Court refused to review it, so it now stands as the law in that Circuit. While this should give pause to any creditor who files claims in the Eleventh Circuit, the case is just as important for what it does not say as what it does.
In this case, a creditor purchased a consumer debt that had been charged off. The statute of limitations expired a few years after the purchase. The debtor then filed a Chapter 13 bankruptcy case, and the creditor filed a proof of claim even though the debt was time-barred. Rather than object to the claim under the Bankruptcy Rules, the debtor filed an adversary proceeding claiming that the filing of the claim violated the FDCPA. Both the bankruptcy and district courts dismissed the adversary proceeding, but the debtor appealed and the Eleventh Circuit overturned the lower courts.
Instead of analyzing the adversary and claim under the Bankruptcy Code and Rules, the court started with the assumption that the FDCPA is the governing statute. Non—bankruptcy courts review FDCPA claims on whether or not “a debt collector’s conduct is “deceptive,” “misleading,” “unconscionable,” or “unfair” under the statute” to a “least-sophisticated consumer”. These claims are commonly raised when a debt collector is threatening legal action or has filed a lawsuit against a debtor to collect a debt. Essentially, the Eleventh Circuit held that because attempting to collect or collecting on a time-barred debt in state court is an FDCPA violation, filing a proof of claim on such a debt in bankruptcy is also a violation.
While debtors in state court collection matters are defendants, debtors in bankruptcy file their cases against their debts. Debtors in state court collections are not usually represented by an attorney and so do not have counsel to protect them against FDCPA violations. However, debtors in bankruptcy are highly likely to have attorneys. Moreover, Chapter 13 trustees are charged with objecting to claims A debtor in a Chapter 13 bankruptcy is therefore, hardly a “least-sophisticate consumer” because of the debtor’s own counsel’s knowledge and the trustee’s duty to object to claims. Debtors in bankruptcy have more protections than debtors in state court.
Claims are allowed in bankruptcy unless objected to. Claims may be disallowed if they are unenforceable against the debtor as time-barred debts are. While the Bankruptcy Code provides a mechanism to object to time-barred claims, it does not impose fines or fees against a creditor who files them. The consequence is only that the claims are disallowed.
The Bankruptcy Rules require that consumer claims based on open-ended or revolving credit agreements attach a statement to the claim that includes the date of the last transaction on the account. Statutes of limitations are calculated in many states based on the date of the last transaction . As long as this is disclosed, there is no deception, and the claim is not misleading, unconscionable or unfair.
This writer is not advocating a regular practice of filing claims in bankruptcy that are time-barred, but the Bankruptcy Code and Rules provide safeguards to protect debtors if these claims are filed. As a result, the FDCPA appears as an interloper in the claims process in Crawford. Indeed, the Eleventh Circuit specifically stated that it was not ruling on whether the Bankruptcy Code preempts the FDCPA in the claims process because that argument was not raised in the briefs. Therefore, this case makes no ruling on whether the Bankruptcy Code and Rules should have been applied over the FDCPA in resolving the objection to the claim.
Not all Circuits follow this reasoning and the appearance of FDCPA claims in bankruptcy are not always welcome in every Circuit. This may be a developing area of the law; that is, to what extent, if any, does the FDCPA overlap or intrude on the claims process set by the Bankruptcy Code and Rules. The best practice in any event is to ensure that any consumer claims you file are within the statute of limitations as of the date that the bankruptcy case was filed.