Bad news for debt collectors: the 11th Circuit Court held in Johnson v. Midland that debt collectors may face penalties under the Fair Debt Collection Practices Act (FDCPA) for filing proofs of claims in bankruptcy for debts in which the statute of limitations has already expired. In the past, parties in interest were able to file proofs of claim, knowing that they may be entitled to a recovery from a bankruptcy estate. Now, debt collectors will be penalized for filing a claim in a bankruptcy case for a debt that they know to be time-barred.
The case involved two separately consolidated matters where proofs of claim were filed against debtors filing for bankruptcy under Chapter 13. In the first case, Midland Funding, LLC was accused of filing a proof of claim for a debt that occurred more than a decade prior to the beginning of the debtor’s bankruptcy filing. The statute of limitation in Alabama, where the claim arose, is only six years. In the second case, Resurgent Capital Services, L.P. attempted to file a proof of claim on a debt that arose more than six years prior to the bankruptcy filing. Both parties sued their respective creditors, citing violations of the FDCPA, and arguing that the claims were barred by the relevant statute of limitations. They maintained that this action was “unfair, unconscionable, deceptive, and misleading.”
The district court dismissed the first case, having found that the provisions of section 501(a) of the Bankruptcy Code were in direct conflict with those of the FDCPA. Because of this conflict, the court applied the doctrine of implied repeal, which states that the later statute may be read as an implied appeal of the earlier statute. In the second case, Resurgent was granted motion for judgment on the pleadings based on the holding in the previous case. Both were then consolidated for appeal. The 11th Circuit concluded that the Bankruptcy Code did not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim that it knows to be time barred.
Furthermore, they found that there actually exists no conflict between the Code and the FDCPA, explaining that both statutes provide different protections and reach different actors and can therefore co-exist. Specifically, they found that the Bankruptcy Code allows all creditors to file proofs of claims, while the FDCPA dictates the behavior of online debt collectors both within and outside of bankruptcy. Additionally, they determined that there was no blanket prohibition on filing a time-barred claim in bankruptcy; if a creditor chooses to file a claim, they can, but will open themselves up to a potential lawsuit.
Ultimately, debt collectors will have to proceed with caution if they wish to file a proof of claim on debts that are time-barred.
If you believe your rights under the FDCPA have been violated, talk to a Chicago consumer lawyer at Atlas Consumer Law to see if you have a case. Click here to fill out an online consultation form, or call us at (312) 313-1613.