Upon receiving notice of a debtor’s bankruptcy case, the prudent debt collector typically files a proof of claim, in the hope of receiving some distribution from the debtor’s bankruptcy estate. Absent a fraudulent claim by the debt collector, the Bankruptcy Code specifically provides for the filing of claims against the debtor’s estate. So how could a debt collector be sued for doing what the Code allows? It could happen if debts a collector actually holds are barred from enforcement under a state statute of limitations.
The typical scenario involves a consumer debtor defaulting on a debt. The debt collector may attempt to collect the debt, but often the debt goes uncollected for years, given the small size of the debt in comparison to the costs to collect. Years later, the debtor files a petition in bankruptcy. The debt collector, seeing some hope of recovery after all, files a proof of claim and hopes for the best. As it turns out, however, the lapse of time between debtor’s default and the filing of the bankruptcy case allowed the statute of limitations on the debt to expire. The debtor, now seeing an opportunity to turn the tables, sues the debt collector for violating the Fair Debt Collection Practices Act (FDCPA), which prohibits a debt collector from falsely representing the character, amount or legal status of any debt, or from threatening to take any action that cannot legally be taken or that is not intended to be taken. (15 U.S.C. § 1692(e)). The debtor argues that by filing the claim, the debt collector misrepresented that the claim was valid and enforceable.
How have the courts responded? Fortunately for debt collectors in the Eighth Circuit, a recent decision by the Eighth Circuit Court of Appeals concluded that the collector did not violate the FDCPA by filing a claim on a stale debt and was not liable to the debtor (Nelson v. Midland Credit Management, Inc., No. 15-2984, July 11, 2016). The Eighth Circuit reasoned that the purpose of the FDCPA is to protect unsophisticated debtors from harassment and deception by debt collectors. The Court noted that the bankruptcy process itself protects against that type of behavior, with debtors aided by trustees with fiduciary duties to object to unenforceable claims. Unlike defending a lawsuit on a time-barred debt, objecting to a proof of claim in a bankruptcy case is not burdensome, and because a proof of claim does not expand the pool of available funds in bankruptcy, debtors have less at stake than a collection defendant would. Consequently, the Court concluded that the inherent bankruptcy protections against harassment and deception satisfy the applicable provisions of the FDCPA, even when claims that are otherwise time-barred may be filed.
But debt collectors should still beware – the 11th Circuit thinks differently, holding that knowingly filing a time-barred proof of claim does violate the FDCPA. The Court reasoned that the same concerns underlying the FDCPA’s protections against litigating or threatening to litigate time-barred debts apply equally to a debt collector filing a bankruptcy claim on an expired debt. (Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014)). Given the disagreement among the Circuits, a debt collector must be sure to know and understand the applicable jurisdiction’s rules before filing a bankruptcy claim on a time-barred debt.