On May 15, 2017, the U.S. Supreme Court ruled (5-3) in favor of the debt collection industry, holding that the filing of a proof of claim against a chapter 13 debtor on a debt that cannot be enforced under state law because the statute of limitations on it has expired does not violate the Fair Debt Collection Practices Act (FDCPA), because filing such a proof of claim is not a “false, deceptive, or misleading representation” or an “unfair or unconscionable” means for collecting a debt, as those terms are used in FDCPA.
The case concerns “debt collectors,” defined in the FDCPA as “any person who…regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another” (emphasis added). So, creditors collecting their own debts are not subject to the FDCPA. However, loan servicers, debt purchasing companies, and law firms may all be debt collectors under the FDCPA.
The majority of the Court used a “plain language” analysis of the Code's provisions and relevant state law to conclude that a debt that is not enforceable because of the passage of a statute of limitations (a “stale debt” or “time-barred debt”) is not therefore extinguished; it still represents a right to payment and therefore a “claim” under the Bankruptcy Code. At least so long as the proof of claim shows on its face that the statute of limitations has passed as to the debt, then there is nothing about the claim that is “false, deceptive, or misleading.” (Note: the Court did not comment on whether the same result would apply to a proof of claim that did not reveal, on its face, that the statute of limitations had passed.)
Calling it a “closer question,” the Court also held that filing a proof of claim on a stale debt – knowing that it will be disallowed, if objected to, as unenforceable against the debtor under Code §502(b)(1) – is not an “unfair or unconscionable means” to collect the debt. Although all circuit courts to consider the matter have found that filing a non-bankruptcy collection action on a stale debt is a violation of the FDCPA, the Court found the bankruptcy process to be different enough from ordinary collection litigation, and to offer sufficient procedural protections to a debtor, that the cases regarding collection actions should not control in the bankruptcy context.
The three dissenting justices objected to the use of the bankruptcy process to obtain payment on debts that could not be enforced outside bankruptcy and urged Congress to amend the FDCPA accordingly. However, unless and until that happens, loan servicers and other debt collectors holding time-barred debts that cannot be enforced in state courts may be able to recover a portion of those debts in their debtors' bankruptcy cases, without fear of being subsequently sued by unhappy debtors under the FDCPA.