Date: May 16, 2017
To: All Scheer Law Group Clients and Affiliates:
Subject: U.S. Supreme Court Rules that Filing a Bankruptcy Proof of Claim that may be Time Barred Is not a Violation of the FDCPA
The right to collect on a debt may generally be challenged by the borrower as beyond the statute of limitations in the particular state where the debt was created. This does not automatically mean the debt can’t be collected, as an obligation can be revived or there may be other defenses asserted by a creditor contesting that the debt is barred. However, most creditors will file a proof of claim in a bankruptcy proceeding, even on a “stale debt”, with the hope that they will be paid something. The U.S. Supreme Court has now ruled on whether filing such claims is a false, deceptive and misleading act under the Fair Debt Collection Practices Act, and found that it is not (See In Midland Funding LLC v. Johnson, 16-348 (Sup. Ct. May 15, 2017).
Practically, this means that every creditor should file a proof of claim in a bankruptcy proceeding (assuming the amount at issue justifies the effort), as failure to do so will in some cases cause the creditor to lose the right to payment on secured, as well as unsecured obligation. However, this decision also gives new impetus to creditors to file claims on obligations which may have been dormant for years, and thought to be uncollectable.
Beyond the implications to creditors collecting on their own debts, is the impact on debt buyers who buy “stale debt” for pennies on the dollar and then seek to collect on the debt in a bankruptcy proceeding, where a trustee or debtor will not have the interest or resources to object to the claim, allowing payment of all or a portion of the claim. This ruling gives debt purchasers more reason to buy debt, even “stale” debt.
The Supreme Court will hear the case of Henson v. Santander Consumer USA Inc.. later this year and will rule on whether a debt buyer who purchases debts is exempt from FDCPA regulation. If he answer is yes, it would provide further insulation to debt buyers and less liability.
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