In every bankruptcy case, in order for a creditor to receive funds from the debtor’s estate, the creditor must file a proof of claim. The debtor, trustee, or any other party in interest may object to a creditor’s claim to prevent the creditor from receiving any funds. One of the reasons to object is that the debt might be time-barred by a state’s Statute of Limitations, which prevents a lawsuit on matters that are too old. In Tennessee, for example, a creditor cannot sue on a contract debt that is over 6 years old.
Additionally, the FDCPA prohibits debt collectors from using any “false, deceptive, or misleading representation or means in connection with the collection of any debt.” Federal courts around the country have widely held that a debt collector who sues or threatens to sue a debtor on a time-barred debt violates the FDCPA as that practice is false, deceptive, and misleading.
In Crawford v. LVNV Funding, LLC from July 2014, the 11th Circuit Court of Appeals held that a debt collector who files a proof of claim in a bankruptcy case on a time-barred debt violates the Fair Debt Collection Practices Act (FDCPA). This case took place in Alabama, which has a 3 year statute of limitations on contract debts. The debtor filed bankruptcy in 2008, but the debt the creditor filed a claim for received its last payment in 2001.
Right now the United States Circuit courts are split on this issue. For example, the 2nd and 9th Circuit Courts of Appeals have held that the Bankruptcy Code preempts FDCPA actions and that the remedies remain with what the Bankruptcy Code offers (the FDCPA allows for a debtor to be awarded $1,000 of statutory damages, court costs, and attorney’s fees from a violating debt-collector). However, the 7th Circuit has not directly ruled on this issue, but has disagreed with the 9th Circuit and the 2nd on preemption. The 3rd Circuit likewise followed the rationale of the 7th Circuit Court of Appeals.
The Crawford court did not address preemption, but merely reasoned that the attempting to collect the debt in state court would have been a violation, and thus the participation in Bankruptcy Court was additionally debt collection in a legal proceeding, and therefore was a violation: “Similar to the filing of a stale lawsuit, a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt.” Moreover, in bankruptcy, there is an automatic presumption that a debt is valid if a claim is filed, therefore it makes a debtor take the additional step of proving the debt is not enforceable.
The 7th Circuit in the Randolph case has a great analysis on whether the Bankruptcy Code preempts an FDCPA action by a debtor. This is the same opinion that the 3rd Circuit decides to follow, and interestingly enough the 2nd Circuit declines to follow by mentioning the opinion in a footnote.
The Crawford case will certainly not be the last case to address this issue, and because of the Circuit split, this is an issue that might make its way up to the Supreme Court in the next few years, especially since it involves two highly litigated Acts.
In current litigation, the debt collectors argue points such as 1) the filing of a claim is not debt collection otherwise the filing of a claim would violate the automatic stay, 2) they are trying to obtain payment from the estate, not the debtor, 3) preemption.
The Crawford case directly addresses point 1 and reasoned that the automatic stay prevents a creditor from collecting a debt outside of Bankruptcy Court, but allows for debt collection via the claims process. Point 2 is not addressed in any of the aforementioned cases, but there is a 6th Circuit Court of Appeals case where the Court held that a debt collector was liable to a Probate Estate for FDCPA violations, so the same rationale would apply in this issue, at least to Courts in the 6th Circuit. As for point 3, the cases above are rich in debate and provide great arguments on both sides.
If you have filed for bankruptcy, be sure to examine every proof of claim that is filed in your case. You can save yourself a lot of money by having your attorney object to claims that you do not believe you have to pay. Additionally, you could end up with the creditor having topay you some statutory damages.