Damned If You Do, Damned If You Don’t: The FDCPA, the Bankruptcy Code, and a Split on Time-Barred Claims

Filing a claim is one of the most basic components of bankruptcy law.  In fact, it’s the only way a creditor can hope to get their investment back in a bankruptcy proceeding.  But what if pursuing your legal remedy opened you up to liability?  Sounds like a catch-22 doesn’t it?  That’s the exact situation that the Supreme Court is about to decide.

What’s Going On

As we all know, bankruptcy is federal law.  However, the contract claims which fall under federal bankruptcy provisions are governed by state law.  These state law provisions provide for such things as enforceability, including when a debt is considered “stale” or the statute of limitations on its enforceability has run.

In addition to these state imposed limitations on debt collection, the federal government has a separate set of rules whose purpose is to protect debtors from unscrupulous debt collectors known as the Fair Debt Collection Practices Act (FDCPA).  One portion of this act bans the collection of stale consumer debts.

So What’s the Problem?

Even though stale debts are technically unenforceable, there is still a market for them.  Purchasers of stale debts hope for one of two outcomes.  That the debtor somehow see’s the light and voluntarily repays their remaining obligations or, the more likely outcome, the debtor files bankruptcy and the holder of the debt files a claim as a creditor in bankruptcy court.  Option two, however, comes with a bit of a problem: a stale claim is still a claim under the bankruptcy code, putting the bankruptcy code in direct conflict with the FDCPA by potentially allowing a creditor to collect on a stale debt.

The Split

Currently, the courts are split over how to resolve this clash between the bankruptcy code and the FDCPA.  The split revolves around whether the bankruptcy code preempts the FDCPA or whether both can apply to a creditor at the same time.  In essence, bringing around the hypothetical posed at the beginning of this article.

(Some history before we dive in. The Eleventh Circuit, in the opinion described below, was responding to some confusion sowed after a prior ruling in Crawford v. LVNV Funding, LLC. In Crawford, the Eleventh Circuit held that the FDCPA applied to a Chapter 13 claim filed for a time-barred debt. The Supreme Court denied cert. District courts, in the wake of Crawford, stated the FDCPA and the bankruptcy code were in irreconcilable conflict and, under a doctrine termed implied repeal, held that the bankruptcy code preempted FDCPA claims. Johnson reversed that holding, reinstating the Crawford regime that held the FDCPA applied to claims for stale debts.)

In Johnson v. Midland Funding, the Eleventh Circuit found that the two statutes were not irreconcilably different, and that the FDCPA is violated when a creditor files a claim on a time-barred debt. The Eleventh Circuit reasoned that:

The Code establishes the ability to file a proof of claim, see11 U.S.C. § 105(a), while the FDCPA addresses the later ramifications of filing a claim, see Crawford, 758 F.3d at 1257.

The Eighth Circuit on the other hand came to the opposite conclusion, finding that the bankruptcy code and FDCPA are in direct conflict, and that the filing on a time-barred debt is not barred by the FDCPA.  In making its decision, the Eighth Circuit noted that due to the special protections afforded to debtors in bankruptcy, the concerns for which the FDCPA was originally enacted are not present.  Stating:

These protections against harassment and deception satisfy the relevant concerns of the FDCPA. “There is no need to protect debtors who are already under the protection of the bankruptcy court, and there is no need to supplement the remedies afforded by bankruptcy itself.” Simmons v. Roundup Funding, LLC, 622 F.3d 93, 96 (2d Cir. 2010) (so stating while rejecting an FDCPA suit even where the proof of claim was inaccurate and inflated).

The ultimate decision reached by the Eighth Circuit was also reached by the Fourth and Seventh Circuits, albeit for slightly different reasons.  But the underlying thread between the decision was the extra layer of protections afforded do debtors in bankruptcy.

I’m Not Broke (Yet), Why Should I Care?

The outcome of this circuit split will have large implications not only for the creditors filing these stale claims but also for the debtors.

If the Eleventh Circuit’s reasoning is followed, then not only will creditors miss out on an opportunity to be repaid, but the debtor will now have a civil cause of action against the holder the debt.

On the other hand, if the Fourth, Seventh, and Eighth Circuits are followed, holders of time barred debt will be able to continue to assert claims and hope to receive payment.  And if this riveting split wasn’t reason enough to follow this case, the Supreme Court just granted cert to Johnson v. Midland.