Filing Bankruptcy? Make Sure You Double-Check Debt Collectors’ Submitted Claims

Debt collection is a multi-billion dollar industry, and it is only growing. One of debt collectors’ tactics is to get people who owe long past due debts to pay those debts despite the fact that the debts cannot be collected as a matter of states’ statutes of limitations. Debt collectors do so in a variety of ways, including filing collection actions in state courts and hoping that debtors will not assert the statute of limitations as a defense. Fortunately, the Fair Debt Collection Practices Act (FDCPA) deems this tactic a misleading and unfair practice. Courts hold that debt collectors violate the FDCPA when they file debt collection actions in state courts on debts that they are barred from collecting under statutes of limitation. Based on the FDCPA, debt collectors have entered into consent decrees with the federal government and paid millions of dollars in restitution to debtors for trying to collect time-barred debts through state court debt collection proceedings.

The FDCPA also has pushed debt collectors to look to another venue to collect on time-barred debts: bankruptcy proceedings. When a person files bankruptcy, particularly chapter 13 bankruptcy, debt collectors file proofs of claim asserting a right to collect these debts. It seemingly is up to the debtor, or the trustee, to object to the claim on the basis that collection of the debt is barred by the applicable statute of limitations. In recent years, debt collectors have added to their business model specifically buying debts that will be collected through bankruptcy proceedings and then filing claims in hopes that the debtor, trustee, or another party will not object. The practice has the potential to be quite lucrative. About a million people file for bankruptcy every year. One-third of those cases are filed under chapter 13. And given that Americans owe trillions of dollars in consumer debt, many of those cases likely include time-barred debts. The questions thus becomes, is filing a proof of claim for a time-barred debt a violation of the FDCPA?

The answer to this question split courts. Some courts said no, the FDCPA does not apply, reasoning that bankruptcy affords debtors its own set of protections. Other courts said yes, the FDCPA applies, and a private party or the government can sue a debt collector for filing time-barred claims in bankruptcy, potentially winning sanctions. This split among courts was brought to the Supreme Court, which yesterday held (in a 5-3 opinion, Midland Funding LLC v. Johnson) that the FDCPA does not apply to proofs of claim filed by debt collectors for time-barred debts. The majority, in short, reasoned that the Bankruptcy Code and other rules provide a way for debtors and trustees to identify and respond to these claims, as well as the ability for bankruptcy judges to levy sanctions against debt collectors for filing time-barred claims. The dissent, in contrast, noted that the realities of bankruptcy practice make it so that trustees and other parties are short on both time and money, such that the protections built into the Code are not protections in reality. Instead, the bankruptcy claims process now sets a “trap for the unwary.”

If you want to read more about the decision itself, see my co-blogger Adam Levitin’s post on Credit Slips. The on-the-ground question for consumers now is, what can people do to protect themselves? There are a couple actions that debtors can take to make sure that they do not fall into that trap and that time-barred claims are not paid out through their chapter 13 bankruptcy cases. If they are represented, they can ask their counsel to examine claims submitted by debt collectors. Indeed, all debtors’ counsel now should be on notice that they must examine claims submitted by debt collectors. Regardless of whether they are represented, debtors should specifically inquire about claims submitted by debt collectors, either through their counsel or by themselves.

That debtors make sure to double-check debt collectors’ submitted claims is very important. As noted in the dissent, and as my co-authors and I have shown in our recent work, less than half of chapter 13 cases end with a discharge of debts. If a time-barred debt is included in a chapter 13 case, and the case is dismissed, that debt is reactivated, and the statute of limitations on collection begins anew. As Justice Sotomayor wrote in the dissent, debtors will “walk out of bankruptcy court owing more to their creditors than they did when they entered it.”

The Newhandshake: Online Dispute Resolution and the Future of Consumer Protection

We used to buy goods and services in person.  We’d introduce ourselves, look each other in the eye, and negotiate the terms of the transaction.  If we thought it was a good deal, we’d seal it with a handshake.  That handshake was more than a kind gesture – it signaled that if any problem arose, both sides were committed to getting it resolved quickly and fairly.  That handshake was our personal trustmark.

Nowadays, it’s harder to close deals with a handshake.  We can buy items from all over the world with just a few swipes on our iPhones, but when problems arise (as they inevitably do) the next step is often unclear.  On the internet it is difficult, if not impossible, to tell the good merchants from the bad merchants, and the processes for resolving disputes are often confusing or hard to find.  Customer service can feel like a runaround (e.g. long hold times, unfair refund policies) and formal redress mechanisms that work in the face-to-face world, like the courts, are generally impractical for online purchases — especially when purchases are low value and cross several legal jurisdictions.

The New Handshake: Online Dispute Resolution and the Future of Consumer Protection focuses on this lack of trust and access to remedies for online transactions.  This groundbreaking book proposes a design for a “New Handshake” for the online world.  This New Handshake uses Online Dispute Resolution (ODR) to provide fast and fair resolutions for low-dollar claims, such as those in most B2C (Business-to-Consumer) contexts.  This revolutionary system is designed to operate independently of the courts, thereby eliminating procedural complexities and choice of law concerns.  Furthermore, it can be integrated directly into the websites where transactions take place. It would provide consumers with free access to remedies, while saving businesses from costs and complexities of court.  The New Handshake aims to rebuild trust in the B2C marketplace, and provide a blueprint for the future of online consumer protection.

This is not your typical “law” or “business” book.  Instead, is a collaborative effort of a business leader and a law professor.   The result is essential reading for:
Online merchants
Payment providers
Customer services
Law and business students
Consumer advocates
Policy makers
ODR systems designers
The New Handshake can be purchased on the ABA website here: