I will not rend my garments over this “victory for the debt collectors” as one commentator put it. If only because, under the bankruptcy rules, the victory is pyrrhic.
Midland Funding, LLC v. Johnson: On May 15, 2017, the US Supreme Court held, in a 5-3 decision, that the filing of a proof of claim filed past the time to do so and otherwise time barred is not a false, deceptive, misleading, unfair or unconscionable debt-collection practice within the meaning of the Fair Debt Collection Practices Act (“FDCPA”).
Therefore, debt collectors do not violate the FDCPA when they file a claim in a bankruptcy proceeding for a debt that has become otherwise uncollectible because the statute of limitations has expired.
The decision by the Supreme Court is well thought out and a good interpretation of what a “claim” is as to the Bankruptcy Code:
The FDCPA punishes conduct by debt collectors that are “false,” “deceptive,” “misleading,” “unconscionable” or “unfair,” the Court said that filing a stale claim is none of the above:
It is not misleading to file a time-barred claim in a bankruptcy proceeding because that obligation remains a “claim” for purposes of bankruptcy law, the Court said. When it passed the Bankruptcy Code, “Congress intended to adopt the broadest available definition of ‘claim.’” The Court then said the statutory text directly recognizes the possibility that an obligation would be a “claim” even if it were unenforceable; specifically, the statute “says that, if a ‘claim’ is ‘unenforceable,’ it will be disallowed. It does not say that an ‘unenforceable’ claim is not a ‘claim.’”
The FDCPA allows for hefty attorney’s fees. Now that SCOTUS has ruled filing a late claim does NOT violate FDCPA, debtor’s attorneys have lost out on a healthy amount of potential income. Not that the attorneys for the Debtor were not being altruistic – they were. But good compensation for a good fight would be nice, too.
So the claims will have to be eliminated the old fashioned way without the extra income.
I concentrate on Chapter 7 and Chapter 13 bankruptcies. Here is how a claim can be filed by a Creditor in either case:
Chapter 13: a creditor gets notice to file a claim by a certain deadline. They will then receive a percentage of their debt (sometimes, but rarely, 100% with no interest or penalties) over the three-to-five-year period of the claim. If they do not file a claim, they get no money and their debt is discharged at the end of the case. With no claim, they will have received no money whatsoever. If they file after the deadline and neither the Trustee nor the Debtor object, they will start receiving money during the life of the Chapter 13.
This is pretty rare though. 13 Trustees object to late claims. And it is the duty of the Debtor’s attorney to review all claims after the bar date and object, if he or she believes it is necessary, to either its contents or its timeliness. When it comes to timeliness (late filing), the Trustee usually files the objection before the attorney does.
Objecting to a late claim is usually a “gimme”. Only under very rare circumstances is it denied.
Chapter 7s are a different matter: if a Chapter 7 Trustee wants to liquidate an asset (a tax refund, a piece of land or unexempt personal property), he or she notifies the creditors to file a claim within a certain time period.
The Trustee objects to any late claims filed. If he does NOT, there is precious little the Debtor can do! The Debtor has no standing to object to claims filed in a Chapter 7 asset case. BUT if the Debtor informs the Trustee about the debt and its controversy (past limitations, etc.), he or she MIGHT be convinced to object. That will leave more funds for the legitimate creditors.
If not, the bankruptcy attorney may have to convince the Debtor to accept it and move on.
A good bankruptcy attorney keeps track of deadlines on claims as well as notices from the court as to late claims and object. If the objection is sustained, the creditor receives no funds. It is also wise for the attorney to note in the schedules that the debt is in controversy from the outset: it is disputed and/or contingent, etc. There is plenty of room on the schedules to explain why the Creditor believes the debt is owed, but the Debtor does not…
So while the ruling in Midland v Johnson seems to favor the creditor, the other options available to Trustees and Debtor’s attorneys do not make it much of a victory.
So let them steal second, you’ll tag them at third.
Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.
He is also the author of books on finance and bankruptcy available on Kindle through Amazon!
Whether you live in Mount Vernon, Salem, Centralia, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally