In a 5-3 decision written by Justice Stephen G. Breyer last week, the Supreme Court of the United States ruled that the Eleventh Circuit erred when it found that Midland Funding, one of the nation's largest purchasers of unpaid debt, was potentially liable under the FDCPA for filing proofs of claim in Bankruptcy Court relating to time-barred credit card debt.¹ Writing for the majority, Justice Breyer said that the filing of an accurate proof of claim that is obviously time-barred "is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act." Rather, Midland's proof of claim falls within the U.S. Bankruptcy Code's definition of the term, "claim," which means "right to payment," Justice Breyer said.

In analyzing whether the assertion of a time-barred claim was "unfair" or "unconscionable," the majority² focused on the differences between a state court action initiated by a debt-buyer to collect a debt after the statute of limitations for doing so had run, on the one hand, and the filing of a proof of claim in a bankruptcy case, on the other. Under the first scenario, lower courts have held that if a creditor files a lawsuit against an individual/consumer borrower on a claim that is time-barred, and does so knowingly, that action violates the FDCPA. For instance, an unrepresented and/or unsophisticated defendant who is intimidated by the lawsuit might respond by sending a check to pay the amount claimed rather than deal with the pending litigation, and thus the filing of the lawsuit is an unfair debt collection practice. Justice Breyer distinguished this from the consumer bankruptcy context, which provides additional protections to a consumer debtor, minimizing the risk to debtors as compared to defendants in civil lawsuits. First, a bankruptcy case is voluntarily initiated by the debtor who is invoking the court process. Second, a trustee is appointed and has a statutory duty to look at whether filed claims are valid. Lastly, because of the automatic stay halting collection action, a debtor would never consider responding to a filed proof of claim by sending a check to the claimant. "These features of a chapter 13 bankruptcy proceeding," concluded the Court, "make it considerably more likely that an effort to collect upon a stale claim in bankruptcy will be met with resistance, objection, and disallowance."

Download the full article, "Burr Alert: Supreme Court Reverses Eleventh Circuit: Debt Collectors Can File Proofs of Claim On Stale Debt Without Violating FDCPA" by Kelly Waits.