Out of Time, Not Out of Luck: Supreme Court holds POCs for Time-Barred Debt are OK under FDCPA

In a win for debt buyers and servicers, the Supreme Court held in Midland Funding, LLC. v. Johnson  that the filing of a proof of claim in a bankruptcy case for obviously time-barred debt is not false, deceptive, misleading, unfair, or unconscionable within the meaning of the Fair Debt Collections Practices Act (FDCPA).

The Decision

The Court’s decision rested on two findings: first, that stale debt is a claim under the Bankruptcy Code, and second, that debtors in bankruptcy have more protections than debtors facing collections lawsuits.

  • A claim is a claim. In bankruptcy, a claim is a right to payment. If the proof of claim is filed for a right to payment, it’s not false, deceptive or misleading. The creditor may not be able to sue on that debt, but as long as they have the right to payment, they have a claim. Alabama state law, which applied to this debt, provides for a right to payment even after the statute of limitations has expired. The plaintiff may still be able to claim staleness as an affirmative defense, and the creditor should be clear on the face of the proof of claim form about the age of the debt, but the debt is still a “claim.”

  • Bankruptcy protects the debtor. A lawsuit seeking payment of a time-barred debt may be unfair or unconscionable. The filing of a proof of claim for such debt is not. A Chapter 13 debtor has several protections, including a streamlined claims allowance process with a knowledgeable trustee at the helm. Additionally, when a claim is filed and adjudicated, that debt is discharged.

What Now? Things to Watch For

The Court’s decision seems broad at first blush, and servicers and holders of time-barred debt may be rushing to file their proofs of claim. But there are still some concerns:

  • Be aware of the facts. The Court’s holding should be read only to apply to proofs of claim where the staleness is “obvious.” Indeed, several times the Court specifically referenced “obviously time-barred debt.” Creditors filing proofs of claim for stale debt should provide sufficient information showing that the statute of limitations has passed. Not providing that information may lead to an FDCPA suit not precluded by this decision.

  • Be aware of state law. Whether the proof of claim violates the FDCPA may hinge on state law. In the majority of states, including Alabama, the right to payment survives the statute of limitations, though the enforceability does not. In some states, including Mississippi and Wisconsin, the right to payment is extinguished when the debt becomes time-barred. While the Court did not expressly hold that proofs of claim for debt governed by such state law would violate the FDCPA, creditors should take appropriate care.

  • Be aware of local precedent. At the end of its decision, the Court recognized that at least one bankruptcy court has found the filing of a time-barred claim sanctionable where the creditor did not investigate the possibility of an affirmative defense before filing (see In re Sekema). Creditors should be wary of filing such claims in this jurisdiction and any others that have held similarly.

The decision is certainly good news for the debt-buying industry. Buyers and servicers of stale debt should breathe a sigh of relief, but should take care not to step on the land mines the Court outlined for them.