Supreme Court Watch: Debt Collector Filing Bankruptcy Proof of Claim for Time-Barred Debt Avoids FDCPA Liability

What does the United States Supreme Court's decision issued earlier this week in Midland Funding, LLC v. Johnson mean for debt collectors? It means that debt collectors may file proofs of claim in a debtor's bankruptcy on time-barred debt without risk of violating the Fair Debt Collection Practices Act (FDCPA). In Johnson, a debt collector filed a proof of claim in bankruptcy court for a debt that was outside the six year statute of limitations, the bankruptcy court dismissed the claim as time-barred, and the debtor filed a separate, subsequent lawsuit arguing that the claim was misleading in violation of the FDCPA. The Eleventh Circuit agreed concluding that filing proofs of claim on time-barred debt amounted to false and misleading conduct.

The U.S. Supreme Court reversed the Eleventh Circuit. The Court reasoned that unlike a civil action to collect a debt, the bankruptcy rules directly guide and streamline the evaluation of claims making it considerably more likely that any effort to collect a stale debt will be met with resistance, objection and disallowance. Specifically, the statute of limitations is an affirmative defense available to and incumbent upon the debtor or the trustee for investigation and response to a stale proof of claim. Moreover, the Court concluded that applying the FDCPA to a bankruptcy claim would upset a "delicate balance" of the debtor's protections and obligations under the bankruptcy code, and would force district courts to interpret bankruptcy issues better suited for bankruptcy courts

The Johnson decision will help resolve inconsistent decisions among the district courts and courts of appeal, and provide industry clarity on filing proofs of claim. What remains to be seen is whether the decision signals a trend of the newly configured Court in favoring debt collectors and business in general.

Read the decision (PDF)