Supreme Court Paves Way for False Claims in Bankruptcy Courts

Most years no FDCPA cases reach the Supreme Court. This year several have and not all of them are good ones. In a 5-3 decision, the Supreme Court recently ruled upon the case of Johnson v. Midland Funding, LLC, a decision that has been widely criticized by consumer-protection attorneys. The decision concerned bankruptcy courts and something called a “Proof of Claim”. When a member of the public files bankruptcy their creditors get an opportunity to tell the bankruptcy court that the debtor owes them money and provide details about the money owed. One way such a notification is given is through something called a proof of claim.

Most debts have an expiration date called a statute of limitations, after which a creditor does not have a lawful claim to recover the debt in a lawsuit. The statute of limitations for different debts varies wildly. In the past credit card companies and debt-buyers would not usually file proofs of claims in bankruptcy cases for debts past the statute of limitations, however, they slowly began to do so a number of years ago and now often do so as a matter of course. Sometimes they are filing a demand for payment for debts that are wildly beyond the statute of limitations and which they have no legal right to collect. Usually, this does not get the creditors any money but on occasion, it does so from their perspective that it is worth filing the proof of claim even if it only works 10% of the time. Bankruptcy courts have been flooded by countless baseless proofs of claims.

Bankruptcy courts are overworked and underfunded so when a large number of creditors all ask for a small piece of a debtor’s assets, it is not uncommon for the bankruptcy court to give each of the creditors a small slice of the pie, even if some of them are not legally entitled to it.

By filing proofs of claims for expired debts, credit card companies and debt buyers are essentially stealing from other creditors and from the debtors. The bankruptcy system is so overloaded that there is no one involved in the process who has the time to sort out the bad claims. For a time consumer-rights attorneys were filing Fair Debt Collection Practices Act (“FDCPA”) lawsuits against credit card companies and debt buyers for filing fraudulent proofs of claims and winning such cases. This was good news for bankruptcy courts because as a consequence many credit card companies and debt buyers ceased filing claims on expired debts altogether.

Then the ruling in Johnson v. Midland Funding came out. The Supreme Court said that filing a proof of claim alleging a legal right to collect a payment that was not legally due was not misleading or deceptive and thus not a violation of the FDCPA because the statute of limitations is an affirmative defense. If that does not make much sense to you, the dissent thought the same, accusing the Court of the realities of the bankruptcy system. The majority of the Supreme Court went so far as to suggest that such issues could be resolved by the already chronically overworked bankruptcy courts when in reality there is no chance at all that they will be resolved bankruptcy courts. To quote Justice Sotomayor, “Debt collectors do not file these claims in good faith; they file them hoping and expecting the bankruptcy system will fail.” As a result of the decision credit card companies and debt buyers are again filing proofs of claim on expired debts and taking advantage of the already chronically overworked and underfunded bankruptcy system.

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This document has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorney in connection with any legal issues related to the matters discussed in this article as the applicability of state, local, and federal laws may vary.