cimarron-1931-best-picture-oklahoma-land-rush-sooners-review (2)

Is it a violation of the Fair Debt Collection Practices Act for a creditor to file a Proof of Claim in a bankruptcy case on an old debt that is no longer collectible by virtue of a Statute of Limitation?  Ever since the 11th Circuit Court of Appeals ruled in Crawford vs. LVNV Funding  that such claims do constitute FDCPA violations many local bankruptcy attorneys have been eager to find out how the 8th Circuit would rule.

Why so such anticipation?  Because large debt buyers such as Midland Funding, Portfolio Recover and Asset Acceptance Corp file hundreds of thousand of claims on such time-barred debts annually and if the 8th Circuit would have joined with the 11th Circuit in declaring such claims illegal, bankruptcy attorneys would have rushed in with thousands of FDCPA complaints against these companies.  In almost every Chapter 13 bankruptcy case there are a handful of claims filed on expired debts and it would be easy to sift through files to line up FDCPA cases ripe for litigation.  Like Boomer Sooner ready to launch his wagon in the Oklahoma land rush, bankruptcy attorneys have waited for a signal to launch litigation against debt collectors filing claims on expired debts.

In Gatewood vs. CP Medical LLC, the 8th Circuit BAP has ruled that no FDCPA violation occurs by merely filing a claim on a time-barred debt.

Filing in a bankruptcy case an accurate proof of claim containing all the  required information, including the timing of the debt, standing alone, is not a prohibited debt collection practice.”

The court reasoned that bankruptcy debtors are able to object to the time-barred claims in the bankruptcy process and observed that debtors are generally represented by attorneys who are duty-bound to object to invalid claims, so filing a claim on an expired debt does not overly burden a debtor.  And, of course, the unspoken deciding factor is that the court did not want to encourage a tidal wave of FDCPA bankruptcy litigation had it ruled otherwise.

What are the consequences and implications of this decision?

  1. Debt buyers will continue to flood the court with expired debt claims as far as their databases can go.  I’m seeing claims for debts where no payments have been made in over 10 to 15 years.
  2. The payout of legitimate claims will decrease since the deluge of claims from time-expired debts will dilute the payment that would have been made to enforceable debts.
  3. Debtors get stuck with footing higher legal fees necessary to object to these expired debts.
  4. Student Loan debtors may get stung when time-barred private student loan claims start receiving payments because their attorney failed to object to the claim.  Does a payment received through a chapter 13 plan on an expired student loan debt reset the statute of limitations?
  5. Resetting the Statute of Limitations.  Does a payment on an expired debt through a Chapter 13 payment plan reset the statute of limitations?  Normally a voluntary payment will reset the statute of limitation.  Does a payment in a Chapter 13 constitute a voluntary payment for purposes of counting the last payment date on an expired debt?  I really don’t know.  Debtor’s counsel cannot just assume that allowing a claim on an expired debt is harmless since such payments may reset the statute of limitations clock.

Although I can understand the 8th Circuit’s reluctance to encourage an avalanche of FDCPA litigation, in the long run this may be an questionable policy.  Sending debt  buyers a clear signal that dead debts should remain dead would reduce time spent by court personnel in managing expired claims and thereby increase the payout to legally enforceable debts.  Debtors and their attorneys now must spend additional time and money reviewing and objecting to claims that never should have been filed in the first place.  In the end, the court may have just created more of that litigation it was seeking to avoid.