Whether it’s a conscious decision or an inadvertent mistake, creditors sometimes try to recover on an old claim that is no longer legally enforceable. A debt collection lawsuit filed by a creditor can be dismissed if the lawsuit is filed after expiration of the applicable statute of limitations. A proof of claim filed in a bankruptcy case can be disallowed if filed after the statute of limitations deadline. Creditors may expect to write off such debts, but do their efforts to collect on time-barred claims create a risk of having to pay damages for violation of the federal Fair Debt Collection Practices Act (FDCPA)?
On August 25, 2016, the Fourth Circuit Court of Appeals ruled in Dubois v. Atlas Acquisitions LLC, No. 15-1945 (4th Cir. Aug. 25, 2016) that filing a proof of claim on a time-barred consumer debt does not violate the FDCPA. Therefore, creditors may continue to file such bankruptcy claims in North Carolina, South Carolina, Virginia, West Virginia and Maryland without triggering liability under the FDCPA. This ruling stands in direct contrast, however, to the prohibited practice of filing a lawsuit on a time-barred consumer debt in the Fourth Circuit.
In Dubois , a Maryland bankruptcy court dismissed complaints filed by a pair of bankruptcy debtors against Atlas Acquisitions, LLC (Atlas) for alleged violations of the FDCPA. Atlas had filed a proof of claim in each debtor’s bankruptcy case seeking payment on a debt for which the statute of limitations had expired. In a well-reasoned analysis, the court distinguished filing a proof of claim on a time-barred debt, which it found to be a permissible practice, from filing a lawsuit on time-barred debt, which will give the borrower grounds to sue the creditor for an FDCPA violation, by the following:
- The Bankruptcy Rules require claims to accurately state the last transaction and charge-off date, making time-barred debts easily identifiable for objection.
- The amount debtors pay under their bankruptcy plans is typically unaffected by inclusion of a time-barred debt since amounts paid are based on ability to pay, not the total amount of claims.
- For chapter 13 debtors, the court appoints a bankruptcy trustee (usually an attorney who is familiar with the applicable statutes of limitation). It is the trustee’s duty to review and object to time-barred claims, so debtors have additional protection in bankruptcy against collection of stale claims. No such oversight is provided to a borrower who is sued in a collection lawsuit.
- Whereas a creditor starts a lawsuit on a time-barred debt, the debtor chooses whether and when to file a bankruptcy petition. Thus, there is a reduced likelihood of embarrassment caused by the creditor’s filing a proof of claim versus a lawsuit because the debtor in bankruptcy volunteered to be in a court proceeding and publicly acknowledged being in debt.
In a dissent, Judge Diaz disagreed with the majority’s conclusion. Judge Diaz found actions to collect on time-barred debts, whether by lawsuit or proof of claim, squarely within the protections of the FDCPA and saw no reason for drawing distinction. Though the dissent makes valid points, it is hard to believe the conclusion was not influenced by Atlas’ business practices, which include purchasing time-barred payday loans for the designed purpose of filing claims and gambling some percentage will slip through without objection. Judge Diaz did not mince words in describing this as “exploiting a weakness in the bankruptcy system” and “preying on potential error.”
Perhaps recognizing the broader impact of the issue, the majority focused less on Atlas’ individual practices and more on the function of the claims allowance/disallowance process and the additional protections afforded in the bankruptcy context. This broader consideration led to the conclusion that a categorical bar on proofs of claim for time-barred debts would not serve the purpose of the Bankruptcy Code. This ultimately informed the court’s decision that imposing FDCPA liability for claims on time-barred debt would be inappropriate.
The Fourth Circuit’s decision contributes to an existing split of authority among federal circuit courts. Earlier this summer, the Eighth Circuit also reached the conclusion that the FDCPA does not apply to claims on time-barred debts in Nelson v. Midland Credit Mgmt., Inc., No. 15-2984 (8th Cir. July 11, 2016) . The Fourth and Eighth Circuit decisions, however, contradict the Eleventh Circuit’s 2014 decision in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014) . Thus, while this most recent decision represents the current state of the law in the Fourth Circuit, creditors should continue to monitor this issue for further developments.