Stale Debts in Bankruptcy
Should liability under the Fair Debt Collection Practices Act (FDCPA) lie against a creditor who submits a proof of claim past the statute of limitations in a consumer bankruptcy case?
That is the question the Supreme Court declined to review recently in LVNV Funding, LLC v. Crawford. In Crawford, the Eleventh Circuit applied the "least sophisticated consumer" standard to find liability for the debt buyer when it submitted a proof of claim in 2008 for a debt that was out of statute as of 2004. Other courts have held differently. In fact, just last month, district courts in Indiana and Pennsylvania dismissed FDCPA suits against debt buyers under essentially the same facts as Crawford. Other courts, including the Second Circuit, have seemingly held that FDCPA liability can never lie in a bankruptcy case.
Putting the merits of applying the FDCPA in a bankruptcy case aside, it seems to me that in this specific instance potential liability under the Act could serve very useful functions: namely efficiency and cost savings.
Without the specter of liability, debt buyers are free to file proofs of claims (POCs) that they very well know would be disallowed under 502(b)(1) if any party in interest points it out. Of course, as the Debt Buyer's Association points out in their brief, the statute of limitations is an affirmative defense (everywhere but within the ambit of the FDCPA) and thus it is up to a party to in interest to object to the POC. This objection must be done in writing and unless the claim is withdrawn, the court must hold a hearing on the matter. If no one objects to the claim, the debt buyer can collect a distribution from the estate, at the expense of other creditors whose claims were enforceable outside of bankruptcy.
The threat of FDCPA liability would decrease the number of time barred POCs filed; thus increasing efficiency and reducing costs. But this only affects debt buyers. Original creditors are not subject to the FDCPA and thus would not face immediate liability (although the CFPB might view it differently). My bigger concern here is with debts that have been sold multiple times, however. As I have written about elsewhere, many of those debts have been sold with no documentation, no assurances as to accuracy and sometimes even title. In its own study of the industry, the FTC also found that as many as 65% of accounts sold failed to include information about the date of last delinquency on the account. The FDCPA would do some work here, even if it was not perfect.
Naturally, other creditors, the trustee, and sometimes even the debtor herself have an incentive to object to these claims, and to look out for them. The information required by Rule 3001 should aid in this quest. In the Crawford case, it did take four years for the debtor to file an objection to the time-barred claim, but it did finally happen (interestingly, it seems like the creditor ultimately kept the $300 or so it received from the estate). So maybe the answer is that these parties should just be watching for these types of claims. But it does seem like a big waste to me, and when we're talking about such low dollars, unlikely to happen.