In recent years, there has been a growing consensus among the courts that a debt collector’s threat to file suit on a debt otherwise barred by the applicable state statute of limitations violates the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. §§1692-1692p (2006).
Now that consensus has been extended to proofs of claim in bankruptcy court. In a decision last week, the Eleventh Circuit became the first court of appeals to hold that filing a proof of claim in a Chapter 13 bankruptcy for a debt that is time-barred under state law violates the FDCPA.
In Crawford v. LVNV Funding, LLC, Case No. 13-12389 (11th Cir. July 10, 2014) (see opinion here), the debt collection agency argued that its proof of claim was not “collection activity.” Instead, it characterized the claim as “a request to participate in the distribution of the bankruptcy estate under court control.” See In re McMillen, 440 B.R. 907, 912 (Bkrtcy. N.D. Ga. 2010). The Eleventh Circuit rejected this argument, concluding that there was no substantive difference between threatening to initiate suit outside of the bankruptcy courts and the filing of a proof of claim with the court:
The same is true in a bankruptcy context. In bankruptcy, the limitations period provides a bright line for debt collectors and consumer debtors, signifying a time when the debtor’s right to be free of stale claims comes to prevail over a creditor’s right to legally enforce the debt. . . .
Similar to the filing of a stale lawsuit, a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt. The “least sophisticated” Chapter 13 debtor may be unaware that a claim is time barred and unenforceable and thus to object to such a claim. . . . For all of these reasons, under the “least-sophisticated consumer standard” in our binding precedent, LVNV’s filing of a time-barred proof of claim against Crawford in bankruptcy was “unfair,” “unconscionable,” “deceptive” and “misleading” within the broad scope of §1692e and §1692f.
Crawford, Case No. 13-12389, pp. 11-12. The court also declined to address whether the Bankruptcy Code preempts the FDCPA, noting that the trial court had not addressed that grounds below. Id. at 14, n. 7.
Given the spate of recent decisions in this area, debt collection agencies should be mindful of the dangers of seeking to collect stale debts. While simply requesting payment of a stale debt itself may not be a violation of the FDCPA, the courts have reached an apparent consensus that threatening or initiating legal action to collect legally unenforceable debts constitutes a misleading collection activity under the least sophisticated consumer test. Debt collectors should consider reviewing their procedures to make sure they adequately identify stale debts and implement collection procedures appropriate to such claims.