High Court Rules Against Consumers In Bankruptcy Proceedings

Debt buyers may file proofs of claim on “zombie debts,” effectively denying bankruptcy debtors a fresh start, according to a new decision from the United States Supreme Court.

In Midland Funding v. Johnson, the moneylender filed a proof of claim for a credit card debt that was well outside Alabama’s six year statute of limitations. Fortunately, Ms. Johnson’s attorney saw that the claim was too old and the bankruptcy court disallowed it following a timely objection. Subsequently, Ms. Johnson sued in civil court, claiming violation of the Fair Debt Collection Practices Act. A lower court allowed the suit, ruling that Midland’s action in filing the proof of claim was “false,” “deceptive,” “misleading,” “unconscionable,” and “unfair” as defined by the FDCPA.

Writing for the Court, Justice Stephen Breyer ruled that the word “claim” in the statute meant any claim, and not just one that is legally enforceable. Furthermore, the claim was not unfair since the debtor initiated the bankruptcy action, he added.

In dissent, Justice Sonia Sotomayor wrote that it was “common sense” that “one should not be able to profit on the inadvertent inattention of others” and that “the law should not be a trap for the unwary.”

Why It Matters

Perhaps more so than some other areas of law, bankruptcy is very technical. For example, the homestead exemption is either above or below the maximum amount, and although an attorney can assign a value to the house in a way that’s favorable to the debtor, only the legislature can change the cutoff dollar amount.

The proof of claim is another example. Unless the moneylender files this document in the correct form and at the correct time, the underlying debt may be uncollectible and the moneylender may not be able to add it to the Chapter 13 repayment plan. Typically, the moneylender must file both the form itself and supporting documents, usually the promissory note and assignment, which prove that the moneylender is legally entitled to collect the claimed debt.

This showing does not include anything about the statute of limitations in debt collection matters, which is usually five years in Illinois; the SOL is ten years if the entire contract, including terms and conditions, is written in a single document. A court of appeals recently ruled that the statute of limitations is five years for credit card debts, even though the contracts are partially written.

Midland Funding will almost certainly embolden debt buyers to file proofs of claim for zombie debt (accounts that are so old that they are not legally collectible due to the statute of limitations) and hope that the petitioner does not pay attention to the debt.

There are other issues with zombie debt as well. For example, debt buyers must provide a written assignment or other evidence that the original debtor gave the company permission to collect the debt. Many times, especially if the account is extremely old, such evidence is simply not available. If the proof of claim is defective in any way, whether in form or timeliness, the debt is invalid for bankruptcy purposes.

Contact Aggressive Attorneys

Diligence and experience often make the difference between a good bankruptcy lawyer and a bad one. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We handle cases in both Illinois and Indiana.

Resources:

supremecourt.gov/opinions/16pdf/16-348_h315.pdf

scholar.google.com/scholar_case?case=1762741768706468737&hl=en&as_sdt=6&as_vis=1&oi=scholarr