Can Debt Collectors Use Bankruptcy to Collect Older Debts?
In a Chapter 13 bankruptcy, a debtor agrees to pay back some of his or her debts under a plan approved by the bankruptcy trustee and the court. This plan assumes the debts are valid. But in recent years, third-party debt collectors have aggressively used the bankruptcy code to try and receive payment for debts that are no longer enforceable under state or federal law. A federal appeals court recently addressed such a case and sided with debtors who seek to fight back against these illegal tactics.
Debt Collectors May Owe Damages for Filing Time-Barred Claims
In every state there is a mandatory time limit—a statute of limitations—for creditors to enforce a debt. In Florida, the statute of limitations on most debts is five years. In Alabama the limit is six years.
This case concerns two debtors from Alabama. Each debtor had filed for Chapter 13 bankruptcy protection. In each case a third-party debt collector filed a claim against the bankruptcy estate for a debt that was more than six years old. Both debtors responded by filing a counterclaim in bankruptcy court against the debt collector for violating the Fair Debt Collection Practices Act (FDCPA).
The FDCPA is a federal law that prevents a debt collector from using any “false, deceptive, or misleading representation in connection with the collection of any debt.” The FDCPA does not apply to the original creditor, only a third-party debt collector. In other words, if you owe an unpaid medical bill to a hospital that subsequently sells that debt to a collection agency, the FDCPA only applies to the actions of the collection agency, not the hospital. If a debt collector violates the FDCPA, the debtor may seek statutory damages of up to $1,000 and other relief.
Here, the two Alabama debtors argued the debt collectors violated the FDCPA when they submitted creditor claims to the bankruptcy court that they knew were barred by the six-year statute of limitations. The bankruptcy court dismissed the debtors claims, however, agreeing with the debt collectors that there was an “irreconcilable conflict” between the FDCPA and the Bankruptcy Code on this issue. The debtors then appealed to the U.S. 11th Circuit Court of Appeals, which has jurisdiction over Alabama as well as Florida.
In a May 24 decision, a three-judge panel of the 11th Circuit reversed the bankruptcy court’s decision and held the debtors could proceed with their claims under the FDCPA. The appeals court said there was no conflict between the FDCPA and the Bankruptcy Code. While bankruptcy law normally permits creditors to file claims that may be barred by the applicable state statute of limitations, the 11th Circuit noted the FDCPA carves out a special exception for third-party debt collectors. Specifically, a creditor may pursue an FDCPA claim in bankruptcy court when a debt collector “knowingly” tries to submit a time-barred claim.
Get Advice from a Florida Bankruptcy Attorney
The statute of limitations is an important legal principle that can protect debtors against abusive collection practices. In fact, there may be cases where bankruptcy may be unnecessary if the majority of your debts are time-barred by the statute of limitations. A Miami bankruptcy attorney can advise you on this and other issues related to debt relief. Contact the Law Office of Julia Kefalinos to speak with an attorney today.