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It seems as though there is something paranormal about the way bankruptcy proceedings will now deal with stale, old debt. Previously, creditors were not able to make claims in bankruptcy proceedings for stale debts that were time-barred by the Statute of Limitations.  Generally, most creditors’ claims on these old debts were considered “unconscionable” and thus in violation of the Fair Debt Collection Practices Act.   However, because of a recent, highly divisive US Supreme Court ruling, debtors now may find themselves haunted by the ghosts of debt past. Do not let debts come back to haunt you! Call on Oppenheim Law.

OLD DEBTS THAT WON’T BITE THE DUST

In states such as Florida, old debts are typically protected against lawsuits by the Statute of Limitations, depending on the amount of time that passes before a creditor tries to sue on the debt. If the time period specified in the Statute of Limitations passes, these old debts would effectively become “time-barred” or “stale”.      In a turn of events, the US Supreme Court ruling in Midland Funding, LLC v Johnson has opened the gates for creditors to file proof of claims in bankruptcy proceedings on these old debts that are otherwise not collectible.   The Court held that although creditors had filed time-barred claims with bankruptcy courts, it is not “unconscionable” for a creditor to file a proof of claim in bankruptcy on an old debt.

BORROWERS BEWARE OF DEBT BUYERS

A recent Bloomberg article suggests that the Court’s ruling appears to give creditors a free pass to file stale claims without fearing FDCPA liability. Debtors, as a result, face the horrors of an unfair and unconscionable practice, whereby “debt buyers” purchase consumers’ forgotten stale debts for a fraction of the cost until they take the form of a giant Stay Puft Marshmallow Man wreaking havoc on the bankruptcy process. Debt collectors have filed tens of thousands of outdated claims with bankruptcy courts knowing and hoping that most debtors won’t object.  In fact, according to FTC Report 45, over 90% of consumers won’t appear in court to defend themselves against these time-barred claims, resulting in default judgments entered against them.  But beware, failing to comply with these default judgments could result in home foreclosures, wage garnishments, and credit problems.  The dissenting opinion of the Johnson ruling suggests that the practice has become so widespread that the Government has argued it constitutes a pattern of systemic abuse of the bankruptcy process.  For some, Justice Sotomayor gravely warns, “… most debtors who fail to object to a stale claim will end up worse off than had they never entered bankruptcy at all:  They will make payments on the stale debts, thereby resuscitating them… and may thus walk out of bankruptcy court owing more to their creditors than they did when they entered it.”

THE TRUSTEE’S TROUBLES

Additionally, the original debtor is not the only person burdened by the potential effects of Johnson.  Trustees and debtors’ lawyers will now be under increased pressure to more closely review proof of claims to determine whether the claims are subject to a statute of limitations defense.  However, the Johnson dissenting opinion argues that trustees are already overworked. In an amici curiae brief, the trustees even agree with the Government’s statement that trustees cannot realistically be expected to identify ever time-barred claim filed in every bankruptcy.  What’s more, as trustee’s have an interest in the amount collected, the effect of allowing continued abuse of the bankruptcy system begs the question of whether potential conflicts of interest could arise?

THE GHOST(DEBT)BUSTERS

Luckily, the Supreme Court’s ruling doesn’t mean you have to face these poltergeists without protection – the Chapter 13 Bankruptcy protections still apply to consumers, as well as other legal defenses.  If you have been hounded by ghoulish debt collectors trying to retrieve requests on old stale debt, make sure you know who you’re gonna call… Oppenheim Law.

From the Ghost(Debt)Busters,

Roy Oppenheim