U.S. Supreme Court Rules in Favor of Creditors Making Stale Claims

 Posted on June 12,2017 in Bankruptcy

The creditor industry scored a victory in May when the U.S. Supreme Court ruled that creditors are not violating the Fair Debt Collection Practices Act when they file a stale claim during a debtor’s chapter 13 bankruptcy proceedings. The 5-3 decision overturned a lower court ruling that such claims were unfair and deceptive. The decision removes some of the burden on creditors for determining when the statute of limitations for claiming a debt has expired, and protects them from debtor lawsuits that claim they violated the FDCPA.

Stale Claims

Creditors may have an unlimited time to attempt to collect a debt, but there is a limited time period during which they can use court action. When a creditor attempts to use legal action to collect on a debt that has passed that deadline, it is known as a stale claim. The statute of limitations varies by state, and creditors with debtors in multiple states may find it difficult to keep track of the different deadlines. In Illinois, the deadlines for court action are:

• 10 years for loans and written contracts, starting from the debtor’s last date of activity;
• 5 years for oral contracts;
• 3 to 3 ½ years for audits and state taxes; and
• 3 years for bad checks.

When a debtor files for chapter 13 bankruptcy, creditors submit proofs of claim in order to collect debt during the bankruptcy process. Creditors cannot collect on the debt by filing a stale claim. However, multiple lower court decisions went a step further in saying that filing a stale claim is a deceptive tactic. The rulings stated that stale claims attempt to take advantage of debtors or their legal representatives not realizing that the statute of limitations on the debt has expired. This allowed many debtors to sue their creditors for violating the FDCPA.

Supreme Court Ruling

The case of Midland Funding, LLC v. Johnson involved a debtor attempting to sue her creditor for filing a stale claim for a credit card debt during her bankruptcy. A circuit court ruled that the creditor violated the FDCPA by knowingly filing a stale claim. In overturning the lower court ruling, the majority decision of the U.S. Supreme Court said the stale claim was fair because:

• While the claim was unenforceable, it was not false because the debt still exists;
• A bankruptcy trustee is likely to recognize a stale claim and successfully challenge it; and
• Debtors, not creditors, should be responsible for investigating whether the statute of limitations on making a claim has expired.

Legal Action

Creditors have deadlines for using the courts to retrieve outstanding debts. A Chicago debt collection attorney at Dimand Walinski Law Offices, P.C. can inform you of your rights as a creditor. To schedule a consultation, call 312-704-0771.

Source:

http://www.scotusblog.com/2017/05/opinion-analysis-justices-approve-filing-stale-claims-consumer-bankruptcies/