Time-Barred Claims of Debt in Bankruptcy Proceedings

loanWhen an individual or a company files for bankruptcy, creditors who are owed money may file proofs of claim in the bankruptcy proceedings. These proofs of claim detail the money allegedly owed by the debtor to the creditor, and they are then paid, in the order required by law, by the bankruptcy trustee. However, claims made against a bankruptcy estate must comply with the Fair Debt Collection Practices Act, which regulates the conduct of debt collectors.  A recent case in the Fourth Circuit looks at whether the filing of time-barred claims, when the statute of limitations has expired on the debt, is a violation of the FDCPA.

In Dubois v. Atlas Acquisitions LLC, two individuals, Ms. Adkins and Ms. Dubois, filed separate Chapter 13 bankruptcy petitions.  In response, Atlas filed two different proofs of claim in each of the bankruptcy proceedings. It alleged that it was owed $575 from Adkins for two loans from payday lenders from 2009.  It also filed a proof of claim for a $135 debt owed by Dubois on a payday loan from 2008. Under Maryland law, where the bankruptcy petitions were filed, both debts had already expired, since there was a three-year statute of limitations on recovering such debts. Despite the fact that the debts were technically time-barred, Atlas still filed its proofs of claim with the bankruptcy court.

In response to these proofs of claim, both Adkins and Dubois filed complaints alleging that Atlas had violated the FDCPA by seeking to recover on debts that were already barred under the statute of limitations. They asserted that this constituted an unfair debt collection practice. The bankruptcy court disagreed, holding that the filing of a proof of claim was not a “debt collection activity” within the meaning of the FDCPA.  Adkins and Dubois appealed.

On appeal, the Fourth Circuit noted that the intent of the FDCPA was to regulate any debt collectors who use interstate commerce or the mail to attempt to collect on debts that are owed. Such debt collectors are prohibited from using false or misrepresentative means of collecting debts, and from engaging in unfair or unconscionable actions to collect. It further noted that federal courts have consistently held that the FDCPA is violated when a debt collector files a lawsuit or threatens to file a lawsuit to collect on a time-barred debt. The question before the court, therefore, was whether a filing of a proof of claim was equivalent to the filing of a lawsuit, and accordingly a “debt collection activity.”

Atlas argued that its filing of a proof of claim was not a debt collection process or similar to the filing of a lawsuit, but it was merely an attempt to participate in the bankruptcy process. The Fourth Circuit disagreed, finding that the intent of the proof of claim was to collect on monies owed, and accordingly the practice was for the purpose of debt collection. The court further held that even though the activity was directed at a third party, the bankruptcy trustee, rather than the debtors themselves, it still fell within the purview of the FDCPA. However, the court went on to determine that the filing of a time-barred proof of claim with the bankruptcy court was not an abusive practice, since it would be handled differently from the filing of a lawsuit. When a time-barred claim is filed with a bankruptcy trustee, debtors may object to the claim, the trustee will review it, and it will be disallowed.  Once disallowed, the debt is permanently erased for the debtor. Thus, in addition to being an acceptable practice in bankruptcy court, the Fourth Circuit determined that it was also an advantageous one for debtors.  Accordingly, it held that Atlas’ actions did not constitute an abusive practice under the FDCPA.

While bankruptcy trustees are charged with appropriately handling time-barred or disallowed proofs of claim, they may not always have the capacity or ability to do so, given the significant workloads for bankruptcy trustees in the Fourth Circuit.  The court has acknowledged as much in evaluating abusive practices and counseled for further administrative support to be provided to trustees. Until such administrative remedies are put in place, it is important that debtors carefully monitor the proofs of claim filed in their bankruptcy proceedings and object to those debts that are no longer valid. The West Virginia bankruptcy lawyers at the Wolfe Law Firm have been serving clients in bankruptcy proceedings for more than 25 years and can work with you to manage your bankruptcy process and protect against invalid debts. Call us at 1-877-637-5756 or contact us online for a free consultation.

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