The Harmful Clash Between the Bankruptcy Code and the Fair Debt Collection Practices Act: Are Debtors Safe From Abuse?

Megan Niespodziany, KLJ Staff Editor[1]

The Fair Debt Collection Practices Act (“FDCPA”) was enacted in order to prohibit debt collectors from using abusive, unfair, or deceptive practices to collect debt.[2] This action was taken because of “abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors” that has resulted in troubled marriages, job loss, and invasions of privacy.[3]

Unfortunately, the FDCPA often clashes with the Bankruptcy Code, resulting in a confusion of the law, splits between circuits, and heightened difficulty ensuring that debtors are not abused through the collection process. Specifically, there has been a great deal of litigation surrounding whether a creditor can file a stale claim – one that has been time-barred by the statute of limitations. Unlike the FDCPA, the Bankruptcy Code specifically allows this, and requires the debtor to object in order to avoid the consequence of paying a debt that does not legally require payment.[4]

The Eleventh Circuit produced a troublesome opinion in Crawford v. LVNV Funding, LLC.[5] Here, the creditor had not advanced any arguments about a conflict between the FDCPA and the Bankruptcy Code, so the court refused to address the issue.[6] Nevertheless, the court concluded that the FDCPA had been violated since the submission of a time-barred claim was “unfair,” “unconscionable,” “deceptive,” and “misleading.”[7]

Lower courts have interpreted Crawford inconsistently. Most recently in Castellanos v. Midland Funding LLC, the court held that a time-barred claim filed by a creditor is not a violation of the FDCPA.[8] Even though this action has been seen as a violation of the FDCPA by other courts, the court decided that the FDCPA must yield to the Bankruptcy Code, which permits the filing of time-barred claims by creditors.[9] Other courts have followed suit with Crawford, simply declaring that the Code does not preclude this kind of claim under the FDCPA.[10]

This mix of results is not exclusive to the Eleventh Circuit. The Seventh Circuit followed suit with Crawford, and the Ninth Circuit has followed suit with Castellanos.[11] “The split in authority indicates that debtors raising FDCPA violations in bankruptcy proceedings will need to demonstrate that the bankruptcy process alone does not address the FDCPA issue.”[12]

Why does this matter? After all, if the court decides that the Bankruptcy Codes preempts the FDCPA on stale claim issues, the debtor has recourse through the Code – they can simply object to time-barred claims.[13] However, this requires the debtor to be somewhat sophisticated and actually make the objection. This very thing failed to happened in Crawford – “neither the bankruptcy trustee nor Crawford objected to the claim during the bankruptcy proceeding; instead, the trustee actually paid monies from the . . . estate . . . for the time-barred debt.”[14]

Courts justify a preemption conclusion by declaring that a time-barred claim in bankruptcy is permissible since the court system provides protection and guidance to debtors.[15] This outcome is questionable, especially in light of the facts in Crawford. Ultimately, the Supreme Court will need to make a decision regarding the proper avenue for a debtor to pursue a challenge to time-barred claims, but one thing is for sure – the courts in a bankruptcy proceeding do not provide as much protection to debtors as they claim to provide.

[1] J.D. expected May 2017.
[2] Federal Trade Commission: Consumer Information, http://www.consumer.ftc.gov/articles/0149-debt-collection (last visited Jan. 27, 2016).
[3] 15 U.S.C. § 1692(a) (2006).
[4] 11 U.S.C. § 502(a) (2005).
[5] Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014).
[6] Id. at 1262, note 7.
[7] Id. at 1261.
[8] Castellanos v. Midland Funding LLC, 2016 BL 460, 3 (M.D. Fla. Jan. 4, 2016).
[9] Id.
[10] See In re Seak, 2015 WL 631578 (Bankr. M.D. Fla. Jan. 22, 2015).
[11] 1 The Law of Debtors and Creditors § 5:55 (2015).
[12] Id.
[13] 11 U.S.C. § 502(a) (2005).
[14] Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1259 (11th Cir. 2014).
[15] Simmons v. Roundup Funding, LLC, 622 F.3d 93, 96 (2d Cir. 2010).