The recent Supreme Court ruling in Midland Funding v. Johnson, puts a burden on debtors and their lawyers in bankruptcy cases. Midland Funding argued that federal bankruptcy law lets creditors file claims for old debt even if the statute of limitations wouldn’t allow a lawsuit. Johnson’s lawyers argued that, by filing outdated requests, debt collectors are falsely suggesting those claims are valid and enforceable.*
Midland Funding won. A divided U.S. Supreme Court ruled that debt collectorscan use bankruptcy proceedings to try to collect liabilities that are so old the statute of limitations has expired.
So what does that mean? It means that debtors must ensure that stale debt is not repaid through a bankruptcy. Debt collectors will file claims to be paid from the Chapter 13 plan even if the statute of limitations has run on a debt. Debtors must carefully review all claims filed by creditors and if a debt is old and not collectable in a lawsuit, but claimed in the bankruptcy, file an objection to the repayment of that debt. Debt collectors are making money buying debt that is no longer collectable, filing claims in bankruptcy cases, and if no one catches it, getting paid in the bankruptcy case.*
I agree with Justice Sotomayor who wrote in her dissent "Professional debt collectors have built a business out of buying stale debt, filing claims in bankruptcy proceedings to collect it, and hoping that no one notices that the debt is too old to be enforced by the courts...This practice is both ‘“unfair”’ and ’“unconscionable,” debt collectors do not file these claims in good faith; they file them hoping and expecting that the bankruptcy system will fail ....”
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*Bloomberg.com journalists Greg Stohr and Dawn McCarty -excellent reporting on this case.
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