It is not often that the United States Supreme Court decides a bankrutpcy related case. Yesterday, the Supreme Court issued a ruling in an important cases that bankruptcy practitioners have been watching for some time. In fact, the case of Midland Funding v. Johnson decides an important question for Chapter 13 lawyers nationwide.

Not All Claims in Chapter 13 Are Valid

A debtor in Chapter 13 is repaying some or all of their debts over time. The Chapter 13 Trustee is responsible for distributing funds to each creditor. Only creditors that file a “proof of claim” will receive distributions from the Trustee.

Believe it or not, creditors often file invalid claims in Chapter 13 cases. These creditors hope that nobody notices the defects in their claims. A party to a bankruptcy can object to time barred claims. If not, the Chapter 13 trustee will pay the claim.

Statute of Limitations and Chapter 13 Claims

The most common defect in a Chapter 13 claim is something called the statute of limitations. The statute of limitations is an absolute defense to the enforceability of a debt in court. Basically, a creditor cannot enforce a debt in court that is too old.

Most consumer debts are governed by a four year statute of limitations in California. That means that a creditor must sue a debtor four years after the debtor defaults on the debt. A creditor that waits too long waives its right to collect the debt in court.

The same statute of limitations defense applies in bankruptcy as well. A debtor can object to a Chapter 13 claim that is too old under the applicable statue of limitations. Again, this does not happen automatically. A debtor, trustee, or creditor must take affirmative action to object to invalid claims in bankruptcy.

Midland Funding v. Johnson

The United States Supreme Court answered a very important question in Chapter 13 cases. Is the filing of a proof of claim that is obviously time barred a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act (“FDCPA”)?

Midland Funding presented a obviously time barred debt in the Johnson bankruptcy case. Johnson turned around and sued Midland Funding for a violation of the FDCPA. Courts throughout the country were split on whether this type of lawsuit by a debtor was allowed.

The Supreme Court ruled “no.” This means that a debtor can still object to time barred debts. But debtors cannot sue creditors under the FDCPA for filing time barred claims.

There are other procedural tools that debtors can use to fight back against creditors trying to sneak time barred claims into Chapter 13 cases.

Are you considering Chapter 13 bankruptcy? Contact my office at (916) 333-2222 to discuss your bankruptcy options.