Consumer Bankruptcy Journal Fall 2015 - Page 14

DEBT COLLECTORS in the pointless exercise of filing proofs of claim for debt obligations that are legally unenforceable with the expectation that debtor’s counsel, the chapter 13 trustee, or the USTP will spend valuable time and resources to object to that claim. Congress intended the FDCPA to fill the gaps of other laws, and it does exactly that: it prevents debt collectors from abusing the bankruptcy system by filing knowingly invalid claims—all in the hope of collecting when the process fails, not when it performs as intended. CASES DISTINGUISHING CRAWFORD RELY ON ILLUSORY SAFEGUARDS Those courts that hold filing stale claims is not misleading, deceptive or unfair generally identify three illusory safeguards that protect debtors: 1) the Bankruptcy Rules that require disclosure of certain information related to the age of the debt; 2) the assumption that bankruptcy debtors are usually represented by an attorney; 3) the assumption that the chapter 13 trustee or the United States Trustee’s Program will object to stale claims.13 FALSE SAFEGUARD # 1: Debt collectors must disclose information in their proof of claim that identifies whether the statute of limitations has expired. Therefore it is much easier to discover and object to stale claims. While debt collectors are supposed to disclose information that would 13 See LaGrone, 525 B.R. at 427; Birtchman, at *7-8; Perkins, 533 B.R. at 261. 14 CONSUMER BANKRUPTCY JOURNAL identify a stale claim, there is no enforcement mechanism or motivating penalty that applies when that information is omitted. Bankruptcy Rule 3001(c)(3), in relevant part, requires a debt collector to list the date of the last transaction, the date of the last payment, and the date the account was charged to profit or loss. The very purpose of the rule was to assist parties in identifying stale claims.14 This rule, however, is not easily enforceable because failure to include this information is not an independent basis to object to a proof of claim.15 Instead objections must fall into the categories listed in section 502(b). If the case proceeds to a final determination, the court may impose a penalty for failing to include information.16 Debtors have limited tools to use in obtaining omitted information in a deficient claim, and the cost of employing such tools is extraordinary and often prohibitively expensive. Depending on the jurisdiction and the inclination of the bankruptcy judge, the debtor may: seek a court order for a 2004 14 See LaGrone, 525 B.R. at 427(“As explained in the Advisory Committee Notes to the 2012 Amendments, these required disclosures were designed to “provide a basis for assessing the timeliness of the claim.”)(J. Wedoff). 15 In re Reynolds, 470 B.R. 138, 145 (Bankr.D.Colo.2012) (“because claim disallowance falls outside of the remedies enumerated under Rule 3001(c)(2)(D), the rule precludes such a remedy.”); see also In re Critten, 528 B.R. 835, 840-41 (Bankr. M.D. Ala. 2015)(collecting cases). 16 See 3001(c)(2). Winter 2015 exam of the debt collector who filed the deficient proof of claim; file an adversary complaint to obtain an injunction or other equitable relief against the debt collector filing the proof of claim;17 initiate the process for sanctions under Rule 9011 or refer the matter to the United States Trustee’s office for the filing of a false pleading; or ask the court to use its powers under section 105 to compel the debt collector to abide by Bankruptcy Rule 3001. All of these options rely on the Debtor’s records and memory to establish a good faith basis for filing the motion or adversary proceeding. Yet courts have expressed significant concern over just such reliance outside the bankruptcy context. All of these actions require significant time and expense. In bankruptcy practice, these tools are scarcely used when claims are deficient because of the steep cost of obtaining debt collector compliance. The bottom line is that a debt collector who fails to include or inserts inaccurate information related to the statute of limitations is effectively insulated from an objection to the claim. This insulation prevents Bankruptcy Rule 3001(c)(3) from acting as a full safeguard against abuse. FALSE SAFEGUARD #2: The job of the Debtor’s attorney is to object to claims for time-barred debts. The economics of a standard Debtor’s Chapter 13 bankruptcy case often diminishes the importance of objecting to claims if the plan proposes to pay back 17 See Fed. R. Bankr. P. 7001(7), 7001(9). National Association of Consumer Bankruptcy Attorneys