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Creditors, statute of limitations and bankruptcy: SCOTUS to review

Creditors go about receiving payment in a number of ways. After multiple attempts, some may sell off old debts to third-party debt collectors. The practices used by these businesses have been scrutinized. Now one of those practices is under review by the highest court in the country.

The Supreme Court of the United States (SCOTUS) has agreed to review a case that questions whether or not a creditor is in violation of the Fair Debt Collection Practices Act (FDCPA) if the creditor files a claim in bankruptcy for a debt that has past the statute of limitations.

What does this issue mean? Essentially, this issue involves businesses that purchase old debt and then file a proof of claim for the debt during bankruptcy proceedings in an attempt to receive payment.

Those who disagree with this method claim it is unethical. This argument is based on the contention that filing this proof of claim leaves the trustee only two options. Either the trustee will not notice that the debt is barred by the statute of limitations and the creditor will qualify to receive payment or the claim will simply be filtered out.

How is the case unfolding? The Supreme Court of the United States Blog discussed this case, noting that the issue is larger than that of old debts.

Justice Sonia Sotomayor questioned the creditor on whether or not the practice was ethical. Justice Sotomayor also pointed out that these claims make it more difficult for creditors with more current claims to receive payment. Justice Stephen Breyer and Justice Samuel Alito voiced concerns on the business model of the creditor in question.

This creditor is one that allegedly purchases old debts that are no longer viable with the hopes of somehow gaining payment from the debtors. Both justices voiced disbelief in this explanation of the business model. Justice Roberts also stated that time-barred claims should be obvious and that trustees in the bankruptcy proceeding should be able to easily recognize these claims and reject those that are frivolous.

What laws are under review? Although the claim is based in allegations of violation of the FDCPA, the analysis involves a review of the juxtaposition of this law and the Bankruptcy Code.

To counter arguments that the practice is unethical and illegal, the debt buyers state that their actions are supported by the Bankruptcy Code. These businesses clarify that they accurately state the date of the transactions at issue in their filings, thus the practice is not only within the confines of the law but also ethical.

What will SCOTUS decide? It is difficult to determine how the justices will rule in this case this spring, but the experts with the SCOTUS blog are leaning towards a divided court. 

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