The Supreme Court ruled on Monday that debt collectors can pursue payments, even if they’re fully-aware that the validity of their claim has expired.
Justices ruled 5-3 that creditors can file litigation to get money owed by debtors, after the statute of limitations on the debt has passed. The decision reversed a federal appellate court order, which forbade the behavior under the Fair Debt Collection Practices Act.
The case centered around an Alabama woman, Aleida Johnson, who had filed for Chapter 13 bankruptcy, in federal court, in 2014. A collection firm, Midland Funding, sued Johnson two months later, in bankruptcy proceedings, for more than $1,800 in credit card payments that were over ten years old.
Johnson objected to Midland’s motion, invoking the six-year statute of limitations under Alabama law. Midland did not respond to the objection, and the claim was dismissed.
Johnson then sued Midland for in federal court for even attempting to collect payment on the old claim. She said argued that the move was prohibited under the Fair Debt Collection Practices Act.
The Supreme Court eventually disagreed. Writing for the majority, Justice Stephen Breyer said that a “claim” is defined as a “right to payment,” under federal bankruptcy code, and that the right is defined by state law.
“Alabama’s law, like the law of many States, provides that a creditor has the right to payment of a debt even after the limitations period has expired,” he wrote.
Breyer also criticized Johnson for apparently conflating “claim” with “enforceable claim,” in her case. Bankruptcy code, he wrote, “does not say that an ‘unenforceable’ claim is not a ‘claim.’”
Breyer, who was appointed to the Supreme Court by Bill Clinton, was joined in the majority by conservative justices – excluding Neil Gorsuch, who was sworn in after oral arguments. Sonia Sotomayor penned the dissent, which was backed by Justices Ruth Bader Ginsburg and Elena Kagan.
“[S]tatutes of limitations have not deterred debt buyers,” Sotomayor wrote. “For years, they have filed suit in state courts – often in small-claims courts, where formal rules of evidence do not apply – to collect even debts too old to be enforced by those courts.”
“Debt collectors do not file these claims in good faith; they file them hoping and expecting that the bankruptcy system will fail,” she also noted.
Sotomayor additionally said that, in most states, “the statute of limitations is an affirmative defense, meaning that a consumer must appear in court and raise it in order to dismiss the suit.” She noted that, according to federal regulators, “over 90 percent fail to appear at all.”
“The result is that debt buyers have won ‘billions of dollars in default judgments’ simply by filing suit and betting that consumers will lack the resources to respond,” she said.
Debt collection firms, like Midland, do not actually lend money. They purchase claims for pennies on the dollar, because the original lender has given up on attempting to recoup its investment.
The Consumer Financial Protection Bureau said last year that the most common complaints it receives pertain to the practices of debt collection firms.