Procedures for Filing Bankruptcy Claims Changed Today! Read. Learn. Be Prepared.

Details matter.  After years of procedural wrangling, significant changes to the federal procedural rules take effect today.  While the changes are focused principally on streamlining procedures in consumer cases, they include provisions – such as a requirement that secured creditors file proofs of claim – that impact all cases.  Here’s a run through of some key points.  You can find the full text of the amendments here.

Proofs of Claims: Secured Creditors Beware!

  • Secured creditors must now file proofs of claim to have their claims allowed. Although in accordance with Section 506(d), if they don’t, their liens will not be rendered void for only that reason. FRBP 3002(a).

Claim Objections: Who to Serve, Whether to Have a Hearing, Where to Object

  • To object to a claim, you must serve the affected creditor by 1st class mail directed to the name and address on its filed claim form.
  • The Court no longer needs to schedule or hold a hearing on every claim objection.
  • Any party-in-interest may seek a determination of the amount and priority of any claim. Plan proponents in Chapter 12 and 13 may now include these objections in the body of a Plan.  FRBP 3007 & 3012.

Objecting to Liens or Transfers? File a Motion or Put It in a Chapter 13 Plan

  • Parties may now seek to avoid a lien or other transfer of the debtor’s exempt property by motion or in the debtor’s Chapter 13 Plan. FRBP 3012 & 4003(d).

Claim Bar Dates: Time It Right in Chapter 7, 12, and 13

  • Filing a claim in a voluntary Chapter 7 (liquidation), 12 (family farmer), or 13 (individual debt readjustment) case?  You must now file your claim within 70 days after the bankruptcy petition filing date.  For involuntary Chapter 7 cases, you have until 90-days after the order for relief is entered. FRBP 3002.
  • If a case converts to Chapter 7 or 13, the new, 70-day period will run from the date of the order converting the case. If it converts to Chapter 7, a new claims filing deadline starts running.  FRBP 3002.
  • The Court may extend these deadlines if the debtor has not filed a complete list of creditors. FRBP 3002(c)(6).
  • And a new 2-stage deadline is created for filing mortgage claims secured by an interest in the debtor’s principal residence. FRBP 3002(c)(7).

Chapter 13 Plans & Confirmation: Use the Form, Know Your Deadlines

  • An “official,” standardized Chapter 13 plan is created… unless your jurisdiction has adopted its own (consistent) local form.  FRBP 3015(c).
  • A debtor must provide creditors with at least 21 days’ notice of the deadline for objecting to Chapter 13 Plans and 28 days’ notice of the confirmation hearing in Chapter 13 cases. FRBP 2002(a)(9) and (b)(3).

Mette K.

Zombie Debt: The Ultimate Survival Guide

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Fall has returned. Maybe you’re making ghost costumes, stocking up on Halloween candy, or tuning in to Season 7 of The Walking Dead. If you’re the Supreme Court, your mind is on zombie debt.

What Is Zombie Debt

I first encountered zombie debt a few months ago when a co-worker asked me to look at a solicitation letter her daughter had received. The letter promised her daughter could get out of paying her student loans (for a fee) by defaulting and hiring the “servicer” to run the clock until the statute of limitations passed. Mom wanted to know if the offer was too good to be true.

First, if you have to ask whether something is a scam, it probably is. Moreover, although we all think of very old, time-barred debt as “uncollectable,” legally speaking, the debt is not necessarily dead; it is only nearly dead. In virtually all states, the statute of limitations does not actually extinguish the debt. Instead, it makes the debt much harder to collect by limiting the creditor’s actions or serving as an affirmative defense that may be asserted in a collection action.

This old, “uncollectable” zombie debt can come back after you. Debt scavengers know this and may purchase zombie debt portfolios for next to nothing and then look for ways to collect.

Fighting Zombie Debt under the Fair Debt Collection Practices Act

These debt collectors must take care to comply with the Fair Debt Collection Practices Act (FDCPA). Federal courts have issued decisions holding that suing, or even collecting, on time-barred debt may violate the FDCPA under a variety of theories. For example, such collection activity could be unconscionable; it may not be authorized or permitted by law; or it may be misleading in various ways.

Can Bankruptcy Stop Zombie Debt….?  The SCOTUS Weighs In.

But what happens to zombie debt when the debtor files a bankruptcy case is the subject of significant confusion, disagreement, and conflicting case law. Because of this, the Supreme Court bravely granted certiorari this month in Midland Funding, LLC v. Aleida Johnson, a decision of the Eleventh Circuit that held that filing a proof of claim in a bankruptcy case on a time-barred debt violates the FDCPA.

The Eleventh Circuit case is at odds with the majority view espoused by the Second, Eighth and Ninth Circuit Courts of Appeal, which hold that the filing of a proof of claim that is accurate but based on a time-barred debt does not violate the FDCPA. Or in any event, that such an application of the FDCPA is precluded by the Bankruptcy Code. (The Fourth Circuit arrives at the same result by a different route, holding that the filing of the time-barred claim is actionable under but does not violate the FDCPA).

There will undoubtedly be numerous scholarly articles written on the nuanced legal questions that the Supreme Court will be considering. When you parse through the issues, they center on two key questions.

The first question is what, precisely, is the definition of a bankruptcy claim? A claim is generally understood to be a right to payment recognized under state law. If time-barred debts are not “rights to payment” within the meaning of applicable state law, then filing a claim based on such debt could be an “abusive practice” that violates the FDCPA

The second question is whether the Bankruptcy Code precludes a FDCPA action based on the filing of a bankruptcy claim for a time-barred debt. In other words, is such a claim inherently at odds with and precluded or displaced by the Bankruptcy Code’s separate claims allowance and objection process?

I will be closely watching the Supreme Court’s decision on these questions and will be updating you on any new developments and their impact on the bankruptcy claims process.

Mette H. Kurth