Can a Stale Debt Be Collected in Bankruptcy?

Stale debt is a term used to describe a debt that is no longer collectable because the statute of limitations has run out on it. The statute of limitations on collecting debt varies from state to state, and in Texas it is four years on most debt collection claims. When a statute of limitations runs out on a debt, and the creditor fails to collect or attempt to collect, the debt becomes time barred, and it cannot legally be collected. Once a debt is time barred, one would think that it is no longer collectable. But across the country businesses buy consumer debt at pennies on the dollar, and then attempt to collect those debts using courts of law. These ‘debt collectors’ are subject to a powerful federal law known as Fair Debt Collection Practices Act (FDCPA).

The FDCPA protects debtors from unlawful attempts by debt collectors at collecting a debt. It is unlawful to collect an unenforceable debt, like stale debt that is time barred by a statute of limitations. In some states, stale debts are never collectible. In some states, Debtors have a good defense to the debt if it is stale. But because of a recent US Supreme Court case, all creditors are allowed to file a “claim” for a debt without violating the FDCPA.

In Midland Funding, LLC v. Johnson, the Court held that debt collectors do not violate the FDCPA when they file a claim in a bankruptcy proceeding for a debt that has become uncollectible. The Court explained that the obligation remains a “claim” within the meaning of the Bankruptcy Code even if it is unenforceable. In other words, if the Debtor objects to the Claim, it will be disallowed under the Code. This case illustrates how complicated bankruptcies can be and why it is necessary to have the right attorney.

This article is written by an attorney at Wyatt & Mirabella, PC. Always consult an attorney before making any legal decisions. To make an appointment today for a free consultation, please click here to contact us.