ZombieIn today’s LA Times, Sean Pyles wrote a nice summary of the problem of zombie debt.

He began with the observation that when the statute of limitations has passed on debt collection actions, creditors are estopped from suing you to collect.  However, I suspect that in the interest of saving columnar space, he elided over some of the details.  One of my previous posts fills in the lacuna:

According to Cal. Civ. Proc. Code § 337, the statute of limitations for most debt collection lawsuits in California is four years.  Therefore, if you receive a summons telling you that you are being sued by a debt collector, review your records.  If it has been more than four years since the end of the grace period after the last time you made a payment, you may have a statute of limitations defense.  But you must assert it immediately by filing a written response with the court within thirty days of being served with the summons.  Otherwise that defense is deemed forever waived.  And just because you assert it, does not mean that you will win.  Be prepared to prove that the defense is valid.  By the way, successfully using the statute of limitations defense does not mean that the debt is invalid.  It just means that the collector cannot use a lawsuit to collect it.  If the debt is valid, the collector can still call you to try to collect the debt.  However, if the collector loses the lawsuit because you successfully applied a statute of limitations defense, you will probably never hear from that collector again.

Because debt collectors can still try to collect time-barred debt ― they just can’t use the courts to facilitate their efforts ― Mr. Pyles suggested bankruptcy as an option for dealing with zombie debts.  And, of course, he’s right.  Bankruptcy will take care of the problem once and for all.  But in Chapter 13 there’s a wrinkle.

Unlike Chapter 7, which just wipes out debts without you paying a dime on them, in a Chapter 13 bankruptcy you enter into a multi-year debt repayment plan that is administered by the Bankruptcy Court.  If a creditor is to be paid in Chapter 13, it must file a proof of its claim in a timely fashion.  Otherwise, it gets left out in the cold.

There is a species of alleged humans that buy debts in bulk.  Their purchases include debts discharged in bankruptcy, and debts that are time-barred.   Debt collectors with time-barred debts have tried to resurrect them by filing proof of claim in Chapter 13 bankruptcy cases.  I have written about this problem, so I won’t get too thick into the weeds.  Instead, I will say that the most effective tool for challenging the claims is the Fair Debt Collection Practices Act (“FDCPA”) that is alive and kicking in other circuits, but not in the Ninth Circuit because of the unfortunate holding in Walls v. Wells Fargo Bank, NA, 276 F. 3d 502 (9th Cir. 2002) decision.  If you have a case with good facts, it might be worth asking the Ninth Circuit to reconsider its Walls holding.  If you have the right fact pattern, I would be delighted to discuss representing you in the litigation.

The reasoning in Johnson vs. Midland Funding, LLC, Nos. 15-11240, 15-14116 (11th Cir. 2016) would be a good starting point.  Here is the gist:

In two separate Chapter 13 proceedings, two different “bulk debt buyers” filed proofs of claim, both of which were time-barred.  The case eventually bubbled up to the Eleventh Circuit.  The Court held the Bankruptcy Code did not preclude an FDCPA claim in a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows is time-barred.

The Court held that while the Bankruptcy Court has the authority under the Bankruptcy Code to disallow improper claims, that authority does not preempt the FDCPA:  “The FDCPA easily lies over the top of the Code’s regime, so as to provide an additional layer of protection . . . .”  If only the Ninth Circuit would drink of the sensible ambrosia of the Eleventh Circuit’s Johnson decision.

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.


Image courtesy of Flickr (Licensed) by Omar Bariffi