Bankrupts Beware – FDCPA No Longer Applies to Claims

Bankruptcy has been one refuge debtors have from debt collectors, but the Supreme Court has recently made things much worse. In Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17), the Court held that filing claims in bankruptcy court on debts that are beyond the statute of limitations does not violate the Fair Debt Collection Practices Act (FDCPA). If you are in bankruptcy or considering it, this is huge.

Opening the Floodgates to Bad Claims

What Bankruptcy Does

In general, if your debts get too bad, you can file bankruptcy and force all your creditors to stop contacting you. They have to file claims in your bankruptcy action, and the court will either grant those claims or deny them. The court then determines the amount of payments you must make, over what period of time, and you do your best to do that.

It isn’t an easy path, and in fact most bankruptcies are dissolved without “discharge.” That is, most bankruptcies end without accomplishing their purpose. Obviously, the less money you have to pay, and the shorter the period you have to make payments, the better your chances of getting what you wanted out of bankruptcy in the first place: a “fresh start.”

The dirty little secret of bankruptcy, though, is that if claims are not disputed, they are generally granted. In bankruptcy cases brought by poor people (you can bet Donald Trump never had this problem), the lawyers representing the bankrupts have little (personal) incentive to dispute wrongful claims because they’re being paid out of the scanty resources of their clients. There’s a U.S. trustee who is supposed to oversee the process and protect the bankrupt and legitimate creditors from bad claims, but guess what?

They often don’t. Likewise, the court should attempt to winnow out bad claims, but given the number of bankruptcies and their complexity, this often does not happen.

In most bankruptcies, allowing a bad claim means that it’s going to get paid (eventually) by the person filing for bankruptcy. Under current realities, that means a lot of bad claims get paid by poor people.

Enter the junk debt buyers to make things much worse. They buy vast amounts of LONG overdue debt – debt far beyond the statute of limitations – and file claims in bankruptcy cases. This bogs the bankruptcy courts, the trustees, and bankruptcy lawyers down. The more bad claims they file, the more get through because of carelessness. They should NEVER get through, because an unenforceable claim should ALWAYS be denied under bankruptcy rules.

Bad claims hurt the chances of the bankrupts to get their fresh start, hurt the chances of the legitimate creditors to get paid, and incidentally makes the whole process stink to high heaven of injustice. Concern about this obvious corruption of the entire process, incidentally, is not just liberal “blather.” The courts jealously guard their claims to legitimacy – legitimacy is essential to their ability to work at all. Allowing a bunch of hoodlums in fancy suits to steal wholesale from the poor damages the legal system at its very core.

The FDCPA used to offer some protection against that, but the Supreme Court negated that protection with its holding in Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17). In that case, the Court ruled that debt collectors could file claims in bankruptcy that would be illegal if filed in other courts.

Midland Funding, LLC v. Johnson

The relevant facts in Midland Funding are very simple. Midland, a junk debt buyer, was buying extremely old debts for very small amounts of money. They were using these debts, which were far beyond the statutes of limitations, as the basis for many claims in bankruptcy. Johnson opposed and had the claim in that case disallowed, and then filed suit in district court under the FDCPA, alleging that the claim had been unfair or unconscionable. The essence of Johnson’s claim was that filing obviously time-barred claims in a bankruptcy proceeding was an unfair debt collection practice.

The Supreme Court ruled that it was not.

There is no need to review (here) the tortured logic that effectively immunizes from consequences the intentional doing of something that never, under any circumstances, should be allowed. The state of the law simply is this: debt collectors can file obviously unenforceable claims in bankruptcy without worrying about the FDCPA.

There is perhaps one glimmer of light in this very bad decision. The Supreme Court was addressing “obviously outdated” claims. What Midland was doing was buying obviously unenforceable claims and hoping they would be overlooked and erroneously allowed. While this obviousness is one main way a debt collector’s intention to file outdated claims would be known, the obviousness was also a reason the Court found that the claims were not “deceptive.” What if the claims were known to be outdated by the debt collector but were not obviously so? Facts like that, or similar facts tending to show some actual intent to deceive would present difficult evidentiary issues, but the case could arise and might tip the balance in the other direction.

Conclusion

What the Midland Funding case means, in practical effect, however, is that even if you’re in bankruptcy you’re going to have to know and protect your own rights. Your lawyer has VERY LITTLE incentive to challenge bad claims, and the U.S. Trustee has VERY LITTLE time (or incentive) to do it. If the claims are allowed, you will be stuck paying them in all likelihood. That means that even if you file for bankruptcy you must be prepared to defend yourself against the debt collectors. You will AT LEAST need to know your rights, and you will very probably have to defend them pro se. You’re probably not going to get much help from your lawyer on this one.

Original Creditor or Someone Else – Who is Suing You?

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Give No Free Information – Beware the Hardship Application

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Never make a Partial Payment

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Demanding Verification is NOT a Substitute for an Answer to Lawsuit

Don’t be a Verification Sucker

Demanding verification of your debt will NOT prevent a default judgment if you get sued.

People in debt trouble hear a lot about debt validation, and that is a good thing. I have argued that even though verification requires little from the debt collector, it’s still a good idea to make the demand when you’re first contacted by a debt collector who is trying to harass you into paying. I think that requesting verification sends a signal to the debt collector that you will defend your rights. If you get sued by a debt collector – even if that’s the first you’ve ever heard from them – you must do more. You must answer the lawsuit by filing your answer in court.

Anything short of that allows the debt collector to get a default judgment, and that will effectively end your rights to fight the debt.

Conclusion

When a debt collector (or creditor) files suit against you, you will have to file an answer in court to avoid a default judgment. Many people think all they have to do is “dispute the debt and request verification.” The right to verification, however, applies only to collection efforts that are not part of a lawsuit. Don’t be a verification sucker – file an Answer and defend yourself.

Things new debt litigants need to know

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Identity Theft Affidavits – Debt Collector Dirty Trick, Part 1

Sometimes debt collectors will attach an “identity theft affidavit” to the discovery they give you and “request” or suggest that you fill it out and file it with authorities. Or they invite you to send it to the debt collector so that it can file it with the authorities. Sometimes they try to get you to believe there is something in the discovery process that forces you to fill out such an affidavit. Sometimes they try to get you to believe they’re “just trying to help.”

They aren’t trying to help, and you don’t have to fill out such an affidavit. They want to make you think that denying you owe them money could turn into or be a crime.

I believe this practice violates the Fair Debt Collection Practices Act (FDCPA) and makes both the debt collector and its attorney liable to you under the Act.

Attaching an Identity Theft Affidavit violates the FDCPA

Attaching the ID theft affidavit violates the FDCPA because it deceptively attempts to create the impression that they can require that such an affidavit be filed. They want you to feel that you must swear – to the police – that your identity has been stolen or give up any claim that it may have been done. It increases the general “pressure” already created by the litigation itself. This exerts improper and unconscionable pressure on the debt defendant to give up on his defense and capitulate to the debt collector.

Let’s Get this Straight

If you allege that your identity has been stolen and maintain this as a defense to the action against you, you will eventually probably have to swear to it under oath. Eventually. If the matter goes to trial.  Doing so falsely could subject you to criminal punishment. But lying in such testimony is probably not as big a deal as lying to law enforcement and filing a false charge. You’re less likely to be caught or punished for “mere” perjury – not that we suggest it, of course. Exerting pressure on you to file such a report is an attempt to raise the stakes of the litigation. Since most people understand that filing a report with the police is serious and could involve repercussions, they are hesitant to do so whether it would be justified or not.

And there are times when someone has stolen your identity in a way which would defeat your liability where you would not want to involve the police. Nor do you have to.

No Right to the Affidavit

The discovery process does not give any party the right to require another party to make a report to any governmental agency. The only way you could be forced to take such an action is by court order (possibly, under certain circumstances unlikely to occur in debt litigation – and certainly not as part of the discovery process). Discovery is a process of asking about and providing answers (or objections) to questions about documents or other information you have in your possession or control. Sometimes – but rarely – this can include making “compilations” of particulary complex data or records. Never can it require you to create or send a report of any sort to someone unrelated to the litigation (i.e., the police).

Deceptive

Knowing that forcing you to make a report on identity theft is far beyond their legitimate powers, the debt collectors will sometimes merely “include” it in their discovery packets – inviting you to draw the conclusion that you must file it with the police. In the case of a represented party against an unrepresented, unsophisticated party, this is probably an unethical practice for the lawyer to engage in. It is deliberately deceptive and blatantly tries to create a false impression on the part of someone vulnerable to misrepresentation.

Attempt to Collect a Debt

The FDCPA makes any debt collector liable when it uses unfair or deceptive techniques in its efforts to collect a debt originally owed to someone else. Simple attaching an ID theft affidavit to discovery is utterly deceptive, as it tries to take advantage of an unsophisticated litigant’s lack of knowledge – and fear – of the legal process to cause it to do something the debt collector has no right to ask. And of course this exerts pressure on the consumer to pay if for any reason he or she cannot truthfully file such a report. Making a false report to the police authorities is a crime. Being unwilling to file one makes no statement about whether or not the debt is legitimate or owed to the debt collector – but it knows that unsophisticated pro se litigants will think that it does. So these litigants will feel pressure to give up their cases – pressure applied under the disguise of the legal process but deriving no actual power from it.

That is the essence of an unfair debt collection practice.

This is Part 1 of this Article. Click here for part 2.

How and why to file counterclaim if you can

There’s a great deal to say about counterclaims in debt law cases, and I suggest you look closely at the text of the Fair Debt Collection Practices Act (FDCPA) itself as you consider what, if any, counterclaims you will bring. In this article, though, I simply want to tell you why counterclaims are so important.

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Why Having a Counterclaim Is So Important?

In most jurisdictions, a plaintiff (the person bringing the lawsuit) is allowed to drop the case (that’s called “dismissing”) virtually at any time it wants to. This isn’t true of federal court, where you have to get permission, but in most state courts it seems to be true. And debt cases are pretty much always brought in state courts.

That means that if you work hard and develop a winning case, the debt collector could just dismiss the case.

That’s just what we want it to do, of course.

However, if the debt collector simply dismisses your case, it could also sue you again later or sell the debt to someone else who would sue you later, and that means you would still be vulnerable to debt collectors. It would also mean you could receive more annoying calls and letters, and would have to put credit repair on hold. Making them dismiss – under any circumstances – is a victory, but you need the case dismissed “with prejudice” to keep it from coming back.

Counterclaims Stop Them from Suing You Again

So how do you keep them from dismissing the suit and refiling the suit later? You do this by filing a counterclaim against them. A plaintiff can dismiss its own lawsuit, but not your claim against it. So if they want to dismiss the case against you either because your claims are good or because they don’t want to spend the money chasing you, they either have to settle the case with you, or they’re still left defending against your counterclaim. They never do that, because then they’d be bound to lose money one way or another. They’d either have to pay you or their lawyers (or both), — without the chance of collecting anything from you. That’s the worst of all worlds for them, and they won’t do it. Instead, they’ll settle the whole case with you.

So a counterclaim gives you power over the plaintiff and lets you keep it around till they agree to destroy (or “extinguish”) the debt. And then not only can you rest easy about the debt, but you can also begin the process or rebuilding your credit report.

Counterclaims Have Value

Sometimes your counterclaim can be worth a lot more than their lawsuit against you was in the first place.

Actually, it is not rare at all for a debt defendant’s counterclaim to be worth more than the claim brought by the debt collector, and this is so for several reasons. First, as I often point out, debt collectors generally bring their claims without any real evidence in their possession – and without the ability to get the evidence cheaply enough to be worth doing. That means that the debt collectors’ claims against defendants will, eventually, be worthless if you just keep fighting enough.

On the other hand, a counterclaim under the FDCPA is usually the result of either something the debt collector did as part of bringing its lawsuit (i.e., bogus notice of right to seek verification, false or deceptive affidavit, etc.) or (by definition) of some other part of the debt collection practice – usually some action involving you personally. Where the violation is part of the lawsuit, there is simply no evidentiary issue at all. The facts are in the file – put their by the debt collector and its lawyers. And where the counterclaim involves some other action against you personally, you should be able to testify. Thus you will rarely have an evidence issue – the hurdle which usually kills debt cases.

Should you try to hide evidence from the debt collector?

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Making excuses loses cases

No Free Lunches, Ever

For a free copy of this article in pdf form, click here: Making Excuses

There is, in the world, what some people call the “iron law of cause and effect.” What this means is that, for every action, something always happens as a result. No matter why it happened, if it does happen, there are consequences. In plain English, you say it this way: There are no free lunches, ever.

In reality, all of life is like this, even when we don’t think about it.

We pretend the iron law of cause and effect does not apply to us all the time. If we’re late, we apologize, and that’s usually enough to get past the other person’s anger or hurt feelings. If we apologize sincerely enough or give enough good reasons for something we did, it seems like we get away with it. But it isn’t called the “iron law” for nothing. Even if the other person excuses us, he or she thinks we are less dependable. And even if the other person doesn’t think that, we think of it ourselves. We know it. No free lunches.

Sincerity vs. Integrity

Sincerity means not intending to do harm – trying to do the right thing. Integrity means not doing harm, and doing the right thing. Naturally, it is much, much harder to have integrity than to be sincere.

Defending yourself pro se requires integrity.

Substantive Law of Debt

If a debt collector can prove (or if you don’t make them prove) that you borrowed money and didn’t pay it back, it will be entitled to a judgment against you. It’s as simple as that, no ifs, ands or buts. There are events that can destroy the debt – showing payment, that it was based on fraud, or settlement to name a few. But if the debt isn’t destroyed, no amount of sincerity (desire to pay or legitimate inability to pay) will get you off the hook. You will still owe the money, and the judge will still give the debt collector its judgment if it proves its case.

It’s surprising how often people get mad at debt collectors for trying to collect debts they (the people involved) owe but can’t afford to pay. They often feel like the debt collector has done them wrong to think they should pay. But remember this: just because the debt collector has a ton of money and you’re poor, that doesn’t mean they won’t get a judgment against you. Don’t think that way. And a judgment gives them the power to take from you. They will use that power.

Instead, fight and make them prove their case if they can. Require them to prove the debt and their right to it. Luckily, they aren’t so good at that, and if you fight, you have an excellent chance to win – that’s why we’re here, after all.

Excuses in Litigation

We’ve been talking about the substantive law of debt, which is almost absolute. It’s a little murkier in litigation, where excuses CAN make a difference – sometimes. If you make a mistake in doing something, or if you fail to do something you should have done, this can sometimes be excused. If you do make a mistake, you should certainly try to get it excused. The sincerity of your excuse will matter then, so make it good and say it with feeling. And you might get away with it.

But even if you do “get away with it,” every mistake has consequences. As a pro se defendant, you work mighty hard to get the judge to take you and your words seriously. You want the judge to apply the law fairly and consistently – that’s really all you need in most debt cases to win. Any time you ask the judge for something special or make some kind of excuse, you will hurt your chances of that. And all too often, the court will not give you the break it probably should.

Always work your hardest and do your very best to understand the law and rules of your court. As much as possible, you NEVER want to ask the judge for anything she isn’t supposed to do. If possible, you never want to ask the judge to excuse some failure or to cut you any sort of unusual break.

And to get your best, you must give your best. Never make excuses for yourself, and never accept them from yourself. It’s impossible to be perfect, but try not to make any mistakes you don’t have to make. And that is not a “platitude” or boring old saying – it’s encouragement to you to work very hard. The only way to avoid making mistakes is by figuring out things ahead of time and always going the extra mile. You can get away with less in some parts of your life, but you often cannot in litigation.

We have a rule at Your Legal Leg Up. When you’re faced with a question (which happens almost constantly), you must ask yourself whether it’s possible to get a clear, certain answer. If that isn’t clear, then find out – with certainty – whether it is possible to get a clear, certain answer. If it is, FIND that answer. Nothing less will do when certainty is possible. If it is NOT possible, then find out with certainty all the things that matter in determining the issue. You understand? Wherever it is possible to know a thing, you must know it. Never ever guess when you could know.

That’s the difference between sincerity and integrity in debt defense.

Research is Key

Maybe it sounds easy to find certainty when it’s there. If it sounds easy to you, you probably haven’t been working on your case very long, or you’ve been taking shortcuts without even realizing it. You would be amazed, maybe, at how often people do take shortcuts. It is a rare teleconference where someone doesn’t admit to not knowing something they need to know but don’t. And they always have a good reason for it, too. It’s hard – but remember the iron rule of cause and effect. You know something or you don’t; you know you’re doing what you should, or you’re guessing and hoping either that you are or that it won’t matter. And it always matters.

Do your research and find out for sure the things you need to know. Then do the work and make sure you’re doing the thing you must do.

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