Should you Go Pro Se in Debt Defense

If you’re being sued for debt, do you need a lawyer? Or can you defend yourself? Obviously lawyers can be very expensive, but there are times when the expense is well worth it. Here are some pros and cons of going pro se in debt law. We think it can make sense for a lot of people.

Some Pros and Cons of Pro Se when You’re Sued for Debt

Pro Se means “for or by yourself” and refers to representing yourself in a lawsuit. If you are being sued by a debt collector this can be a good choice because lawyers are expensive and often would either cost more than the amount in dispute or are in any event unaffordable for ordinary people. So it may be practically necessary, and it can also be effective because the same thing that makes hiring a lawyer to defend yourself uneconomical also makes hiring a lawyer to sue you uneconomical once your defense requires individual attention by the debt collector’s lawyers. The fact that debt suits are for small amounts of money (considering typical lawsuits) and that people owing money may not (or usually do not) have the money to pay makes it unwise for a company to spend a lot of money trying to obtain the right to try to collect that money from you.

If you are suing the debt collector under the Fair Debt Collection Practices Act (FDCPA) or other statute that includes a right to attorney fees if you win, it may be more practical and possible to find a lawyer to represent you. This is because, if there is a chance the lawyer can force the debt collector to pay, the lawyer can spend more time on the case without worrying so much about not being paid. That is the purpose of “fee-shifting” statutes, and it reduces the pressure to keep attorney fees to an absolute minimum. On the other hand, even where you are suing the debt collector it isn’t always possible to find a lawyer who will represent you for an amount you can afford, and that can make going pro se the practical choice.

Representing Yourself

When debt collectors file cases they usually do so “in bulk,” filing many cases at the same time – this allows them to divide the cost and risks of the cases among all the cases. The first trick to representing yourself pro se, therefore, is to do it in a way which forces the debt collection lawyers to spend time specifically and exclusively on your case. I call this “intelligent” defense because it raises the price of suing you and increases the chance that any money spent will be lost even if the debt collector wins the case. That makes walking away and leaving you alone the best economic choice for the debt collector.

And then the second trick, of course, is to do the things that give you a chance to win the case if it goes to trial.

Debt collection cases tend to be “document-intensive,” meaning that the evidence of the case is much more likely to be documents than anybody’s testimony, provided you do not admit owing the money. This means that the case has a better chance of ending before trial, but that if it goes to trial there will be less emphasis on managing witnesses or testimony, reducing the advantage of having a lawyer.

A Warning

In lawsuits, the only person who can actually speak for any other person is a lawyer, and so this means, for example, that spouses cannot speak for each other (even when they are both parties to the suit), and parents and children cannot speak for each other. Non-lawyers are not allowed to address the court on behalf of any other person, and “person” includes separate business entities.

Bankruptcy – what it is and how it works

When people are being sued for debts, they often panic and look for the quickest, easiest, or least scary way out. Bankruptcy sometimes seems to be that way. What is bankruptcy? and how does it work? How does it affect some of your other rights?

What Bankruptcy is

Most people have an intuitive idea of what bankruptcy is – legal protection for people who are broke, right?

Sort of.

Bankruptcy is at least equally a protection for creditors. You see, when people are financially troubled, this doesn’t mean that they literally have NOTHING. Rather, they will spend or distribute an inadequate number of resourses in a way to relieve them of the most pressure, or to favor people they want to favor. Bankruptcy exists to help prioritize and organize the ways debtors distribute their money so as to protect the creditors from favoritism or sneaky behavior. It does protect the debtor (person declaring bankruptcy) from all lawsuits or judgments, and this in turn spares the creditors from having to “race to the courthouse” to file suits against the financially weakened.

That makes good sense, right? So shouldn’t anybody with debt troubles dive into bankruptcy?

Price of Bankruptcy

Bankruptcy is not a “free lunch” to debtors. It can be expensive to do, and over the past decade or two has been made much trickier to get in and finish. It is also extremely intrusive and occasionally time-consuming. It also does not protect you from all claims, notably those associated with “secured” debts – debts like home and auto loans.

In my opinion, bankruptcy is RARELY a good first option for people being sued for debts, especially if they’re being sued by debt collectors. On the other hand, if you expect to negotiate with a debt collector or creditor in any way, our position is that you should consult a bankruptcy lawyer. You should know what it costs and requires, and letting a debt collector know you’ve actually talked to a bankruptcy lawyer can have a wonderful effect on their willingness to accept lower amounts of money.

Issues in Bankruptcy

Perhaps surprisingly, bankruptcy and debt law are not closely related, and lawyers who practice one kind of law rarely know much about the other. Unless your lawyer (if you have one) actually practices both types of law, he or she is probably not qualified to give you advice about the area in which he does NOT regularly practice.

Bankruptcy and FDCPA

Another issue comes from the interaction of bankruptcy and debt laws. This isn’t uniform, consistent, or particularly fair. In some jurisdictions, for example, if you declare bankruptcy, creditors will come out of the woodwork to file “claims” against the bankruptcy estate. It would be illegal for them to sue you, but in SOME courts it’s fine for them to litigate against you in bankruptcy. This is plan stupid and bad, but some federal appeals courts allow it while others make it a violation of the Fair Debt Collection Practices Act (FDCPA). The Supreme Court has not addressed the issue yet.

Bankruptcy and Student Debt

The courts are even less consistent or fair when it comes to student debt. If most of your debt problem comes from heavy student loans, bankruptcy may not offer you much help. They are treated differently from almost all other debts, and in many courts they are almost impossible to shake off. Strangely, perhaps, this issue has not been organized or even considered very much by bankruptcy or debt lawyers. I have addressed the issue in Getting Out of the Trap of Student Loans. That book discusses the way bankruptcy law and student loans collide and, on a federal circuit by circuit basis, what your chances of escaping the trap might be.

Against Debt Collectors

Our view on suits brought by debt collectors is that bankruptcy is rarely a good first option – and only sometimes a good last option. However, you should know that, if bankruptcy will work for you at all, it will work for you just about as well even if the debt collector has obtained a judgment. That is, bankruptcy protection applies to state court judgments as much as any other kind of debt, alleged or proven. Thus you could defend yourself pro se and, if you lost (as very few of our members do), you would still be able to declare bankruptcy if it would help.

Threatening Consumers Violates FDCPA

Read more

To Sue You or Not to Sue You – What Matters to Debt Collectors

If you are behind in paying some bills and are considering negotiating with someone bugging you for money, what are the factors you need to consider as you prepare for and then talk with them? We have discussed elsewhere the need not to “give away” information carelessly. In this article we discuss the negotiations more from the point of view of the collector. You’ll need to know this as you decide what to do.

As simple as it seems, the first question is whether you are dealing with an original creditor or debt buyer, or debt collector. Their perspective makes a lot of difference. With that in mind, we’ll look at negotiations with the three categories of counter-parties you will encounter: original creditors, debt buyers, and actual debt collectors (firms retained to try to collect money for the original creditor).

Original Creditor

Original creditors are, usually, the businesses that actually made a deal with you in the first place, typically via a consumer transaction. Dealing with original creditors, because they are lots of different businesses in the business of doing whatever they do, is much less predictable than dealing with debt collectors or buyers, who generally have standardized procedures for talking to you.

Original creditors are in business to do business, and not to collect money. Depending on the size of the company and the person to whom you are talking, trying to collect money may be the worst part of the person’s day. He doesn’t want the bother, and spending time collecting money could be taking away from much more important tasks. Also, every business owner is aware that the business’s reputation could be hurt either by being too aggressive or by provoking harmful responses.

Even in larger companies (excluding auto sales, which are designed with collections in mind), the person talking to you will have other considerations than just squeezing the last dollar out of you. Most original creditors – even banks and credit cards – don’t want to sue you, so the chances are good that you won’t get sued without plenty of warning. Companies that are not set up to litigate normally fear and avoid it – with very good reason – and an original creditor must also be concerned about reputation with other customers and clients in general.

 

As a general rule, original creditors would rather not do things to damage your credit (although the bigger the business the less they care about this in my experience), and most small ones might not even be set up in a practical way to do so. On the other hand, because original creditors are not in the business of suing and do not think of the bills strictly as numbers, it can be difficult to get them to stop thinking that you must pay all the money you owe, although people will have different perspectives on this for lots of reasons.

Depending on how their business is doing, original creditors could be much more or less aggressive in chasing you. For a smaller company, chasing you is difficult and impractical, and at some point the owner will settle for far, far less than you owe just to put the experience behind him or her. If they do sue you, chances are pretty good they’ll have what they need to prove you owe the money, but not necessarily the resources to keep after you to try to collect the judgment.

Debt Buyers

Debt buyers are pretty much the opposite of original creditors. They really have no other business than collecting money other people earned. Whereas the original creditor may have budgeted primarily for production and sale of goods, and been surprised by having to try to collect, debt buyers budget exclusively for collection and have no other significant costs. Nor do they have the same concerns about public opinion – they aren’t vulnerable to market forces. On the other hand, they are further from the original transaction and often have trouble obtaining the records they need to beat you in court if push comes to shove.

Bottom Line

What all that means is that whereas original creditors are somewhat reluctant to negotiate with you but sometimes have to for practical reasons, debt buyers are all about negotiating with you, and have a harder time winning, but are more willing to sue you anyway. They are designed to extract money from you, in other words.

A debt buyer can do you some harm on your credit report by reporting your debt, but in reality the main harm will have already occurred if your original creditor reported the debt. Debt buyers cannot clean your record of credit damage caused by the original creditor, so you can only negotiate to get them to stop reporting you.

Debt buyers purchase debts for widely different amounts, depending primarily on how old the debt is. Exactly how the figure is determined is a closely guarded secret, but the purchase is usually made by auction of large numbers of debts packaged together. Not all debt buyers are willing to sue you under any conditions, incidentally. They will telephone you endlessly and then, eventually, sell the debt to another company. And some debt buyers routinely sue without even any kind of warning. The biggest of the debt buyers seem to call for a while and then sue.

If you are negotiating with a debt buyer, there are a number of things you need to bear in mind. For a full discussion of that, you will want to get the Debt Negotiation Dashboard. Bear in mind that while debt buyers are less equipped to sue you, they are more ready and willing to do so, than most original creditors. But since they are in the business of extracting dollars from people without a lot of money, they can take a more realistic view of how much you can pay if you want to. And remember, you can negotiate to get them to stop hurting your credit report, but you can’t get them to wipe clean the debt from whatever the original creditor did.

Actual Debt Collectors

Actual debt collectors can negotiate with you, but they draw their real authority to do so from the original creditor and will have to take any request for a deep reduction in amount or change of terms back to the original creditors (although they will have some discretion over smaller changes). Debt collectors are more “numbers” oriented, however, so it might be possible to get them to accept an offer that the original creditor previously turned down.

Usually, when the bill is sent to the debt collector, the original creditor will stop negotiating with you – so if you call up and want to talk about the debt, for example, they will refer you to the debt collector. In that situation, the debt collector will keep a significant amount of anything you pay – 25% or more is not unusual. What will frequently happen, however, is that the debts will eventually be returned to the original creditor. If you can time that correctly, you might have an opportunity for a steep discount, because the next step is to sell the debt for a small fraction of its nominal value or to let it go entirely. The advantage of catching the debt before it gets sold, of course, is that you can make cleaning your credit a part of the deal.

Two Supreme Court Cases Attacking Fair Debt Collection Practices Act

The Supreme Court has recently damaged debt defendants’ rights with two very important decisions, one allowing debt collectors to bombard the bankruptcy courts with outdated claims, and the other holding that junk debt buyers are not debt collectors under one important definition of the Fair Debt Collection Practices Act (FDCPA) These rulings may have changed the landscape of defense, but one thing is clear: you need to know your rights more now than ever. Pro se defense may be the only kind of debt defense you can get anymore.

Pro Se Defense

Let’s start with what “pro se defense” is. Pro se means representing yourself in a lawsuit. This will save a tremendous amount in legal fees, but it ALSO means taking on the burdens and risks of doing the defense yourself. These burdens and risks are not small, and I’ve always called hiring the right lawyer the “gold standard” of defense. But in most debt cases people can handle their own defense because the law is not complicated and the cases are document, rather than witness, intensive. Pro se defense even has some significant advantages in the debt law context.

The recent Supreme Court rulings are going to force more people to take a more active role in their defense.

Who is a Debt Collector

In Henson et al. v. Santander Consumer USA, Inc., No. 16349 (Slip Op. 6-12-17), the Supreme Court ruled that junk debt buyers are not“debt collectors” under one provision of the Fair Debt Collection Practices Act (FDCPA). I discuss that case, its impact, and what action people need to take regarding it, in my article and video, “Who Is a Debt Collector – Supreme Court Tries to Destroy the Fair Debt Collection Practices Act and what to Do about that.” In general, the effect of Santander is to make it more difficult to establish that a junk debt buyer is a debt collector, and it may signify that the Supreme Court would not let you sue junk debt buyers under the FDCPA at all.

Santander is going to make it more difficult for you to get a lawyer to defend you in a debt case – and more expensive if you can get one. That’s because the FDCPA applies only to debt collectors and gives you certain counterclaims, and certain defenses, that make defending you easier. The FDCPA also includes a “fee-shifting” provision which allows a consumer to make a debt collector pay for most of the time a lawyer spends on a case. These things – ease of defense and a rich company to pay fees – make FDCPA cases attractive to lawyers. Take away the FDCPA, and the lawyers are going to have to charge more – a LOT more. And they simply won’t take as many cases because they’re harder. This means that debt law defendants, already drastically underrepresented, are going to find it much more difficult to hire lawyers.

The decision in Santander threatens to neutralize the FDCPA and let junk debt buyers – who now make up the vast majority of debt collectors – run completely wild. They will be much freer to abuse, deceive, harass – in short, all the tricks that brought about the FDCPA in the first place because the laws regulating them will have been predominantly removed. At the same time it makes getting a lawyer much more difficult, the decision in Santander will likely result in a large number of new and wrong lawsuits. HOWEVER, Santander does not negate any (or very few, anyway) of your defenses in a debt law case, and it does not reduce the burden of proof for debt collectors. You can still win, in other words, but you very well may have to do it yourself.

Bankrupts Beware

Bankruptcy is one refuge debtors have from debt collectors. In general, you can file bankruptcy and force all your creditors to stop contacting you and, instead, file their claims in your bankruptcy action. In theory, the court will then either grant those claims or deny them according to what is right. 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 incentive to dispute wrongful claims. 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 usually don’t.

So bad claims get allowed. In most bankruptcies, allowing a bad claim means that it’s going to get paid (eventually) by the person filing for bankruptcy.

Junk Debt Buyers Make Things Worse

Enter the junk debt buyers. 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 and everyone involved down, and as a practical matter results in people paying billions of dollars to debt collectors who have no real right to collect. This crushes the people who declared bankruptcy and rips off the legitimate creditors whose debts get paid at a lower rate.

Some debtors were suing debt collectors under the FDCPA for filing claims in bankruptcy that were beyond the statute of limitations. Because of the FDCPA’s fee-shifting provision, the debtors’ bankruptcy lawyers had at least some financial incentive to bring these claims and dispute unenforceable claims. They were doing so as part of the bankruptcy proceedings, and the debtors were also bringing suit outside of the bankruptcy context as well.

The Supreme Court negated the FDCPA’s 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 they know are unenforceable in an ordinary court (and would violate the FDCPA if filed there).  For a fuller discussion of that case, look at my article and video, “Bankrupts Beware, FDCPA No Longer Applies – Opening the Floodgates to Bad Claims.”

What the Midland Funding case means, in practical effect, 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 likewise 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 despite having a bankruptcy lawyer.

Conclusion

 

The net result of the Supreme Court’s decisions in Henson and Santander is that debt defendants will get much less help from lawyers. These cases are still possible to defend against and win – they’re as easy as any law gets, probably. Because so many fewer cases will in fact be litigated, your chances of winning have actually probably gone UP: it is even less profitable for debt collectors to fight now than it used to be because they will have so many more easy wins. But you are more likely to have to do it yourself now than ever.

Make it hard for them.

Supreme Court Attacks FDCPA – Erodes Definition of Debt Collector

The Supreme Court has recently issued rulings very harmful to people with debt collectors harassing or suing them. Its ruling in Henson et al. v. Santander Consumer USA, Inc., No. 16349 (Slip Op. 6-12-17) (“Santander”), seems to try to negate application of the Fair Debt Collection Practices Act (FDCPA) to the vast majority of debt collectors. I expect this decision will make it far more difficult for debt defendants to obtain legal representation and will cause debt collectors to engage in more deceptive, dishonest and abusive behavior.

Fair Debt Collection Practices Act

When Congress passed the FDCPA, the corruption and destructiveness of debt collectors were so rampant that debt collection was considered a threat to the American way of life. The FDCPA was accordingly designed to prevent fraud, deception and unfairness in general in the collection of debts, with Congress going to so far as to name numerous specific actions as “per se” violations of the Act but also to include the more general description of “unfair” debt collection practices. The reason for identifying numerous specific practices, as well as including the more general rule, was to prevent debt collectors from changing the forms their actions took without changing what they were basically doing.

The Supreme Court has just reduced that Congressional intent to a farce, applying just half of the statutory definition of “debt collector” to a case and finding that, under that half of the definition, junk debt buyers were not debt collectors.

Real-Life Debt Collection

What happens in most debt collection is that creditors sell charged-off debt to debt buyers who exist entirely to collect that money by hook or by crook. Instead of hiring debt collectors to collect on debts and then paying them out of the proceeds, the creditors now get their money first and let the debt collectors take their money from the debtors. All that has happened is that nominal ownership of the debt has changed. In other words, debt collectors have assumed a different form to pursue the very same activities.

Henson et al. v. Santander Consumer USA, Inc.

The Supreme Court has said that it would not allow parties to elevate form over substance and evade the impact of laws only about twenty million times during the course of its existence. Santander cheerfully elevates form over substance to allow the same actors to perform the same abhorrent deeds that the FDCPA was designed to prevent.

One could also characterize the Court’s ruling as dishonest in that it only analyzed half of the definition of “debt collectors.” In looking at Section 1692a(6), the court examined the defining language as “any person… who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” The court’s decision then repeatedly referred to and emphasized the words “due another,” arguing that companies were only debt collectors if they fit that traditional form of collectors.

How the FDCPA Defines “Debt Collector”

Perhaps we should look at the part of the definition preceding the language in question to get a truer view of the statute’s clear intention:

The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

Section 1692a(6) (underlined portion is the part ignored by the Supreme Court in Santander, italicized word “any” is for emphasis)

Doesn’t it seem reasonable to read “any debts” literally, so that if the principal purpose of a business is to collect debts, they’re a debt collector? Of course it does, and that would obviously include businesses that exist to purchase debts and collect on them. The Court opinion glibly slides over that, saying that “the parties haven’t much litigated that alternative definition of debt collector and in granting certiorari we didn’t agree to consider it, either.” Santander, Slip Op. at 5. In other words, the Supreme Court agreed to hear only so much of the case as allowed them to shove a dagger into the apparent heart of the FDCPA – not enough of the case to show what the FDCPA actually intended or to do justice.

In theory, the decision in Santander leaves open the possibility that this “alternative” definition would extend the meaning of “debt collector” to junk debt buyers. On the other hand, the decision looks to me like a court in search of a justification for a desired outcome, and it has to be viewed as a negative indication for the Court’s integrity. Particularly in the context of its decision in Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17) (see my article, “Opening the Floodgates of Bad Claims”), it shows actual hostility to the laws that protect consumers from debt collectors and a willingness to engage in intellectually dishonest games to destroy them. As a practical matter, it will likely be several years before the Supreme Court revisits the definition of “debt collector” and applies the entire definition to the question of junk debt buyers.

Pleading that a Junk Debt Buyer is a “Debt Collector”

The Supreme Court passed over the part of the definition of debt collector that defined businesses in terms of their “principal purpose” in favor of the “regularly collected” language. Why? Probably because debt defendants have normally found it very easy to prove that a company “regularly collected” debts – in fact, under prevailing Eighth Circuit law, for example, if a law firm represents collectors in as few as three to five cases per year it is considered to be “regularly collecting” debts. Under fact pleading rules, one must plead facts constituting a basis for your legal conclusion. So debt defendants routinely allege something like the following:

Heartless, Ruthless and Merciless, Attorneys at Law, represent debt collectors in dozens of lawsuits attempting to collect debts per year and are, accordingly, debt collectors, and

Heartless Debt Collector, Inc., regularly sues persons for debts purchased after default…

In other words, debt defendants have typically used the “regularly collected” language because it is easy to demonstrate as a matter of public record. Establishing a business’s “principal purpose” will be much more difficult. My attempts to find an authoritative definition for “principal purpose” of a business turned up zero cases. While I’m confident that there must be some cases that address the issue, it is certainly not many. The term “principal purpose” is frequently used in judicial decisions, but its use is primarily generic, as a synonym for “main” or “major.” I found no cases quantifying the term in any way.

The junk debt buyers, who purchase billions of dollars of debt for no other purpose than to collect it in any way they can, will argue that their “principal purpose” is to “service” that debt. In their lexicon that really means extort payment in as many ways, over as long a period, as possible. But they will claim all manner of beneficial purposes for their activities, and this will alter the nature of the proof required to establish that the company is a debt collector. Rather than being a matter of public record, information regarding a business’s “principal purpose” will be in the possession of the debt collector – and that means that parties attempting to obtain that information will encounter the same series of stone walls, delays and unethical and oppressive litigation strategies they encounter in all their other discovery attempts.

Considering the current ideology and integrity of the Supreme Court, of which debt collectors are very well aware, who knows what the courts will officially “believe?” As a debt defendant, you must now allege and attempt to prove that the debt collector’s main business is to collect debts, but the judicial wind will be in your face.

What Debt Defendants Should Do

Debt defendants have all the same defenses to debt lawsuits they ever did – or almost all of them. Santander applies very little to the defense of debt suits.

On the other hand, many and perhaps most lawyers are going to be scared away from taking debt cases. Many lawyers who have not closely examined Santander will simply regard the FDCPA as not applying to junk debt buyers – and that is almost all the debt collectors in litigation these days. These lawyers will decline to take debt defense cases or will charge much more, and accomplish much less, than they would have, because they will not think they can counterclaim on your behalf. Lawyers who have closely examined Santander and see the same things I do will have to charge more for their services and warn clients that chances of prevailing are not as good as they used to be.

This means that far more debt defendants will be on their own. The only way many of them will be able to have a defense at all will be if they defend themselves.

If you are currently involved in a debt lawsuit – with or without a lawyer, or as a lawyer on behalf of clients – and have a counterclaim, you should expect to see a motion to dismiss based on Santander. I believe you will want to amend your counterclaim to include the “principal purpose” language mentioned above. You will also need to conduct discovery designed to prove the company’s principal purpose.

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.

Give No Free Information – Beware the Hardship Application

Hey there! This content is available to MEMBERS only! Consider registering for an account.

Never make a Partial Payment

Hey there! This content is available to MEMBERS only! Consider registering for an account.

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.