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Fair Debt Collection: 13.7.1 Overview

Sometimes after a debtor has filed for bankruptcy, debt collectors’ actions violate both a provision of the Bankruptcy Code and federal or state debt collection laws. For example, a debt collector’s attempt to collect a discharged debt violates the discharge order and may also constitute harassing, oppressive, or abusive conduct under the FDCPA. A debt collector may file a debt collection lawsuit against the debtor after they have filed for bankruptcy, giving rise to both an automatic stay violation and an FDCPA claim.

Fair Debt Collection: 13.7.2.1 The Seventh Circuit Randolph Decision

Debt collectors have routinely argued that FDCPA claims are “preempted” by the Bankruptcy Code. According to the debt collectors, a debtor is precluded from pursuing claims under the federal FDCPA for conduct related to bankruptcy, including violations of the automatic stay and discharge injunction.

Fair Debt Collection: 13.7.2.2 The Third Circuit Decision in Simon

Disputes at the intersection of the Bankruptcy Code and the FDCPA most often involve debt collection claims related to enforcement of the automatic stay, the discharge order, and the validity of proofs of claim. The Third Circuit addressed a more unusual intersection of the Bankruptcy Code and the FDCPA in Simon v.

Fair Debt Collection: 13.7.2.3 The Second Circuit Decision in Garfield

The Second Circuit in Garfield v. Ocwen Loan Servicing, L.L.C.,366 adopted the reasoning of Randolph to reject a preemption argument in the context of an FDCPA claim alleging violation of the discharge injunction. The court distinguished decisions that had found preemption of FDCPA actions related to violations occurring during a bankruptcy case.

Fair Debt Collection: 13.7.2.4 The Ninth Circuit Decision in Walls

By contrast, the Ninth Circuit in Walls v. Wells Fargo Bank,370 concluded that a contempt action in the bankruptcy court provided the sole remedy for violation of the discharge injunction.371 The Walls court based its decision, with respect to the FDCPA claim, on the view that a debtor should not be permitted to create a private right of action for a violation of the Code’s discharge injunction, when none exists under the Bankruptcy Code, by using another federal statute.

Fair Debt Collection: 13.7.2.6 The Prevailing View: No Implicit Repeal

Outside the Ninth Circuit, lower courts apply the direct conflict analysis articulated by the Randolph, Simon, and Garfield courts and allow consumers to seek remedies under the FDCPA for debt collectors’ bankruptcy-related misconduct.380 This is particularly true with respect to FDCPA claims based on collection activities that violate the discharge order entered in a bankruptcy case.381 Violations of the automatic stay also give rise to FDCPA claims.

Fair Debt Collection: 13.7.2.7.3 The Exception for Secured Debts

An exception to section 1006.30(b) of Regulation F applies to certain secured debts. In 2005 Congress amended the Bankruptcy Code to add an exception to the discharge injunction for debts secured by a debtor’s principal residence.396 Section 524(j) of the Code permits a mortgage creditor to communicate with the debtor post-discharge in the ordinary course of business to the extent the communications are limited to obtaining periodic payments on the mortgage.

Fair Debt Collection: 13.7.3.3 Filing a Stale Proof of Claim as an FDCPA Violation—the Supreme Court’s Midland Funding Decision

Through a “stale” proof of claim filed in a bankruptcy case, a creditor seeks payment from the bankruptcy estate for a debt that can no longer be enforced by a judicial action filed in a non-bankruptcy court due to expiration of a statute of limitations. With the growth of the debt buying industry, abuse of the bankruptcy claim process by filing stale claims has become widespread.

Fair Debt Collection: 13.7.4 Preemption of State Debt Collection Laws

The preemption doctrine has its roots in the Supremacy Clause of the U.S. Constitution and is implicated when state law interferes with or is contrary to federal law.472 The issue of Bankruptcy Code preemption of state fair debt collection claims arises in a group of cases that also focus on whether the Bankruptcy Code itself creates a private right of action to enforce the discharge injunction. The Sixth Circuit first considered the issue in Pertuso v.

Fair Debt Collection: 13.7a.1 Overview

In the wake of the Supreme Court’s rulings in Spokeo, Inc. v. Robins488 and TransUnion L.L.C. v. Ramirez,489 debtors are likely to face challenges to their standing to bring virtually any type of FDCPA claim in federal court.

Fair Debt Collection: 13.7a.2 Bankruptcy Rights in Historical Context

Since the mid-nineteenth century, the discharge of debts has been a primary objective of American bankruptcy laws.493 Throughout the early twentieth century, courts construing the Bankruptcy Act emphasized the importance of the discharge that relieved “the honest debtor from the weight of oppressive indebtedness” and gave the debtor the opportunity to “start afresh free from the obligations and responsibilities” of prior debts.494

Fair Debt Collection: 13.7a.3.1 General Principles

While Spokeo recognized that Congress could “elevate” a particular harm to the level of a legally cognizable injury for Article III standing purposes, the Ramirez decision added uncertainty to the role of Congressional enactments in authorizing standing to sue.500 Despite this lack of clarity, advocates can point to several factors that

Fair Debt Collection: 13.7a.3.2 Forms of Concrete Injury Related to Violations of the Bankruptcy Code

Advocates have recourse to a substantial history of court rulings that award compensatory damages for violations of the discharge order and automatic stay.504 The types of injury found compensable in these rulings should be sufficiently concrete to establish Article III standing. For as long as they are in effect, both the automatic stay and the discharge order prohibit naming the debtor as defendant in a collection action and entering judgment against the debtor.

Fair Debt Collection: 13.3.3.2 When Judicial Estoppel Should Not Apply

A court’s adoption of a position asserted by the party in a prior proceeding is a required element of judicial estoppel. Many bankruptcy cases, particularly under chapter 13, are dismissed without a discharge. Debtors should argue that, in prior bankruptcy cases in which the court never entered a discharge order, the bankruptcy court did not “adopt” any position based on the omission of a claim from schedules.207 There is no risk of inconsistent adjudications in this situation.

Fair Debt Collection: 13.3.2.2 Other Limits to Postbankruptcy Standing Challenges

The bankruptcy standing doctrine has other important limitations. Many bankruptcy cases, particularly under chapter 13, are dismissed without a discharge. Different Bankruptcy Code provisions govern what happens with property of a bankruptcy estate upon a dismissal of a bankruptcy case, as opposed to when a bankruptcy case is closed after entry of a discharge.179

Fair Debt Collection: 13.3.2.3 When Standing Problems Cannot Be Avoided

If the trustee does not abandon the debt collection claim, the court will likely find that the bankruptcy trustee, rather than the consumer plaintiff, has standing to pursue the claim. In this instance, dismissal of the lawsuit is the least appropriate option for the court to choose. The court should allow for substitution of the trustee as plaintiff.185 The reference to “standing” in this context is actually something of a misnomer.