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Consumer Bankruptcy Law and Practice: 18.5.5 The Consumer Priority

Section 507(a)(7) of the Bankruptcy Code provides certain consumers with priority as creditors in bankruptcy proceedings.389 Consumer creditors are given a seventh priority after claims made by six other categories of preferred creditors.390 The consumer priority gives individual creditors priority for claims in the amount of $3350 for any prebankruptcy deposit of money made in connection with the purchase, lease or rental of property or services intended for personal, family or household use, w

Consumer Bankruptcy Law and Practice: 18.5.6 Equitable Subordination

Bankruptcy courts possess the power to prevent the consummation of a claimant’s fraudulent or otherwise inequitable course of conduct by subordinating that creditor’s claims to the claims of other creditors.415 This principle of equitable subordination is now codified in 11 U.S.C. § 510(c), but it was first developed by the courts.416 Consumer creditors may be able to use these principles to get their claims paid before the claims of secured or priority creditors in some situations.

Consumer Bankruptcy Law and Practice: 18.5.7 Seeking Defendants Not in Bankruptcy

In addition to pursuing claims against the party in bankruptcy, the consumer’s attorney should explore whether there may be other parties not in bankruptcy who can be held liable.437 Whether the consumer’s claims involve torts, contracts or violations of consumer protection statutes, there are a variety of theories for holding the following liable:

Consumer Bankruptcy Law and Practice: 18.5.8 Rule 2004 Examinations

Section 343 of the Code provides for examination of the debtor at the meeting of creditors. Federal Rule of Bankruptcy Procedure 2004 goes beyond this provision, and allows the examination of any entity on motion of any party in interest,450 as well as the production of documents. Rule 2004 examinations may help consumer creditors discover hidden assets or decide whether there is a basis to challenge dischargeability.451

Consumer Bankruptcy Law and Practice: 18.6.1 Need for Consumers As Creditors to Proceed In Forma Pauperis

Once a bankruptcy petition is filed, there is no fee for debtors to file motions or adversary proceedings in bankruptcy court.471 For creditors and other parties who are not debtors, however, there are fees—$350 to file a complaint, and $188 for a motion for relief from the stay.472 When low-income persons are creditors or are otherwise parties in bankruptcy proceedings, such as when a landlord is in bankruptcy, they may need to proceed in forma pauperis.

Consumer Bankruptcy Law and Practice: 18.6.2 Seeking In Forma Pauperis Relief

While former 28 U.S.C. § 1930(a) was not a model of clarity, most courts had held that its restriction on in forma pauperis filings applied only to starting a bankruptcy case, and that the regular federal in forma pauperis statute, 28 U.S.C. § 1915, applied to other proceedings.473 In addition to removing the restriction on fee waivers for chapter 7 filing fees, the 2005 amendments to the Code also clarified that the courts may waive other filing fees imposed under any part of 28 U.S.C.

Consumer Bankruptcy Law and Practice: 18.7.1 Overview

Consumer attorneys accustomed to using chapters 7 and 13 for their clients may be less familiar with chapter 11, the chapter likely to be utilized by a lender, landlord, retailer or other party against whom consumers have claims. While a chapter 11 case, in theory, is a reorganization,496 which suggests that at least some of the consumer claims will be paid, in most cases the debtor goes out of business and no payments are made to unsecured creditors.

Consumer Bankruptcy Law and Practice: 18.7.2.2 Commencement of a Chapter 11 Case

As under other chapters, a debtor commences a chapter 11 case with the filing of a petition for relief. A business entity can file in the federal jurisdiction where its principal place of business or principal assets have been located for 180 days. Corporations that have the option often choose to file in New York, Delaware, or Texas.

Consumer Bankruptcy Law and Practice: 18.7.2.3 First Day Filings and Other Early Motions

In a chapter 11 bankruptcy the debtor may still operate its business(es) while the bankruptcy is ongoing. Debtors may generally lease, sell, or use property within the bankruptcy estate as they would in the usual course of business, unless the court orders otherwise. In exceptional circumstances, for example, the court may appoint a trustee to manage the debtor’s business operations.

Consumer Bankruptcy Law and Practice: 18.7.5 Objection to Compensation Paid to Debtor’s Principals

When a business files a chapter 11 bankruptcy, the debtor may continue to pay its employees their salary for the postpetition services rendered. In fact, such employees’ right to payment is an administrative expense claim entitled to priority payment.626 However, there is also the potential for the debtor’s principal shareholders, partners, or proprietors to continue to pay a substantial salary to themselves during postpetition operations, thereby dissipating the remaining assets that would otherwise be available to creditors.

Fair Debt Collection: § 1006.1 Authority, purpose, and coverage.

(a) Authority. This part, known as Regulation F, is issued by the Bureau of Consumer Financial Protection pursuant to sections 814(d) and 817 of the Fair Debt Collection Practices Act (FDCPA or Act), 15 U.S.C. 1692l(d), 1692o; title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), 12 U.S.C. 5481 et seq.; and paragraph (b)(1) of section 104 of the Electronic Signatures in Global and National Commerce Act (E-SIGN Act), 15 U.S.C. 7004.

Fair Debt Collection: 3.4.4.2 Regulations

As discussed in § 3.4.2.5, supra, effective July 21, 2011,166 the Dodd-Frank Act amended the FDCPA to grant the CFPB broad authority to prescribe rules “with respect to the collection of debts by debt collectors, as defined in this subchapter,”167 an authority denied to the FTC by Congress.

Fair Debt Collection: 3.4.4.3 Advisory Opinions

The FDCPA states that debt collectors may rely upon a formal advisory opinion as a complete defense in a private suit.183 As discussed in § 3.4.2.5, supra, the 2010 amendment transferred authority to issue advisory opinions under FDCPA § 1692k(e) from the FTC184 to the CFPB.185

Fair Debt Collection: 3.1 Scope, Purpose, and Effective Date

The Fair Debt Collection Practices Act1 (the Act or FDCPA) promotes ethical business practices by debt collectors.2 The Act was the result of compromises that resulted in its bipartisan support and support by both the major debt collection trade associations involved and consumer organizations.3 The FDCPA applies to debt collector’s activities in forty-nine states; Maine’s substantially similar law applies to collection activities in Maine.

Fair Debt Collection: 3.2.1.1 Origin of Least Sophisticated Consumer Standard

After the enactment of the FDCPA, courts had to determine what legal standard to use when deciding whether a debt collector had violated the Act: a “reasonable consumer” standard or a standard focused on protecting “less experienced” consumers as adopted by Federal Trade Commission Act (“FTC Act”) cases.32

Fair Debt Collection: 3.2.1.3 Least Sophisticated Consumer Standard Applies to Multiple Types of FDCPA Claims

To accomplish the consumer protection purpose of the FDCPA, the courts most often apply a “least sophisticated” or “unsophisticated” consumer standard to analyze many of the protections of the Fair Debt Collection Practices Act.48 Specifically, courts have applied this standard to claims made under FDCPA §§ 1692e,49 1692f,50 and 1692g.51 Some courts have used an analogous “more susceptible consumer” standard

Fair Debt Collection: 3.2.1.4 Applying the Least Sophisticated Consumer Test

Courts have described the least sophisticated consumer standard as objective55 and have stated that the standard “pays no attention to the circumstances of the particular debtor in question, and asks only whether the hypothetical least sophisticated consumer could reasonably interpret the representation in a way that is inaccurate.”56

Fair Debt Collection: 3.2.4 Strict Liability Under the FDCPA

The FDCPA generally is a “strict liability” statute79 unless an FDCPA provision explicitly requires intent or knowledge, or the debt collector successfully establishes a bona fide error defense.80 The FDCPA follows the strict liability model of the Truth in Lending Act81 and the Federal Trade Commission Act.82