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High court backs bids to collect outdated debt in bankruptcy

May 15, 2017

A divided U.S. Supreme Court has ruled that debt collectors can use bankruptcy proceedings to try to collect liabilities that are so old the statute of limitations has expired.

Voting 5-3, the court said companies don’t violate the U.S. Fair Debt Collection Practices Act when they file bankruptcy claims on that type of years-old debt. Justice Stephen Breyer joined the court’s conservative wing in the majority.

Critics accused debt collectors of violating the law by filing tens of thousands of outdated claims with bankruptcy courts in the hope that some debtors won’t object.

The ruling is a victory for Encore Capital Group Inc.’s Midland Funding in an Alabama case that started with an effort to collect a $1,900 credit-card debt. The debtor, Aleida Johnson, sued Midland after a bankruptcy judge threw out Midland’s claim.

Midland argued that federal bankruptcy law lets creditors file claims in those proceedings even if the statute of limitations wouldn’t allow a lawsuit.

Johnson’s lawyers said that, by filing outdated requests, debt collectors are falsely suggesting those claims are valid and enforceable.

Justice Neil Gorsuch, who joined the court after the case was argued in January, didn’t participate in the ruling.

Lower courts had been divided on the issue. The Obama administration backed Johnson in the case.

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