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Ruling allows old debt claims to surface in bankruptcy

Kentucky residents who are dealing with financial challenges may face a pitfall in the bankruptcy process after a Supreme Court ruling. The issue was whether collection agencies run afoul of the Fair Debt Collection Practices Act by filing a claim with bankruptcy courts on time-barred debt. The court decided to allow the practice to continue, a move which brought cheers from the collections industry. Other commentators pointed to damaging consequences of the court's majority opinion.

In theory, a bankruptcy trustee will collect all proofs of claim, either allow them or file an objection, negotiate with the creditors and divide up the debtor's payments among them. The majority opinion held that old debt may no longer be collectable, but it still carries the right to payment common to all documented claims. The trustee is expected by the court to object to all stale debt, so only valid and current claims are paid out of the debtor's funds.

Two law professors argued that theory does not always hold up in practice. One stated that collectors engage in "mass-filing proofs of claim for stale debt" that take advantage of problems in the bankruptcy courts. Another pointed to the costs imposed on the system.

Indebted Kentucky residents may turn to Chapter 13 bankruptcy for a variety of reasons, including to stop foreclosure, obtain manageable payments or reduce interest payments to make repayment a possibility. An experienced attorney can review an individual's financial challenges and offer advice on the potential for debt relief with Chapter 13. As the Supreme Court decision shows, a fresh financial start can be more difficult to achieve by collectors holding old debt. Legal counsel can also help client watch out for this and other pitfalls in the process.

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