Collecting time-barred debts has never been an easy task. Tracking down debtors and convincing them to pay is difficult enough. Now with the latest activity from plaintiffs’ attorneys, the Federal Trade Commission (FTC), and the Consumer Financial Protection Bureau (CFPB), collectors may want to think twice before engaging in this already arduous task.
What is a “debt”? According to the Merriam-Webster.com dictionary, a debt is “an amount of money that you owe to a person, bank, company, etc.” According to the Fair Debt Collection Practices Act (FDCPA), a debt is “any obligation or alleged obligation arising out of a transaction in which the money, property insurance or services which are the subject of the transaction are primarily for personal, family or household purposes, whether or not such obligation has been reduced to judgment.” (15 U.S.C. 1692a(6).) While the FDCPA definition is verbose, at its core it is no different than the dictionary definition: an obligation to pay money. And neither definition includes the qualifier that the debt is still enforceable in court.
In the real world if you owe me money, I will ask you for the money and hopefully you will pay your debt to me. If you do not pay me and I do not have the time to keep asking you for the money you owe me, I may hire a collector to try to collect the money from you. That collector may call you on the telephone. That collector may call you on the telephone many times. That collector may send you a letter or many letters. All of these communications are designed to recover the money that you owe me. Once we have exhausted all other efforts to collect from you, we may have to resort to filing a lawsuit against you (to recover the money that you owe me). It does not matter whether we ask you for the money today, tomorrow, or 40 years from now. The fact remains that you still owe the debt.
This all sounds very simple, as it should. At its core, debt collection is not complicated. However, over the years, debt collectors, plaintiffs’ attorneys, and the government have turned the simple act of collection into an extremely complicated and financially dangerous profession.
Frustrated with “abundant evidence of the use of abusive, deceptive and unfair debt collection practices by many debt collectors,” Congress passed the FDCPA in 1977 with the stated purpose of “eliminate[ing] abusive debt collection practices by debt collectors.” Congress did not say that it wanted to prohibit debt collection, and in fact, acknowledged that it wanted to “insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged.”
Congress has never said that you should not pay me, nor has it said that I cannot collect from you. Rather, Congress wants to make sure that my collection efforts are not abusive, deceptive, or unfair. Should it matter that your debt to me is from money that I loaned you 25 years ago? You still owe me the money today, the same way you did when you had big hair and a jean jacket.
In most states, the statute of limitations does not extinguish a debt. Mississippi and Wisconsin are the only states that currently have statutes that extinguish the debt upon the running of the statute of limitations. (See Miss. Code Ann. § 15-1-3; Wis. Stat. Ann. § 893.05.) North Carolina limits a debt buyer’s ability to collect time-barred debts, but does not prohibit it in its entirety. (See N.C. Gen. Stat. § 58-70-115.) Elsewhere, the statute of limitations is an affirmative defense that must be asserted or it will be waived. (See e.g., Notte v. Merchants Mut. Ins. Co., 185 N.J. 490, 500 (2006).) Bankruptcy courts have also held that creditors may file proofs of claim on time-barred debts and that it is the responsibility of the debtor to object to the claim under the Bankruptcy Code. (See e.g., In re Keeler, 440 B.R. 354 (E.D. Pa. 2009); In re Varona, 388 B.R. 705 (Bankr. E.D. Va. 2008).) In fact, even a discharge in bankruptcy does not extinguish the debt, but only the debtor’s personal obligation to pay the debt. (See e.g., 11 U.S.C. 524(f).)
The FDCPA does not extinguish debts either. However, many least sophisticated plaintiffs over the years have used it as a tool to practically extinguish their debts and to increase their income as well as the income of their attorneys participating in this cottage industry. (See Jacobson v. Healthcare Fin. Servs., 434 F. Supp. 2d 133, 138 (E.D.N.Y. 2006) (lamenting the growth of the cottage industry and abundance of professional plaintiffs).) Even though time-barred debts are valid and enforceable (but subject to the statute of limitations defense), courts began to hold that filing suit or threatening to file suit on time-barred debts violated the FDCPA. One of the earliest reported decisions was Kimber v. Fed. Fin. Corp., 668 F. Supp. 1480, 1488 (M.D. Ala. 1987), where the court found that the defendant violated the FDCPA by filing a collection lawsuit after the statute of limitations had expired. The court reasoned that “time-barred lawsuits are, absent tolling, unjust and unfair as a matter of public policy, and this is no less true in the consumer context.” Kimber rejected the defendant’s argument that the statute of limitations was an affirmative defense that had to be raised and found the conduct both deceptive under Section 1692e and unfair/unconscionable under Section 1692f.
After Kimber, courts expanded on the statute of limitations problem, finding violations where a collector threatened suit on time-barred debts, but did not actually file them. For example, in Larsen v. JBC Legal Group, P.C., 533 F. Supp. 2d 290 (E.D.N.Y. 2008), a collector demanded payment and warned that “you may be sued 30 days after the date of this notice if you do not make payment.” The court held that the letter threatened legal action that could not be taken and violated Sections 1692e(5) and 1692e(10).
At this point, filing suit and explicitly threatening to file suit on valid debts were considered violations of the FDCPA. For quite some time, this was the limit of extra protections afforded to debtors who owed old debts. The Eighth Circuit specifically drew the line at this point in Freyermuth v. Credit Bureau Servs., 248 F.3d 767, 771 (8th Cir. 2001), holding that “in the absence of a threat of litigation or actual litigation, no violation of the FDCPA has occurred when a debt collector attempts to collect on a potentially time-barred debt that is otherwise valid.” Many courts have agreed with this line, including the Third Circuit in Huertas v. Galaxy Asset Mgmt., 641 F.3d 28 (3d Cir. 2011), and most recently, the Fourth Circuit in Mavilla v. Wake-Med Faculty Physicians, 2013 U.S. App. LEXIS 18803 (4th Cir. Sept. 10, 2013). So as long as I do not sue you or threaten to sue you, I can still ask you to repay me the money that you owe me.
Well, not so fast. What exactly does “threaten to sue you” mean? The language in the Larsen letter is pretty overt: “Warning: You may be sued 30 days after the date of this notice if you do not make payment.” Clearly, the letter makes no mistake that the only way to avoid the lawsuit is by making payment on the debt. But what if the threat is a little more subtle? In Baptist v. Global Holding & Inv. Co., L.L.C., 2007 U.S. Dist. LEXIS 49476, *3 (E.D.N.Y. Jul. 9, 2007), an attorney sent a letter on a time-barred debt that stated, “If you do not contact this office and make arrangements for payment of this debt, my office will proceed in accordance with the instructions of [the creditor]. Legal action against you may be authorized. . . . You can avoid this action by contacting this office immediately.” This letter does not threaten suit, but instead advises that the collector will proceed based on the instructions of its client. Nevertheless, the court held that this was enough to lead the least sophisticated consumer to believe that litigation was likely unless the debtor contacted the collector as instructed in the letter. The court noted that the fact that the letter came from an attorney as opposed to a collection agency was a factor to consider in the implied threat. Indeed, in Knowles v. Credit Bureau of Rochester, 1992 U.S. Dist. LEXIS 8349, *4 (W.D.N.Y. May 28, 1992), the statement “failure to pay the creditor will leave our client no choice but to consider legal action” did not threaten legal action as it did not come from an attorney. Nevertheless, most courts have held that attorney letterhead alone is insufficient to imply a threat of litigation. (See e.g. Nichols v. Frederick J. Hanna & Assocs., PC, 760 F. Supp. 2d 275, 279 (N.D.N.Y. 2011).)
The clear line in the sand drawn by Freyermuth is definitely getting messier, but it seems as though as long as I do not sue you, threaten to sue you, or imply that I may sue you, I am in the clear. Well . . . not exactly. Like many other areas of the FDCPA, implied threats of suit are open to interpretation by the courts. Thanks in part to the FTC, courts are really stretching to find an implied threat of suit.
Back in July 2010, the FTC issued a report titled Repairing A Broken System, Protecting Consumers in Debt Collection Litigation and Arbitration. In the report, the FTC acknowledged that collecting time-barred debt is not prohibited (except in Wisconsin and Mississippi), and stated that it took no position as to whether the FDCPA should be amended to preclude collectors from collecting debts that are time-barred. But the FTC did take the position that in certain situations, the act of collecting time-barred debt could “create a misleading impression that the collector can sue the consumer in court to collect the debt.” The report continues: “To avoid creating this misleading impression, collectors would need to disclose clearly and prominently to consumers before seeking payment on such time-barred debt that, because of the passage of time, they can no longer sue in court to collect the debt or otherwise compel payment.” Wow! So how does that work in our example? “Hey buddy, remember that money you owe me for the Whitesnake album? Well, I really need you to pay me back, but just so you know, I am not able to sue you or in any way compel you to pay the debt. Please pay me.”
That sounds pretty crazy, but that is exactly what the City of New York requires you to do if you want to collect time-barred debt. Pursuant to Local Law No. 15, a debt collector is prohibited from contacting a consumer to collect a time-barred debt unless the following disclosure is included in every written communication to the consumer: “WE ARE REQUIRED BY LAW TO GIVE YOU THE FOLLOWING INFORMATION ABOUT THIS DEBT. The legal time limit (statute of limitations) for suing you to collect this debt has expired. However, if somebody sues you anyway to try and make you pay this debt, court rules REQUIRE YOU to tell the court that the statute of limitations has expired to prevent the creditor from obtaining a judgment. Even though the statute of limitations has expired, you may CHOOSE to make payments. However, BE AWARE: If you make a payment, the creditor’s right to sue you to make you pay the entire debt may START AGAIN.” (Emphasis in original.)
Do not even think about burying this disclaimer on the back of your letter with a bunch of other disclaimers, as the local law requires the notice to be “provided in at least 12 point type and set off in a sharply contrasting color from all other type on the permitted communication. The language must also be placed adjacent to the identifying information about the amount claimed to be due or owed on the debt.”
The FTC continued to push the disclosure requirement in its complaint against Asset Acceptance, LLC. As part of a Consent Decree, Asset was required to include the following notice when attempting to collect time-barred debts: “The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it.” (United States of America v. Asset Acceptance, LLC, No. 8:12-cv-00182-T-27EAG (M.D. Fla. Jan. 31, 2012).) While previously acknowledging that collecting time-barred debt is permitted by most states, the FTC has now required a debt collector to inform consumers that nothing will happen to them if they do not pay the debt that they are trying to collect.
Picking up on the FTC’s position, plaintiff’s attorneys are now asking courts to adopt this reasoning in their FDCPA lawsuits. In McMahon v. LVNV Funding, LLC, 2012 U.S. Dist. LEXIS 92655 (N.D. Ill. Jul. 5, 2012), the plaintiff asked the court to give deference to the Asset Consent Decree and certify a class of individuals who merely received letters to collect time barred debts. In declining to do so, the court noted that the FTC’s position was that “in many circumstances, [attempting to collect on a time-barred debt] may create a misleading impression that a collector can sue the consumer . . .” but did not specify those many circumstances. Nevertheless, on a motion for reconsideration, the court did allow the plaintiff leave to amend his complaint to pursue a class action on the basis that offering a “settlement” on a time-barred debt implied that there was some legal obligation to pay the debt in violation of the FDCPA. (McMahon v. LVNV Funding, LLC, 2012 U.S. Dist. LEXIS 113576 (N.D. Ill. Aug. 13, 2012).)
From here, things are only getting worse for debt collectors trying to collect time-barred debts. In Magee v. Portfolio Recovery Assocs., LLC, 2013 U.S. Dist. LEXIS 8500 (N.D. Ill. Jan. 13, 2013), the collector sent a letter offering to settle a time-barred debt. In addition to the settlement offer, the letter also stated the date that the debt collector purchased the debt, but not the date that the debt was incurred. The court found that it was plausible that the least sophisticated consumer could believe the debt was recent, thus rendering the letter false under the FDCPA. In Harris v. Total Card, Inc., 2013 U.S. Dist. LEXIS 131747 (N.D. Ill. Sep. 16, 2013), a debt collector tacitly acknowledged that it was attempting to collect an older debt in a letter which stated, “We believe most people want to do the right thing and satisfy their past financial obligations.” But the letter went on to state that the collector had negotiated a fantastic settlement offer which the court found could be construed as implying that there was some legal obligation to pay the debt.
Things were bad enough for debt collectors when it was just the FTC inspiring plaintiffs, but now the CFPB has entered the fray and has been much more active in investigating debt collectors and filing amicus briefs. (For a current list of amicus briefs filed by the CFPB, see www.consumerfinance.gov/amicus.) In addition, the CFPB has identified the collection of time-barred debt as one of the areas it will explore in its Supervision and Examination Manual (see http://files.consumerfinance.gov/f/201210_cfpb_debt-collection-examination-procedures.pdf), and devoted an entire section to time-barred debts in its Advanced Notice of Proposed Rule Making for debt collection (see http://files.consumerfinance.gov/f/201311_cfpb_anpr_debtcollection.pdf). Recently, the CFPB joined the FTC in amicus briefs filed with the Seventh Circuit in Delgado v. Capital Management Services, LP, and the Sixth Circuit in Buchanan v. Northland Group, Inc.
At the trial level in Delgado, the court sided with the plaintiff and decided to give deference to the FTC’s position as stated in the Asset Consent Decree and its prior reports and held that “absent disclosures to consumers as to the age of their debt, the legal enforceability of it, and the consequences of making a payment on it, it is plausible that dunning letters seeking collection on time-barred debts may mislead and deceive unsophisticated consumers.” (Delgado v. Capital Management Services, LP, 2013 U.S. Dist. LEXIS 40796, *19 (C.D. Ill. Mar. 22, 2013).) The letter at issue contained an offer to settle for 30 percent of the amount owed. In the amicus brief, the FTC and CFPB argued that “the debt collector need not make an overt threat or a false or misleading representation about the debt to violate the FDCPA. Rather, the court must consider a practice’s effect on unsophisticated consumers from their perspective – for example, in light of circumstances such as their prior collections experience and any preexisting misconceptions.” The FTC and CFPB argued that “in some circumstances, a debt collector may be required to make affirmative disclosures in order to avoid misleading consumers.” They do not specify the “circumstances,” but taking the argument to the extreme, a completely benign letter containing little more than the Section 1692g(a) disclosures could violate the FDCPA given an unsophisticated debtor’s “preexisting misconceptions.”
The Seventh Circuit agreed with the FTC and CFPB, noting that they have found that “most consumers do not understand their legal rights with respect to time-barred debts.” (McMahon v. LVNV Funding, LLC, 2014 U.S. App. LEXIS 4592, *29 (7th Cir. Mar. 11, 2014) (the McMahon and Delgado appeals were consolidated).) In affirming the district court’s denial of the motion to dismiss, the Seventh Circuit Googled the term “settlement” and cited to the Wikipedia entry for “settlement offer” as support for its conclusion that a consumer could be misled into believing that a time-barred debt is legally enforceable. (Interestingly, that same Wikipedia entry later notes that “this article does not cite any reference or sources.”) The Seventh Circuit acknowledged that its reasoning conflicts with the Eighth and Third Circuits, which both require an overt threat of litigation. The Seventh Circuit reasoned that “whether a debt is legally enforceable is a central fact about the character and legal status of that debt,” and any misrepresentation about that fact is a violation of the FDCPA.
An optimistic takeaway from the Seventh Circuit opinion is that the focus of the opinion was on the use of the term “settlement.” However, the conclusion is a little more grim for debt collectors: “we conclude that an unsophisticated consumer could be misled by a dunning letter for a time-barred debt, especially a letter that uses the term ‘settle’ or ‘settlement.’” (Emphasis added.) It seems extremely unlikely that any suits based on collection of time-barred debts will be dismissed at the pleading stage under this standard.
The appellate arguments in Buchanan v. Northland Group, Inc., Case No. 13-2523 (6th Cir. 2013), are nearly identical to those made in Delgado except that at the trial level, the court in Buchanan was not persuaded by the FTC reports or consent decree and dismissed the complaint for failure to state a claim. However, in Buchanan, the amicus brief asks the Sixth Circuit to import a Seventh Circuit standard for interpreting letters, specifically, to consider extrinsic evidence when determining a letter’s effect on an unsophisticated consumer. They argue for a fact-bound interpretation of the letter from the perspective of the unsophisticated consumer which will essentially preclude ruling on the letters as a matter of law. Adopting this standard will make dismissal at the pleading stage extremely difficult, if not impossible, in time-barred debt cases in the Sixth Circuit, as they are now in the Seventh Circuit.
So what do you do with time-barred debts? Unfortunately, Wikipedia has no answers. Sure you can put a disclaimer on the letter, but you might as well tell the debtor that it does not have to pay the debt. Otherwise it appears that the less enticing your letters sound, the less likely they are to confuse the least sophisticated debtor into believing he or she is legally obligated to pay the debt. The trend appears to be that collecting time-barred debt is almost certainly going to be an invitation to litigation, and perhaps at some point collectors will have to decide if it is even worth the effort to try and collect, time-barred debt at all. Of course if older debt becomes harder and harder to collect it will become harder and harder for original creditors to sell these accounts in the first place. As a result, the original creditors and their collectors will have more incentive to pursue litigation before the statute of limitations runs. This will lead to more consumers being sued and having to deal with their debts sooner rather than later. Consider whether the original creditors will offer consumers as great a discount on their debts as debt buyers currently do. If that is the case, is this big push to eradicate the collection of time-barred debts really going to help consumers in the end? I doubt it.