DEBT COLLECTION: ISSUES WITH TIME-BARRED DEBT

DEBT COLLECTION: ISSUES WITH TIME-BARRED DEBT

The Statute of Limitations, Consumer Debt and the Interplay with the FDCPA Latest Trends in FDCPA Time-Barred Debt Litigation The CFPB and FTC: Recent Activity Regarding Time-Barred Debt State Law and Time-Barred Debt Bankruptcy and Time-Barred Debt Calculating the Statute of Limitations Collection Do s and Don ts Regarding Time-Barred Debt Defenses to FDCPA Claims Arising From Collection Efforts on Time- Barred Debt The Future of Time-Barred Debt Collection

Statute of Limitations relates to the amount of time within which an injured or aggrieved party may bring a claim after accrual of the claim. Its purpose: to require diligent prosecution of known claims; this provides predictability and finality to legal affairs. Statute of limitations limits amount of time in which a creditor, its assignee, debt collector or debt purchaser has to file a lawsuit to collect on a particular type of debt. These periods vary from state to state. Until the adoption of the FDCPA, 15 U.S.C. 1692, et seq. neither a creditor, nor its agents (including its attorneys) owed any obligation during the collection process (prelitigation, or even after suit was filed) to advise a debtor that the debt being collected upon was beyond the statute of limitation.

Many federal courts have issued decisions holding that suing, or even collecting (without suit), on timebarred debt may violate the FDCPA under a variety of theories, such as: collection under such circumstances is unconscionable (15 U.S.C. 1692f), is neither authorized, nor permitted by law (id.), or is misleading in various ways ( 1692e(2), 1692e(5) and 1692e(10)). (See the trend gleaned from the list of cases in your material.)

Generally, the FDCPA does not regulate substantive state law. The FDCPA does not affect state procedural law. On one hand FDCPA generally provides that if state law is not violated, the FDCPA is not violated. On the other hand If state law is violated (i.e. it is not authorized by agreement or permitted by law) then the FDCPA is likewise violated.

Before it may be determined that the FDCPA has been violated by collection activity, one must first determine whether the collector has violated state law by making threats to seek remedies through collection or litigation, to which it is not entitled. In most states, expiration of the statute does not eliminate a creditor s/debt collector s right to pursue payment of unpaid debt.

Notwithstanding that most states have historically permitted collection, and even suit, on time-barred obligations, this has changed slowly over the last 30 years with the advent of the FDCPA and similar state statutes applicable to consumer (non-business) collection practices. Kimber v. Federal Financial Corp., 668 F.Supp. 1480 (M.D. Ala. 1987) Freyermuth v. Credit Bureau Svcs, Inc., 248 F.3d 767, 771 (8 th Cir. 2001) McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1021-1022 (7 th Cir. 2014) Buchanan v. Northland Group, Inc., 776 F.3d 393, 395 (6 th Cir. 2015)

The mere attempt to collect a voluntary payment on an out-of-statute debt does not violate the FDCPA. But, threatening the consumer implicitly or expressly, directly or indirectly, with a lawsuit concerning a debt the collector either knew or should have known was beyond the statute of limitations does violate the FDCPA.

Courts have found the act of threatening or filing lawsuits on debts that are beyond the statute of limitations violate, inter alia, 15 U.S.C. 1692f(1) (which prohibits the collection of any amount...unless such amount is expressly authorized by the agreement creating the debt or permitted by law. ). Courts have also found that threatening to take legal action when the debt has gone beyond the statutory time limit constitutes a false representation of the status of a debt, in violation of: 1692e(2)(A) (which prohibits [t]he false representation of the character, amount or legal status of the debt. ); 1692e(5) (which prohibits [t]he threat to take any action that cannot legally be taken or that is not intended to be taken ); and/or 1692e(10) (which prohibits [t]he use of any false representation or deceptive means to collect or attempt to collect any debt... ).

Some federal courts have suggested that in order to not violate the FDCPA, the debt collector may be required to affirmatively disclose to, or warn, the consumer in its collection letters that the debt is beyond the statute of limitations. Courts are showing increasing concern that the failure to disclose that the debt is beyond the statute may mislead a debtor into the belief that she may be sued, or into making a partial payment, thus reviving an expired statute of limitations.

The Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) have each taken the position that it is the obligation of the collector, creditor or the debt buyer to affirmatively disclose to the consumer that the debt being collected is beyond the statute of limitations so as to ensure the least sophisticated consumer is not misled. It is clear the positions of FTC and CFPB are that even in the absence of express threat of litigation, a FDCPA 1692e claim is stated where the collector uses the term settle, or a similar term, in connection with collection on a time-barred debt.

Another possible concern for debt collectors, as well as creditors collecting outof-statute debts, is a potential for claims that such a collection practice constitutes an unfair, deceptive or abusive act or practice (UDAAP) under the regulations implementing the Dodd-Frank Act. Under Dodd-Frank, the CFPB has the authority to prohibit collection practices that it deems to constitute a UDAAP. Both the CFPB and the FTC have engaged in regulatory actions against debt collectors related to demands for payment after the applicable statute of limitations has expired; some of these actions have alleged violations of UDAAP as well as the FDCPA. In sum, neither the CFPB nor the FTC has asserted that the collection of out-ofstatute debts is illegal in and of itself; rather, these regulators have brought enforcement actions against debt collectors that demand payment of out-ofstatute debts through express or implicit threats of litigation, but fail to disclose the debt s out-of-statute status.

Virtually all states follow the rule that expiration of the statute does not extinguish the creditor s substantive rights (Mississippi and Wisconsin are exceptions), seemingly all states permit at least a request for voluntary payment. Whenever consumer debt is at issue, collectors must proceed cautiously. Collectors must examine their state law before engaging in collection activities after the statute of limitations has expired. Some states do not permit a suit on consumer debt after the statute of limitations has expired, or they explicitly require affirmative disclosures when attempting to collect consumer out-of-statute debts.

Filing a proof of claim in either a Chapter 7 or a Chapter 13 bankruptcy on timebarred debt may, or may not, be deemed a violation of the Bankruptcy Code. In an extremely thoughtful and well-articulated analysis which surveyed the field of decisions, the court in In re: Gatewood, 533 B.R. 905 (8 th Cir. BAP 2015) found the filing of a proof of claim on a time-barred debt did not violate the FDCPA because (1) the filing of a proof of claim was necessarily triggered by the debtor s affirmative action of filing for protection, (2) the debt itself still existed, and (3) the debtor s rights were fully protected by the bankruptcy court and the bankruptcy claims process.

Calculating the applicable statute of limitations on a particular debt is usually, but not always, the easy part of a statute of limitations analysis. The more troublesome issue is determining when the statute of limitations accrues, and thus expires. For contractual type debt, this is not always easy to figure because the creditor may forebear declaring a default for various business reasons, even though payment is overdue. Credit card debt is a good example: The office of the Comptroller of the Currency has specific rules when an unpaid credit card must be charged off by a financial institution. This date (180 days after the last payment) may or may not coincide with the date of breach. Even where there has been a default on payment, partial payments may have been made reviving or resetting a new statute accrual date. There may have been tolling of the statute for other reasons, such as the debtor had moved out of state. The debtor may be estopped to assert the statute for other reasons.

When collecting debts beyond the statute of limitations, collectors must be aware of the laws of the particular jurisdiction in which they are collecting that either prohibit the practice, or that require certain notices and disclosures. Collectors must consider recent federal court cases on the issue and determine whether disclosure of the out-of-statute status of a debt may be necessary. Collectors must be careful not to make any statements that could be construed to be a threat to take legal action that cannot be taken, as such threats may violate the FDCPA. Implement policies and procedures for screening debt that is placed for collection to determine whether (1) the debt is clearly fresh or within the statute, (2) the debt is clearly out of statute, and (3) the debt is not clearly time barred (uncertain status).

Each category of debt should be categorized and marked as such in the collection software, and collectors should be trained to note this such that their talk-offs with debtors are adjusted accordingly Collection letters should be modified accordingly as well. Collection letters that refer to settlement, or suggest similar resolution, where the statute on the debt has expired present the risk of a potential violation of the FDCPA. Even where the threat of suit is only implied, the risk of violation rises dramatically. Collection letters with common violations may expose the collection agency to a class action. To the extent possible, the collector should attempt to have the referring creditor client contractually vouch that the debt being forwarded for collection is within the statute, and to explain what procedures it uses to make this determination.

For debt purchasers, where the debt is not assigned, but bought, and the debt is very old, the risk/reward in collecting on such debt is skewed toward riskiness. Collectors who collect on purchased debt should never sue on out-of-statute debt. They should also revise and edit their collection letters carefully to avoid even a hint that their collection activity will proceed to suit. Threatening remedies or amounts only available upon a successful suit and judgment must be avoided.

For portfolios made up of old debt, it may be wise to include in every collection letter that the debt is too old to sue upon, and the collector will not sue if not paid. It may be prudent to disclose if any part of the debt is paid, it may reset the statute of limitations.

The primary and perhaps only defense available to an FDCPA claim based upon the claims of misrepresentation of the status of time-barred debt, or the availability of remedies, is the bona fide error defense. 15 U.S.C. 1692k(d). See, e.g., Simmons v. Miller, 970 F.Supp. 661, 664-667 (S.D. Ind. 1997).

It is unclear what the future holds. The CFBP and FTC will also both certainly continue to push the courts in this direction. Debt purchasers are particular targets subject to intense scrutiny by regulatory agencies and the courts.