Debt collection: How to collect money owed, how to protect against abuse.

DEBT COLLECTION

Nothing in this blog post constitutes legal advice. It is posted merely for informational purposes only. For specific questions about a debt, the reader is encouraged to seek private legal counsel to whom all of the facts may be divulged. Nothing here gives rise to an attorney-client relationship or privilege.

 

When one thinks of debt collection it often comes to mind in the form of getting a letter in the mail from a ‘collection agency’ that threatens all manner of horrible consequences if a debt is not paid from a credit card one may have had in the past and simply forgot about. That certainly is a scenario that is common enough, but what I want to highlight in this blog entry are the outliers and more insidious aspects of debt collection for both the debtor and the creditor.

Creditors

First I will speak about the creditor’s side of the equation. Creditors, for the purpose of this entry, are any party that is at least arguably owed a debt, either by being the original creditor, an assignee of the debt by the original creditor, or a third party debt buyer. There are a lot of pit falls a creditor may stumble upon unless she is careful to avoid them. An original creditor may try to collect its own debts in its own name and will not be considered a debt collector under the Fair Debt Collection Practices Act, 15 USC 1692 et. seq. (FDCPA). A debt collector under the FDCPA is any person or institution that regularly collects the debts of another. Notice the word ‘regularly.’ That is not there by mistake. As an attorney, I have a number of clients for whom I regularly represent their interests in all manner of legal services. If at some time one of those clients is owed money from a debtor, I can collect that debt on my client’s behalf and still not subject to the FDCPA because that is not a regular function of my practice, it is incidental to the regular operation of my business. There are, however, a number of firms and other businesses that do regularly collect the debts of a third party and, therefore, would constitute debt collectors under the FDCPA.

Debt collection law firms are all over the place and spend a lot of time in courthouses trying to collect the various debts that are owed to their clients. Examples of their clients include credit card companies, homeowner associations, hospitals, city and county governments, and even some State departments of revenue. I will not go into the requirements of the FDCPA for attorneys subject to the FDCPA simply because the requirements of that Act should be known to collections firms and there is nothing I can say here that will aid those firms.

As for third party debt buyers that buy the written off, or charged off, debt of other debt buyers or the original creditors should take note of the Requirements of the FDCPA. In an attempt to collect a debt, a debt collector may only contact the debtor, the debtor’s attorney, the credit reporting agencies, the creditor, its attorney, or the collector’s attorney. Notice that family members, employers, social organizations, and the like are not on that list. A collector may seek specific permission from a court of competent jurisdiction over the debtor to contact those other third parties, but may do so only once with restrictions as to the content of those communications. More than one communication with those third parties is a violation of the FDCPA unless there is good reason to believe that that third party has new information or has asked for further communications from the collector.

Prohibited Acts. A debt collector, in collecting a debt, may not harass, oppress, or abuse any person. Specifically, a debt collector may not use or threaten to use violence or other criminal means to harm the physical person, reputation, or property of any person; use obscene, profane, or other language that abuses the hearer or reader, publish a list of consumers who allegedly refuse to pay debts, except to a consumer reporting agency or to persons meeting the requirements of section 603(f) or 604(3) of the FDCPA; advertise a debt for sale to coerce payment; annoy, abuse, or harass persons by repeatedly calling their telephone number or allowing their telephone to ring continually, make telephone calls without properly identifying himself or herself, except as allowed to obtain location information.

A debt collector, in collecting a debt, may not use any false, deceptive, or misleading representation. Specifically, a debt collector may not falsely represent or imply that he or she is vouched for, bonded by, or affiliated with the United States or any state, including the use of any badge, uniform, or similar identification; falsely represent the character, amount, or legal status of the debt, or of any services rendered, or compensation he or she may receive for collecting the debt; falsely represent or imply that he or she is an attorney or that communications are from an attorney; threaten to take any action that is not legal or intended to be taken; falsely represent or imply that nonpayment of any debt will result in the arrest or imprisonment of any person or the seizure, garnishment, attachment, or sale of any property or wages of any person, unless such action is lawful and intended by the debt collector or creditor; falsely represent or imply that the sale, referral or other transfer of the debt will cause the consumer to lose a claim or a defense to payment, or become subject to any practice prohibited by the FDCPA; falsely represent or imply that the consumer committed a crime or other conduct to disgrace the consumer; communicate, or threaten to communicate, false credit information or information that should be known to be false, including not identifying disputed debts as such; use or distribute written communications made to look like or falsely represent documents authorized, issued, or approved by any court, official, or agency of the United States or any state if the appearance or wording would give a false impression of the document’s source, authorization, or approval; use any false representation or deceptive means to collect or attempt to collect a debt or to obtain information about a consumer; fail to disclose in the initial written communication with the consumer, and the initial oral communication if it precedes the initial written communication, that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose. In addition, the debt collector must disclose in subsequent communications that the communication is from a debt collector. (These disclosures do not apply to a formal pleading made in connection with a legal action); falsely represent or imply that accounts have been sold to innocent purchasers for value; falsely represent or imply that documents are legal process; use any name other than the true name of the debt collector’s business, company, or organization; falsely represent or imply that documents are not legal-process forms or do not require action by the consumer; or falsely represent or imply that the debt collector operates or is employed by a consumer reporting agency. * Source: http://www.federalreserve.gov/boarddocs/supmanual/cch/fairdebt.pdf

Now, although individuals and institutions that are not covered by the FDCPA and don’t necessarily have to comply with the law, it is a good idea to use those as a benchmark so you have it in mind if you may, at some point in the future, be considered a debt collector under the statute. And, it’s just best practices. Each individual state may have a similar law, the goal of which is to protect consumers. No state law may violate the preemption principal in federal jurisprudence, but each state may go further than the requirements of the FDCPA by setting out stricter requirements of debt collectors in that state.

A business which has outstanding debts owed is well advised to seek out reputable counsel to try to collect those debts. A collection lawyer well versed in the area of collections and defense of collections will be best able to advise and prosecute such an action, and thus will more successful in securing the obligation owed to such a business.

 

Debtors

            Over the last few years, the debt collection and debt buying industry has grown by leaps and bounds. After the collapse of the world economy in September of 2008, when the subprime mortgage market and similar Wall Street gambling toppled the financial structure of the country, people found themselves jobless, unable to pay their mortgages, car payments, and all manner of other bills. Let’s start with an example: Sam Booker lives in a suburb of Chicago called Winnetka. He worked on the Board of Trade and made a decent living. Once the market crashed, as a mid-level manager, Sam was laid off with no prospects of returning to his job because there seemed to be no end in sight as one bank after another was folding. He went home to a terrified family, not knowing how they were going to keep their house payments up, as well as the other bills. For a time they relied on savings, but that quickly dried up. They made cuts to their family budget, but that only did so much. Finally there was nothing left. Default noticed a pile up for the various loans, credit cards, and bills they had. As the saying goes, “you can’t get blood from a turnip.” Because of the huge amounts of default going on all over the country, Sam’s credit card company simply didn’t have the ability to try to collect on all of the accounts it had, so it charged off the debt, and sold the account to a third party debt buyer (debt buyer A) for twenty cents on the dollar. Sam Booker and his family had to move out of their house because their home mortgage was foreclosed and moved in with Sam’s brother in Lansing Illinois. That third party debt buyer for Sam’s credit card debt was provided with a spread sheet with Sam’s name and address, what he owed to the credit card company, and maybe a contact number. Debt buyer A attempted to use that information to find Sam so he could send letters offering to “settle” the debt for fifty cents on the dollar, but could not find him. So after a few months, debt buyer A sold the debt for five cents on the dollar to debt buyer B. Debt buyer B found a Sam Booker in Fort Wayne Indiana and sent him letters saying that debt buyer B will “settle” the debt for twenty cents on the dollar. It was a good deal for debt buyer B which bought the debt for five cents on the dollar. And, when Sam Booker of Fort Wayne didn’t respond to the letters, debt buyer B assumed the debt is valid. Since Fort Wayne Sam Booker didn’t respond to the letters, debt buyer B filed a claim in small claims court in Fort Wayne. Sam Booker of Fort Wayne never had a credit card with debt buyer B, A, or the original creditor.

            This scenario has played itself out all over the country in the last half dozen years. Sam Booker of Fort Wayne Indiana now has a problem. He knows he doesn’t owe this money to anyone, even if it is for twenty cents on the dollar. He has no idea who the other Sam Booker is and can’t formulate an argument against debt buyer B other than, “I have no idea why I’m being sued for a credit card debt, from an agency I’ve never heard of, for a credit card I’ve never had.”

            An uncontested debt will be presumed valid and owing, so it is important that, even if this Sam Booker of Fort Wayne cannot hire an attorney, he go to the court and recognize at least one thing; it is not incumbent upon him to prove he doesn’t owe the debt. The burden of proof is always going to be on the Plaintiff to prove validity of the debt.

In Indiana, Trial Rule 9.2 requires that when an action is taken based on a written document, here a credit card application, such a written instrument must be attached to the pleading, or an affidavit from a party with knowledge of the obligation filed in its place. Third party debt buyers routinely try to get around this rule by providing an affidavit of indebtedness sworn to by an employee of the debt buyer which says something along the lines of, “I am an employee of debt buyer; I have personal knowledge of the practices of how we acquire debts; or I also have knowledge of the debt in this case,” or some such similar evasive statement. The point of the rule is to make sure that the Sam Booker who is being sued is the same Sam Booker who took on the debt in issue. If that cannot be proven the case should be dismissed.

If the original credit application is provided, it should show that the Sam Booker who is being sued is not the correct Sam Booker.

Indiana Trial Rule 11 requires a signatory to an affidavit i.e. the affiant, to swear to the statement in the affidavit. The affiant swears that the representations made in the affidavit are true, and that they are based on the personal knowledge of the affiant. An affiant employed by debt buyer B simply cannot know the business practices, and the account specifics of Sam Booker’s account with the original creditor unless that affiant has followed that particular account from the credit card company, to debt buyer A, and then to debt buyer B.

There was a similar problem with affiants failing the general requirements of Rule 11 in the mortgage foreclosure debacle from about 2008 through the present. Many mortgage lenders have tried to fix these problems, but when a problem is systemic, it is difficult to completely fix all of them. I will speak more about the history of the mortgage crisis in a later blog entry.

The example of my fictional characters Sam Booker formerly of Winnetka, and Sam Booker of Fort Wayne is simply on example of how debt collection can go awry. There are many problems in the debt collection industry, and people are well advised to seek out an attorney if sued or contacted by a debt collector, even if it is for a debt that you once owed sometime in the past. The Statute of limitations (SOL) on written contracts in Indiana is ten years, for oral contracts the SOL is six years, promissory notes is ten years, and the SOL for open accounts, including credit cards is six years.

Debtors should also pay attention to the list of prohibited acts (above) by debt collectors under the FDCPA. Violations of the act can come with statutory damages in the amount of $1000.00 per individual, actual damages suffered by the debtor, and attorney’s fees and court costs accrued by the debtor.

There is also an income threshold for debtors. Below such a threshold a person is considered “judgment proof.” With exemptions for certain property up to a certain value, and with income lower than $154.50 per week, a person is judgment proof. Also, if a person’s sole income is from social security or another means based income is not collectible. A person sued who only has means based income must show the court the deposits made to the individual coming from an agency such as the Social Security Agency.

The relationship between creditors, collectors, and debtors is a tenuous one. When a person falls on hard times it is hard enough to make ends meet let alone pay for debts accrued in the past. Know what you can do, and seek legal help. In Indiana there is a pro bono commission set up by the State Bar Association that I will link to below. You are not going to go to jail for not paying a debt, but be careful not to agree to pay an amount you cannot afford while having that payment reduced to a judgment. Failure to follow a court order can lead to a body attachment (i.e. warrant) to get you into court again. And also, even if you go through the whole case and a judgment is rendered against you a judgment creditor can only take so much of your “disposable income.” Expect from time to time, as often as every three months you can be back in court to be examined by the plaintiff’s lawyer about new income or assets.

An individual who has been contacted by a creditor, or collections attorney, should seek out an attorney who is knowledgeable of collections and how to defend against collections, especially those accounts that are unknown to the individual, or that may be passed the statute of limitations.

 

Nothing in this blog post constitutes legal advice. It is posted merely for informational purposes only. For specific questions regarding a debt, the reader is encouraged to seek private legal counsel to whom all of the facts may be divulged. Nothing here gives rise to an attorney-client relationship or privilege. The author is licensed to practice in the state of Indiana. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, client or otherwise, should act or refrain from acting on the basis of any content included herein.

 

Links:  

http://www.federalreserve.gov/boarddocs/supmanual/cch/fairdebt.pdf