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 time-

barred 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 (8th Cir. 2001)

● McMahon v. LVNV Funding, LLC, 744 F.3d 1010, 1021-1022 (7th

Cir. 2014)

● Buchanan v. Northland Group, Inc., 776 F.3d 393, 395 (6th 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 out-

of-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-of-

statute debts is illegal in and of itself; rather, these regulators have brought

enforcement actions against debt collectors that demand payment of out-of-

statute 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 time-

barred 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 (8th 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.