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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.