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Do Debt Relief Companies Violate the Fair Debt Collections Practices Act?

Written by Steve Rhode

For some time the esoteric argument of debt relief companies putting debt outside the statute of limitations in a credit counseling or debt settlement program, has been bantered about.

But a recent twist to this otherwise academic discussion has put a new emphasis on this issue.

A Seventh Circuit court opinion found that debt collectors’ letters to consumers offering to “settle” time-barred debts (that is, debts that would be subject to a successful statute-of-limitations defense) could mislead consumers and, thus, could violate the federal Fair Debt Collection Practices Act (FDCPA).

From the written opinion:

“The proposition that a debt collector violates the FDCPA when it misleads an unsophisticated consumer to believe a time‐barred debt is legally enforceable, regardless of whether litigation is threatened, is straightforward under the statute. Section 1692e(2)(A) specifically prohibits the false representation of the character or legal status of any debt. Whether a debt is legally enforceable is a central fact about the character and legal status of that debt. A misrepresentation about that fact thus violates the FDCPA.

Matters may be even worse if the debt collector adds a threat of litigation, see 15 U.S.C. § 1692e(5), but such a threat is not a necessary element of a claim. We recognize that this interpretation conflicts with that of the Eighth and Third Circuits. See Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 33 (3d Cir. 2011); Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767, 771 (8th Cir. 2001).

With respect, however, we have concluded that the statute cannot bear the reading that those courts have given it. [footnote omitted] In their view, if a dunning letter on a time‐barred debt states that the collector could sue but promised not to, that letter would not violate the FDCPA, since no litigation was actually threatened (and indeed was expressly rejected). On its face, that may seem reasonable, but closer examination reveals why it is not.

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The plain language of the FDCPA prohibits not only threatening to take actions that the collector cannot take, but also the use of any false, deceptive, or misleading representation, including those about the character or legal status of any debt. If a debt collector stated that it could sue on a timebarred debt but was promising to forbear, that statement would be a false representation about the legal status of that debt.”

“Our decision today does not require debt collectors to conduct additional research. If a debt collector does not know whether the debt submitted for collection is time barred, it would be easy to include general language about that possibility. That said, we find it unlikely that debt owners lack knowledge about the age of the debts they are attempting to collect.

If the debt collector is the original creditor, it will know the relevant dates. If the collector is a third party collecting on behalf of the original creditor, it should easily be able to get that information at the time the file is assigned by the original creditor on whose behalf it is acting. If the collector has purchased the debt from the original creditor, we know from the [Federal Trade Commission] that such buyers pay different amounts for debts depending on the age of the debt and the number of previous attempts to collect it, in which case whether the debt is time‐barred should be known.” – Source

This issue about out of SOL debt and debt relief companies is important for consumers to be aware of and informed about so they do not rush to settle or repay debt that is out of the Statute of Limitations (SOL) or time barred.

And the statute of limitations isn’t so clear cut that anyone on the street can provide correct advice. It would be best to get the opinion of an attorney who is licensed in the state the consumer lives in to make sure which state statute applies in a specific and particular situation.

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Consumers need appropriate disclosures and awareness before enrolling debt in a debt relief program so they can make an informed decision about how they really want to tackle the out of SOL debt. And this should be equally important for the debt relief company to be aware of as well. Out of SOL debt should be the lowest priority on repayment and set aside till all other debts are tackled first.

The biggest problem for credit counseling and debt settlement companies seems to be in blindly assisting the consumer to repay debt which would otherwise not be legally repayable. Or worse yet if the debt relief company represented to the consumer they debt was still legally repayable when it was not. That’s where it seems a debt relief company could brush up against the same FDCPA problem the debt collector did.


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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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