Ending Litigation and Financial Windfalls on Time-Barred Debts

By McAllister, Marc C. | Washington and Lee Law Review, Winter 2018 | Go to article overview

Ending Litigation and Financial Windfalls on Time-Barred Debts


McAllister, Marc C., Washington and Lee Law Review


Table of Contents

I. Introduction.................. 452

II. Option 1: Paying the Full Offered Settlement Amount................... 457

III. Option 2: Partial Payments that Revive the Statute of Limitations................... 462

A. The Partial Payment Rule................... 464

B. Debt Collector Use of the Partial Payment Rule................... 468

IV.Option 3: No Response by Debtor, Leading to Collector Suits Against Debtors.................. .469

A. The Prevalence of Default Judgments Against Debtors................... 469

B. Default Judgments Against Debtors: The Root Causes................... 472

V.Option 4: Debtor Suits Against Collectors for FDCPA Violations.................. .476

A. Suits Against Debtors on Time-Barred Debts as Violations of the FDCPA.................. .477

B. Threats to Sue on Time-Barred Debts as Violations of the FDCPA................... 484

C. Offers to Settle Time-Barred Debts as Violations of the FDCPA................... 488

VI.Proposals................... 491

A. Proposed Notices Regarding the Age of the Debt and the Partial Payment Rule................... 492

B. Providing Option of Avoiding the Partial Payment Rule................... 497

C. Proposed FDCPA Amendments................... 498

1. FDCPA Amendment Clarifying that Filing Suit to Collect on a Time-Barred Debt is Unlawful................... 498

2. FDCPA Amendment Specifying How to Lawfully Collect a Time-Barred Debt................... 500

D. Stricter Standards for Default Judgments................... 501

E. Rule 11 Sanctions Against Attorneys Who Sue to Collect Time-Barred Debts................... 507

VII.Conclusion................... 509

I. Introduction

Americans have a lot of debt,1 and often experience difficulties paying their debts.2 These circumstances have given rise to the 13.7 billion dollar debt collection industry, which includes approximately 6,000 collection agencies,3 affects nearly 77 million Americans,4 and is one of the fastest growing industries today.5

Much debt collector revenue derives from medical debt, student loans, credit cards, student loans, and mortgages.6 When consumers are unable to pay their debts, debt owners typically deem the consumer in default, and eventually "charge off' the debt and place it in collection.7 Collection efforts may then be made by the original creditor or present owner of the debt (called first-party debt collectors), or by third-party debt collectors consisting of both debt collection firms and law firms that specialize in such collection efforts.8

More than half of third-party collector revenue, $7.5 billion, is generated by collectors contracting with creditors to collect their debts on a contingency fee basis under which any amount collected is split between the creditor and collector.9 Under such arrangements, collectors' fees may increase based on the age of the accounts.10 In general, older accounts offer larger fees, creating incentives to use more aggressive collection tactics.11 Because third-party debt collectors seek to collect as much money as they can on old debts for themselves and their creditor clients, their interests are adverse to consumers.12 In addition, as compared to creditors, who compete for consumer business, third-party debt collectors may be relatively unconcerned with their reputation amongst consumers.13 For these reasons, third-party debt collectors have little market incentive to attempt to collect debts in a non-aggressive manner, generating a need to regulate their practices.14

In 1977, in light of the "abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors,"15 Congress enacted the Fair Debt Collections Practices Act (FDCPA) to govern the collection efforts of third-party debt collectors.16 When the FDCPA was enacted, one of Congress's stated purposes was to "eliminate abusive debt collection practices by debt collectors. …

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