Client Alert: From the Scheer Law Group: Buying Debt May Be Buying More than You Bargained for. FDCPA Cases under Examination by the Supreme Court

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To All SLG Clients and Affiliates.
From: Spencer Scheer
Date: January 16, 2017
Client Alert: From the Scheer Law Group:
Subject: Buying Debt May Be Buying More than You Bargained for. FDCPA Cases under Examination by the Supreme Court.

Debt collection activities have been under close scrutiny over the last few years and may be heading for more stringent regulation under pending Supreme Court cases.

The CFPB has been taking aim at debt collectors for years. Recently, it outlined its proposals to overhaul the practices and rules governing debt collectors ( See CFPB Considers Proposal to Overhaul Debt Collection Market, http://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-considers-proposal-overhaul-debt-collection-market/

One group that the CFPB has targeted are debt buyers. There has been a huge upswing in the purchase of both secured and unsecured debt over the years. The CFPB wants to make successors responsible for debt collection claims that occurred before the sale and to hold them responsible as debt collectors for post-sale activity.

Now the Supreme Court will be weighing in. The U.S. Supreme Court on Friday agreed to decide the case of Ricky Henson et al v. Santander Consumer USA, Inc. et al, Case No. 16-349. The Court will decide whether firms collecting on debt they bought for pennies on the dollar can be held liable in lawsuits brought by debtors they targeted under the federal Fair Debt Collection Practices Act (“FDCPA”). See http://mobile.reuters.com/article/idUSKBN14X2DY/ for more discussion).

The distinction in this case will turn on whether a debt buyer is classified as a creditor (which may exclude the purchaser from regulation under the FDCPA or whether they are classified as a debt collector, which would subject them to FDCPA regulation. This is likely not good news for purchasers of debt. What may appear to be a bargain purchase of distressed debt, may end up being the purchase of a lawsuit or unresolved consumer claim, or the creation of new claims after purchase because the debt buyer thought it was immune from FDCPA claims.

This highlights the need for debt buyers to exercise diligence in this area and to consider requiring expanded representations and warranties that no claims have in fact been raised prior to the transfer of the debt. This will not cover subsequent acts taken, but may give recourse to require defense of the claim by the seller, assuming the seller is still around. Prudent debt purchasers will consider complying with FDCPA requirements until the Supreme Court Rules.

But Wait There is More:

The Supreme Court is also concerned with debt collector practices when a consumer files bankruptcy. In Midland Funding, LLC v. Johnson, No. 16-348, the Court will be looking at:

(1) Whether the filing of an accurate proof of claim for an unextinguished time-barred debt in a bankruptcy proceeding violates the Fair Debt Collection Practices Act;

(2) whether the Bankruptcy Code, which governs the filing of proofs of claim in bankruptcy, precludes the application of the Fair Debt Collection Practices Act to the filing of an accurate proof of claim for an unextinguished time-barred debt.

In simple English:

Many creditors file a proof of claim in bankruptcy, even though the debt might otherwise not be subject to collection because of the statute of limitations. It used to be “no harm no foul”. The Supreme Court will determine if there is harm and if there is it will be a foul, and creditors may be subject to FDCPA claims for doing so Stay tuned.

Please call me if you would like to discuss

Spencer Scheer