FDCPA Defense Blog recently published a post decrying the Consumer Financial Protection Bureau and FTC's position
regarding debt collectors attempting to collect on time-barred debts (debts
that are too old to sue on).
In short, the federal agencies tasked with enforcing the Fair Debt Collection
Practices Act and other consumer protection statutes think that collecting
time-barred debt is a bad thing for consumers.
I agree with the CFPB and the FTC.
The position has a bit more dept than that, but the above is the gist.
If debt collectors disclose that the debt is time-barred, it's a good
first step. I believe (and the CFPB and FTC agree) that debt collectors
need to also disclose the effect of voluntarily paying old debts.
The FDCPA Defense Blog rolls out the same arguments that we see whenever
regulators want to regulate the industry that they are tasked with regulating.
1. "The CFPB wants consumers to make informed decisions not to pay
This is a classic example of using charged language to set the tone of
the conversation. Most people want to pay debts that they owe. Consumers
aren't an army of deadbeats that want to steal money from creditors.
What the CFPB wants is for consumers to make informed decisions regarding
their financial affairs. (See how that charged language cuts both ways?)
The CFPB and the FTC have done extensive studies regarding the debt collection
and debt buying industries. 99% of the time, if a debt is too old to collect,
it is no longer held by the original creditor. There are companies that
purchase charged-off debts from account originators. These debt buyers
rarely have enough documentation to prove what is owed on the purchased
accounts. More often than not, the accounts are sold with no assurances
as to the quality of the accounts sold.
This is a big problem. Should consumers pay debts that they owe? Yes. Should
they pay any entity that shows up, claiming it owns the underlying debt?
No, not without credible proof that the debt is actually owed. The CFPB
and FTC want debt buyers to disclose when a debt is time-barred because
making a payment on that debt
re-starts the statute of limitations on the debt. In some states, like Illinois,
simply promising to pay can renew the statute of limitations.
Once the SOL is revived, the debt buyer can sue to collect the debt. In
Illinois, if a judgment is obtained, that judgment will collect interest
at a rate of 9%. Wages can be garnished. Bank accounts can be garnished.
Judgment liens can be filed against the consumer's home. Knowing that
paying on a time-barred debt can expose the consumer to some rather severe
legal consequences is of the utmost importance if a consumer is to make
an informed decision regarding his or her legal rights.
2. People defaulting on debts makes credit more expensive for everyone.
Once a debt is time-barred, the original creditor no longer holds that
debt. Debt buyers do not issue credit. If a debt buyer doesn't collect
one cent on an account, that does not increase the cost of credit for
anyone. In fact, any "increased cost of credit" was already
incurred when the original creditor charged-off the account. Moreover,
the charge-off may result in a tax break.
Arguing that debt buyers not collecting money increases the cost of consumer
credit is absurd. Debt buyers pay credit originators cash for the accounts
that they purchase. That money offsets (although not fully) the uncollected
funds that the creditor charged-off.
The CFPB and FTC aren't suggesting that consumers shouldn't pay
their debts. They are, however, suggesting that consumers should know
all of the facts about the legal status of a debt and the rights that
they may waive by paying that debt. Surely, some consumers will take advantage
of offers to settle time-barred debts. Many of those offers include steep
discounts on the balance allegedly owed. However, asking consumers to
take actions without fully understanding their consequences is unconscionable.
This is not a situation where less information is good; that's just
what the creditor defense industry wants you to think.