A business named Midland Credit Management failed to get a case dismissed, questioning their collection process about time barred debt. The case addresses the question of what information companies must disclose to consumers regarding their “stale debt”, which has had no activity on the account for a number of years. While this ruling did not settle the court case, it legitimized the question, and will be further reviewed by the courts at a later time for a summary judgment. At that time, the courts are expected to further clarify what the average consumer knows and understands about debt collection, and what terminology must be used by collection agencies to remain in compliance with the FDCPA (Fair Debt Collections Practices Act).
What Is Time Barred Debt
The law has established that defaults, wrongs, and injustices must be settled within a certain period of time, known as the statute of limitations. The SOL varies based on the wrong information claimed and the state in which you live, and establishes a time limit, under which a person can be sued. This prevents old grievances, debts, and cases from coming back to light after evidence is no longer available.
Statute of Limitations or SOL differs from state to state and the type of credit or loan in question. Oral contracts, written contracts, promissory notes (such as a mortgages), and open ended accounts (such as a credit card), have different SOL’s. The state’s rules that apply to your account may be from the state where you currently live, the state the creditor is incorporated, or the state where the contract was signed. In most cases, the state of the debtor’s residence or where the debt was initiated is used. Typically, the creditor may choose whichever state offers them the greatest advantage. The exception to this is when the contract or credit card agreement specifically says that the lenders state of incorporation will be used for disputes.
State statutes range from 3 years to 8 years from the date of default, giving the creditor the right to take you to court as a method of collection within this time frame. Once the SOL has passed, the debt is considered Time Barred, and a lawsuit can no longer be filed.
Default Dates are also determined by the state laws. One of three dates is generally used. This might be the date of the last payment, 6 months after the last payment, or when an acceleration clause is activated. Selling the debt to a debt buyer does not impact the SOL on the stale debt.
Late Payments and Account Defaults remain on the borrower’s credit file for seven years from the time of default, and sometimes that is motivation for consumers to pay stale debt, even without the threat of a lawsuit. Loan applications and job requirements may stipulate payment of outstanding collection accounts prior to approval.
Passing the SOL does not eliminate the debt or efforts to collect. The account may be sold an unlimited number of times for an unlimited number of years. However, legal options available to collection companies are significantly reduced once the SOL has passed. This also means that debt buyers who purchase accounts beyond the SOL will pay pennies on the dollar for the debt, because of the limited collection options.
How Does the Fair Debt Collections Practices Act (FDCPA) Protect Consumers?
The FDCPA was first established in 1978 and was most recently amended in 2010 to reflect changes in the credit markets. The purpose of the FDCPA is to regulate the credit collection industry and address abuse and deceptive behavior on the part of collection agencies. The Act addresses everything from when they may call, who the company may speak to regarding your account, what may be said, and what type of correspondence may be used.
The case currently working its way through the courts in Kansas is addressing two key questions. 1) Has the company in question used deceptive or false practices with their written correspondence and 2) How would the ‘least sophisticated consumer’ interpret their communication.
This case was initiated because of a letter sent to the consumer owing debt beyond the statute of limitations. The letter stated that ‘The law limits how long you can be sued on a debt.’ It also stated that due to the age of the debt, ‘we will not sue you for it.’
Midland Credit Management contends they met the legal requirements laid out in the FDCPA informing the consumer they would not be sued. The question for the courts is whether the ‘least sophisticated consumer’ will understand the debt is beyond the SOL and, therefore, can no longer be sued for the existing debt.
The ‘deceptive’ part of the letter being addressed is the failure to disclose that making any payment towards the debt, even a small amount, will revive the statute of limitations under Kansas law. This would renew the company’s ability to sue the consumer, upon receipt of a payment.
As the court decides this case, the decision will impact the way all debt collectors in Kansas address stale debt beyond the SOL. It also has the potential to have a ripple effect to other states, especially those with the clauses that revive debt.
What Actions Could Potentially Revive Time Barred Debt?
Debt beyond the statute of limitations can be brought back to life in several different forms. Sending a payment of even a few dollars has the potential to reset the clock. In some states acknowledging the debt, or any new activity on the account, may revive old debt.
These statutes put consumers in a vulnerable position because collection agencies understand the law in great detail, where many facing collection calls do not know any of the laws in place to protect them.
For these reasons the court case in Kansas is being closely watched by industry experts and could establish a new standard around what is considered deceptive practices. It will also consider what consumers are expected to understand and interpret certain messages from creditors.