How to Collect on Time-Barred Debt

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John Rossman

A recent $2.5 million settlement between a debt buyer and the FTC arising from complaints about collections on time-barred debts sent shock waves through the industry.  The proposed settlement also raised new questions about the dangers associated with collecting time-barred debt.  Time-barred accounts (those that are past the statute of limitations) are ticking bombs that, if mishandled, will damage or destroy a collection business.  However, like nearly any type of debt collection account, your company can implement deft strategies to collect these accounts in certain states and within the boundaries of the law.

What is the Statute of Limitations?

The statute of limitations is a law that prohibits, for example, a creditor from suing on a collection account after a specified period of time.  State law typically sets the statute of limitations.  Depending on the applicable state law and type of account, the statute of limitations can generally range from two to ten years.

Accounts on which no lawsuit is commenced before the statute of limitations expires are sometimes called “time-barred.”  While typically no lawsuit can be commenced on a debt account that is past the statute of limitations, some collection efforts on such time-barred accounts may continue in certain states.  However, ANY collection efforts that include suing or threatening suit on a time-barred account are considered a violation of the FDCPA, regardless of state law.

Courts Rule on the Statute of Limitations

The U.S. Supreme Court held in the 1904 landmark decision Davis v. Mills that while the expiration of the statute of limitations eliminates judicial remedies, it does not eliminate the underlying rights.  In 2001, the Eighth Circuit Court of Appeals wrote in the Freyermuth case:

[I]n the absence of a threat of litigation or actual litigation, no violation of the FDCPA has occurred when a debt collector attempts to collect on a potentially time-barred debt that is otherwise valid.

The ruling in Freyermuth states that even though no lawsuit may be brought or threatened on a time-barred debt, other collection efforts may continue.  However, a growing handful of state and local laws prohibit and/or restrict collection on time-barred debt.  Thus, in those jurisdictions, it is unlawful to pursue any collection activity on time-barred accounts OR it is unlawful without complying with specific disclosure requirement.

FTC Commentary Acknowledges Legality of Collecting Time-Barred Debt

The FTC recently issued comments for consumers faced with collectors seeking payment on time-barred debt.  In these comments, the FTC acknowledged that it is legal for collectors to seek payment on time-barred debt:

Collectors are allowed to contact you about time-barred debts. They might tell you that the debt is time-barred and that they can’t sue you if you don’t pay.

The FTC comments also address the issue of partial payment by a consumer on a time-barred debt:

In some states, if you pay any amount on a time-barred debt or even promise to pay, the debt is ‘revived.’ This means the clock resets and a new statute of limitations period begins. It also often means the collector can sue you to collect the full amount of the debt, which may include additional interest and fees.

State and City Laws Restrict Collecting Time-Barred Debt

When looking at collecting on time-barred debt, there are laws in five states (technically four states and one city) that require close examination as of the date that this article is written:

  • Mississippi
  • New Mexico
  • New York City
  • North Carolina
  • Wisconsin

Mississippi and Wisconsin

Mississippi and Wisconsin prohibit any collection efforts on time-barred accounts.  Thus, no collection efforts should be undertaken on time-barred accounts in these states.

New Mexico and New York City

The New Mexico Attorney General issued a rule requiring specific disclosures for every communication a debt collector has with a consumer on a time-barred account.

Likewise, New York City regulations require that a debt collector must provide a consumer with specific information about the consumer’s rights regarding a time-barred account in every communication with the consumer.

North Carolina

North Carolina law prohibits any collection efforts on time-barred accounts that are owned by a debt buyer.  North Carolina further requires that collectors make specific disclosures to the consumer about the time-barred nature of the debt before collecting and when accepting payments on accounts owned by the original creditor.

Staying Ahead of the Curve

The law regarding the collection of time-barred debt is complex and in flux.  The laws in several of the states mentioned herein changed within the past three years.  Further, the recent settlement agreement by the FTC may spark further changes by state and local governments. If your company is considering purchasing or collecting on time barred debt, contact John Rossman at rossmanj@moss-barnett.com.

John K. Rossman is a shareholder and Chair of the Creditors’ Remedies Practice Group at Moss & Barnett, P.A. Mr. Rossman is a nationally acclaimed authority on the Fair Debt Collection Practices Act and the labyrinth of laws that impact the debt industry. He is a counselor and advisor to national and international companies and noted for his intelligent, creative and successful representation of collection agencies, debt buyers, creditors and fellow attorneys in cases across the country.

This publication is provided only as a general discussion of legal principles and ideas. Every situation is unique and must be reviewed by a licensed attorney to determine the appropriate application of the law to any particular fact scenario. If you have a legal question, consult with an attorney. The reader of this publication will not rely upon anything herein as legal advice and will not substitute anything contained herein for obtaining legal advice from an attorney. No attorney-client relationship is formed by the publication or reading of this document. Moss & Barnett, A Professional Association, assumes no liability for typographical or other errors contained herein or for changes in the law affecting anything discussed herein.

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Posted in Collection Law Firms, Collection Laws and Regulations, Debt Collection, Debt Statute of Limitations, Featured Post, Opinion .

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  • avatar Ameripay says:

    I’m not an attorney, perhaps one can explain how if the Supreme Court has ruled that these debts can be collected on states can make laws prohibiting collection. I always though the Supreme Court was the “law of the land.” Are these state prohibitions technically unenforceable?

  • avatar Tony Waybright says:

    I clicked through the headline on the email expecting it had likely been truncated with the rejoinder “….and continue giving the ARM industry a second black eye” setting the tone for a story on improving the industry’s image.

    It would be interesting to see poll results on how many ACA members have a business model that spends resources on attempting to collect debt that has been creamed 3 or 4 times with the final attempt – filing suit – unsuccessful. Legal or not, my guess is that those who treat the business like their profession simply don’t.

    A CLE speaker distinguished the difference between ethics and professionalism stating that attorney ethical guidelines should be considered the bare minimum for behavior while professionalim meant striving for the aspirational and ideal.

    If the ARM industry hopes for its reputational black eyes to heal it will likely need to spend more time lifting itself up and leaving behind the bare minimum justification of ‘well it isn’t illegal everywhere.”

  • avatar Aaron Kozloski says:

    Ameripay:

    The Supreme Court is not the “Law of the Land.” The Court passes on issues of federal law, and on constitutional issues made applicable to the states through selective incorporation via the 14th Amendment.

    The States reserve certain police powers under the 10th Amendment, and certain immunities under the 11th.

    It is within the police power of the state to halt practices it considers contrary to public health, safety, or welfare (as long as the subject area is not pre-empted by the federal government under a constitutional provision like the Commerce Clause.)

    The Court is within its province to say that collecting time-barred debt by suing or threatening to violates FDCPA. The states are within their province to say collecting that debt at all is illegal.

    It’s called federalism. Hope this helps.

    Aaron

  • avatar Delaine Smith says:

    Regardless of whether or not a debt is “Time Barred” in the state of Tennessee, which has an “sol” of 6 years, no debt collector is allowed to
    “commence or conduct the business of debt collection” unless they are licensed and bonded in the state of Tennessee in accordance with the The Tenn Collection Services Board regulations, and must comply with the TENN FAIR DEBT COLLECTION PRACTICES ACT in it’s entirety ( TFDCPA 62-20-101 thru 62-20-127 and 127(a) as amended. Otherwise, they are subject to civil and or criminal penalties under Tenn Code. Legal standing must be established. And all collection services must have a licensed and bonded location manager in every place they pursue collections in the state of Tennessee.
    Debt Collectors BEWARE…Tennessee will file suit !

  • avatar statuteoflmitations says:

    I always thought that collecting on a time barred bet was a violation of the Fair Debt Collection Practices Act

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