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From Banking and Finance Law Daily, September 12, 2016

Offer to settle time-barred debt can violate debt collection act

By Richard A. Roth, J.D.

A debt collector’s dunning letter that offered to settle a debt that was too old to be sued on could misrepresent the collectability of the debt even if the letter did not threaten a suit, the U.S. Court of Appeals for the Fifth Circuit has decided. The settlement offer could lead an unsophisticated consumer to believe that the stale debt remained legally enforceable, in violation of the Fair Debt Collection Practices Act, the court said (Daugherty v. Convergent Outsourcing, Inc., Sept. 8, 2016, Dennis, J.).

The consumer acknowledged that she had defaulted on nearly $13,000 in credit card debt. LVNV Funding bought the debt from the credit card company and hired Convergent Outsourcing to collect it. By the time Convergent sent the consumer the challenged collection letter, the 8-percent interest rate had taken the amount owed to more than $32,000.

Convergent’s letter offered the consumer three different settlement options, the least expensive of which was a single payment of 10 percent of the amount owed. The letter did not include any threat of litigation. However, it did not disclose that the debt was so old that the statute of limitations had run, making the debt uncollectible through litigation. It also did not mention other possible consequences—that a voluntary partial payment could start a new statute of limitations or that loan forgiveness could have income tax implications.

The federal district court judge dismissed the suit. The FDCPA does not bar efforts to collect stale debts as long as the debt collector neither threatens nor initiates litigation, the judge decided.

Possible misrepresentation. The appellate court’s opinion offered a survey of four opposing precedents on the issue of whether such a settlement offer could violate the FDCPA. According to the court, the Sixth and Seventh Circuits have said that an offer to settle a stale debt without disclosing its unenforceability can be a violation, even if there is no threat of a collection suit, while the Third and Eighth Circuits have reached a contrary conclusion.

The Fifth Circuit accepted the premise that it is not a violation to request that a consumer pay all or part of a time-barred debt, which was the basis of the Third and Eight Circuits’ position. However, offering to settle a debt that is unenforceable, without disclosing the unenforceability, could mislead an unsophisticated consumer about the debt’s legal status. That could violate the FDCPA.

Limits of ruling. Two things should be noted about the Fifth Circuit’s opinion. First, the court did not decide that the settlement offer violated the FDCPA; rather, it said that the consumer’s claim of a violation was "facially plausible." Second, the court did not prohibit all attempts to collect time-barred debts. It simply said that failure to disclose that such a debt was not enforceable in court could be a violation.

The case is No. 15-20392.

Attorneys: David Neal McDevitt (Thompson Consumer Law Group, PLLC) for Roxanne Daugherty. Robbie LuAnn Malone (Robbie Malone, PLLC) for Convergent Outsourcing, Inc. Michael Lamar Jones (Henry & Jones, LLP) for LVNV Funding, LLC.

Companies: Convergent Outsourcing, Inc.; LVNV Funding, LLC

MainStory: TopStory DebtCollection LouisianaNews MississippiNews TexasNews

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