This paper summarizes those federal and state law governing debt collection practices. Those individuals and entities (i.e. attorneys, collection agents, etc.) that engage in debt practice collection on behalf of others should be cognizant of these statutes. Failure to follow the requirements of the federal and state statutes could not only result in the practitioner not being able to collect the debt. Violations of these statutes could also subject the practitioner to imposition of statutory damages and attorneys fees among other sanctions. I. Federal Law – Fair Debt Collection Practices Act
The primary federal statute governing debt collection is popularly known as the Fair Debt Collection Practices Act, found at 15 U.S.C. §§1692 et seq. These provisions govern all those who collect certain debts on behalf of others unless the Federal Trade Commission has exempted any particular class of debt collectors within a particular state because that state has requirements substantially similar to the federal requirements and provides adequate provision for the enforcement of those state requirements. See 15 U.S.C. §§1692n, 1692o. Collectors practicing in North Carolina have not been exempted from the federal requirements. See 60 Fed. Reg. 66972 (Dec. 27, 1995) (so far only state of Maine exempted from Act).
A. Debts Covered Under the Act
Only certain types of debts are covered under the federal Act. The Act covers consumer debts. A “consumer” is defined under the act as “any natural person” either actually or allegedly obligated to pay a debt. 15 U.S.C. §1692a(2). As such, debts owed by legal entities (i.e. corporations, partnerships, LLCs, unincorporated associations, etc.) are not covered by the Act.
The Act also covers only “consumer” debts and not commercial debts. Consumer debts are defined as an obligation to pay money “arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family or household purposes[.]” 15 U.S.C. §1692a(5). It is irrelevant under the Act whether or not the obligation has been reduced to judgment. Id.
Case law construing the nature of debts covered under the Act have given the Act a broad scope in determining what is a “consumer” debt. Items such as dishonored checks, medical bills, attorneys fees, utility bills, rent, and student loans have all been found to be covered by the Act. As a practical matter, if a debt is owed only by an “artificial” entity and not a natural person, then the collector does not have to worry about application of the Act. If a collector is trying to collect from an actual person, then the nature of the debt needs to be determined to see if the Act applies to collection of the debt in question. Given the broad interpretation accorded the Act by courts, if there is any doubt about the nature of the debt owed, the collector should abide by the provisions of the Act in collecting the debt.
B. Collectors Covered by the Act
The term “debt collector” is defined by the Act as including any person who is “in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” 15 U.S.C. §1692a(6). The Act does not apply to those persons who are attempting to collect their own debts unless that person is using a third party name that could lead the debtor to think that someone other than the creditor is attempting to collect the debt. Id.
Debt collection agencies easily fall within the first prong of the statute encompassing businesses who “principally” collect debts. It is the second alternative definition of persons who “directly or indirectly” “regularly collect or attempt[] to collect” debts where the statute provides broader coverage for those who are not your traditionally thought of debt collector. Much litigation has ensued over whether or not a person “regularly” attempted to collect debts. Generally if just a small portion of the alleged collectors business is oriented to collecting consumer debt it will not be deemed to have “regularly” collected debts and thus fall outside of the auspices of the statute. See, e.g., Hartl v. Presbrey & Associates, 1996 WL 529339 (N.D. Ill. 1996) (no “regular” debt collector under Act when less than 1% of firm’s business involved debt collection); Griffen v. Bailey Associates, 855 F. Supp. 1047 (E.D. Mo. 1994) (no “regular” debt collection when only 10% of defendant’s employees involved in debt collection).
While historically there was some question as to whether or not attorneys were intended to be covered under the Act, the Act was amended 1986 to expressly cover attorneys who regularly engaged in the collection of consumer debts. Heintz v. Jenkins, 514 U.S. 291, 115 S. Ct. 1489, 131 L. Ed. 2d 395 (1995) (United States Supreme Court expressly finding attorneys who meet definition of “debt collectors” under Act covered by the statute).
C. Prohibited Acts by Debt Collectors
The Act prohibits many acts by debt collectors that appear to be a matter of common sense. Debt collectors cannot engage in harassing or abusive conduct in collecting debts (i.e. threatening violence, using profanity, repeated telephoning, etc.) 15 U.S.C. §1692d. They cannot solicit postdated checks by threatening criminal prosecution. 15 U.S.C. §1692f(3).[1] Collectors cannot make false or misleading representations in collecting debts (i.e. implicating the debtor has engaged in a crime, presenting false documents purporting to be government documents authorizing action with respect to the claim, threatening to take action that is unlawful, etc.) 15 U.S.C. §1692e. Similarly depositing or threatening to deposit a postdated check on a date before the date on the check is deemed one of several identified “unfair practices.” 15 U.S.C. §1692f(4).
Other practices prohibited by the Act may not be so intuitive so that someone would think them to be a prohibited act. For example, a collector may not accept a postdated check of more than five days unless the debtor is notified in writing of the collector’s intent to deposit the check not more than ten nor less than three business days prior to the collector’s actual deposit of the check. 15 U.S.C. §1692f(2). Similarly the collector cannot collect any charges incidental to the debt (i.e. interest, fees, charges) unless those amounts are expressly authorized by the agreement creating the debt or permitted by law. 15 U.S.C. §1692f(1).[2]
D. Notice and Validation Requirements for Debtors
Perhaps the most closely scrutinized (and most routinely violated) requirements of the Act are the notice and validation requirements for debts under the Act. In a nutshell, collectors have to provide debtors with a variety of information about the debts that the collector is attempting to collect at the outset of the collector’s efforts to collect said debts. The collector’s failure to provide this information can subject the collector to civil liability under the Act’s remedy provisions.
The Act requires the collector either in the collector’s initial communication with the debtor or within five days after the initial communication to provide written notice to the debtor of the following items:
(1) the amount of the debt;
(2) the name of the creditor;
(3) a statement that unless the debtor within thirty days of the notice disputes in writing the validity of the entire debt or any portion of the debt the debt will be assumed to be valid by the collector;
(4) a statement that if the collector receives written notice by the debtor disputing the debt within the thirty day period that the collector will obtain verification of the debt or a copy of the judgment against the debtor and mail a copy of the verification/judgment to the debtor; and
(5) a statement that if the creditor will provide the name and address of the original creditor if different from the current creditor provided the debtor requests such information within the thirty-day period.
15 U.S.C. §1692g(a).
There is an additional notice requirement not contained in 15 U.S.C. §1692g(a). The collector in his initial communication with the debtor must disclose that he is attempting to collect a debt and that any information provided by the debtor will be used for that purpose. 15 U.S.C. §1692e(11). All subsequent communications from the collector must contain a statement that the communication is from a debt collector. Id.
Notice and validation information must be clearly provided. Thus, placing notices on the back of initial collection demands have been held to be violations of the Act. See, e.g., Siler v. Management Adjustment Bureau, 1992 WL 3233 (W.D.N.Y. 1992) (information in smaller, lighter typeface on back of initial communication violated Act). Similarly the collector cannot “bury” the notice and validation language in the initial communication by emphasizing other aspects of the communication demanding payment. See, e.g., Miller v. Payco General American Credits, Inc., 943 F.2d 482 (4th Cir. 1991) (capitalized demands of “IMMEDIATE FULL PAYMENT” “NOW” in white letters nearly two inches tall on red background contradicted notice and validation information in normal type on back of letter). Whether or not violations of the Act have occurred, including those provisions involving notice and validation, are judged by a “least sophisticated consumer” standard. Jeter v. Credit Bureau, Inc., 760 F.2d 1168 (11th Cir. 1985).[3]
If a debtor disputes any part of the debt, the collector must cease collection efforts until the collector provides verification of the debt or validation of the judgment. 15 U.S.C. §1692g(b).
There is some controversy as to whether or not the notice and validation requirements apply to a summons and complaint if that represents the “initial” communication from the collector. The requirements of 15 U.S.C. §1692e(11) with respect to the information about the collector collecting the debt and information provided being used for that purpose do not apply to judicial pleadings, as the statute expressly exempts the same from its coverage. Courts have taken differing positions as to whether or not the “debt validation” notice requirements of 15 U.S.C. §1692g(a) are applicable to a summons and complaint as the “initial communication” from the collector. Cf. McKnight v. Benitez, 176 F. Supp. 2d 861 (M.D. Fla. 2001) (holding that summons and complaint not “initial communication” under Act and thus §1692e not applicable); Mendus v. Morgan & Assoc., 1999 Okla. Civ. App. LEXIS 140 (Okla. Ct. App. 1999) (pleading or summons is “initial communication” triggering validation requirements). The Federal Trade Commission has issued a formal advisory opinion noting that even if the “debt validation” information is precluded from being included in a complaint and summons under state law that the information can be sent in a separate notice within five days of the debtor being served with the court documents. FTC Advisory Opinion (Mar. 31, 2000).
Attached as exhibit “A” to this paper is a sample letter constituting an “initial communication” to the debtor that should be in compliance with the current notice and validation requirements of the Act.
E. Penalties and Remedies for Violations of the Act
The Act provides that collectors failing to comply with the Act are liable to debtors for actual damages suffered by the debtors, statutory damages not to exceed $1,000 as determined by the court, and costs including a reasonable attorneys’ fee. 15 U.S.C. §1692k(a). “Actual damages” can include both pecuniary and nonpecuniary damages such as emotional distress, loss of reputation, etc. See, e.g., Collins v. Retail Credit Company, 410 F. Supp. 924 (E.D. Mich. 1976) (allowing for recovery of damages including loss of reputation, embarrassment, and humiliation). In determining what statutory damages to award a court is required to consider the frequency and persistence of noncompliance by the collector, the nature of the noncompliance, and whether the noncompliance was intentional. 15 U.S.C. §1692k(b)(1).
Collectors can avoid liability under the Act if the collector can show by a preponderance of evidence that the violation was unintentional and was a “bona fide error” notwithstanding the creditor’s maintenance of procedures reasonably designed to avoid such error. 15 U.S.C. §1692k(c). (This is commonly known as the “bona fide error” defense.) In extreme cases the court has the ability to award the creditor its attorneys fees upon a finding that the plaintiff’s action was brought in bad faith and to harass. 15 U.S.C. §1692k(a)(3).
Attached to this paper as exhibit “B” is a sample of a complaint against a law firm alleging violations of the Fair Debt Collection Practices Act.
II. North Carolina Law – Prohibited Acts by Debt Collectors
In 1977 the North Carolina General Assembly passed Article 2 to Chapter 75 of the North Carolina General Statutes prohibiting certain acts by debt collectors. See generally N.C.G.S. §§75-50 et. seq. In most instances the state law act mirrors the protections afforded debtors under the federal act. Given that claims for violations of the federal act can be brought in both federal and state courts, there have been few litigated cases under the North Carolina act. See 15 U.S.C. §1692k(d) (conferring jurisdiction for FDCPA cases upon both federal and state courts). The state act, just like its federal counterpart, is applicable only to consumer debts. See N.C.G.S. §75-50(2).
One interesting thing to note about the state act is that it has no separate section setting out damages and penalties akin to that of the FDCPA’s §1692k. The state act has been construed by the North Carolina Court of Appeals as constituting as unfair methods of competition pursuant to N.C.G.S. §75-1.1. Talbert v. Mauney, 80 N.C. App. 477, 343 S.E.2d 5 (1986). As such, the treble damages and attorneys’ fees provisions of Chapter 75 should be the standard by which damages are awarded. See generally N.C.G.S.§§75-16, 75-16.1.
Perhaps the biggest change between the federal and state acts is that the state act governs parties attempting to collect their own debts. See N.C.G.S. §75-50(3) (defining “debt collector” as “any person engaging, directly or indirectly, in debt collection from a consumer”) (emphasis added). Under this definition a landlord attempting to recover past due rent and related charges from a tenant was deemed a “debt collector” under the North Carolina statute. Friday v. United Dominion Realty Trust, Inc., 155 N.C. App. 671, 573 S.E.2d 532 (2003). The state act does not have the notice and validation requirements of the federal act, and thus those parties directly attempting to collect their own debts shouldn’t be required to jump through those particular hoops. The state act does mirror the federal act in prohibiting those activities (i.e. harassment, threats and coercions, unreasonable publication of the debt to third parties, etc.) that would hopefully be common sense for most parties to refrain from in attempting to collect monies owed to those parties.
There have been two reported federal cases construing the state act. In Fishe v. Eastern Air Lines, 517 F. Supp. 672 (M.D.N.C. 1981), the federal court ruled that a party who did not owe the debt in question could not enforce the state act against a collector that had mistakenly attempted to collect the debt from the plaintiff. The Middle District trial court found that the North Carolina General Assembly had not intended to include “alleged” debtors but only actual debtors within the scope of the state act. In Tate v. NationsBanc Mtg. Corp., 253 Bankr. 653 (Bankr. W.D.N.C. 2000), a debtor alleged that creditors’ filing of proof of claims containing disguised attorneys’ fees claims in violation of the state act. The bankruptcy court held that federal law preempted the debtor’s state law claims against the creditors, as the filing of proofs of claims was a unique federal concern.
It appears that collectors abiding by the federal requirements would be in compliance with the state requirements in Chapter 75. The state act does not appear to set a higher bar for compliance than that set by the federal act. The paucity of appellate opinions construing the state act leads one to believe that those parties who feel aggrieved by a collector’s actions are pressing those claims under the federal and not state acts, where the provisions are more detailed and there is an abundance of case law construing the federal provisions.
EXHIBIT “A”
November 12, 2003
VIA CERTIFIED MAIL
RETURN RECEIPT REQUESTED
[Debtor]
[Debtor’s Address]
Re: [Creditor]; Our File No. _______________
Dear [Debtor]:
[Creditor] has retained us to assist them in collecting your past due account as referenced above. My client’s records indicate that your outstanding balance as of September 15, 2003 is $2,256.61 as shown by the enclosed invoice. My client is appreciative of your business, but we point out that your account has been past due for an extended period of time and we now ask that you clear it up. If we do not receive payment in full of this account in cash or certified funds on or before 5:00 p.m. on December 17, 2003, we will commence such action as is necessary to protect [Creditor’s] legal rights.
You should be aware that this is an action to collect a debt, and any information you provide to us can be used for that purpose. All portions of this claim shall be assumed valid unless disputed within 30 days after receipt of this notice. If notified, we will obtain verification of the debt and mail a copy to you. This letter is a communication from a debt collector.
We are certain you wish to avoid the expense and burden of litigation, and we ask that you give this matter your prompt attention. Until then, I remain
Sincerely,
MANNING, FULTON & SKINNER, P.A.
MSH
Enclosure
cc: [Creditor]
EXHIBIT “B”
NORTH CAROLINA : IN THE GENERAL COURT OF JUSTICE
DISTRICT COURT DIVISION
WAKE COUNTY : 0___-CVD-_______
[DEBTOR], )
)
Plaintiff, )
)
v. ) COMPLAINT
)
[COLLECTOR], )
)
Defendant. )
NOW COMES the Plaintiff, [Debtor], by and through undersigned counsel, and complaining against the Defendant [Collector], by and through undersigned counsel, and alleges as follows:
1. The Plaintiff is a citizen and resident of Wake County, North Carolina, is over eighteen years of age, and is otherwise competent.
2. Upon information and belief, Defendant is a professional association of attorneys duly authorized under laws of the State of North Carolina with its principal place of business in Wake County, North Carolina.
3. Defendant is engaged in the business of the collection of debts in this state and regularly intends to collect debts on behalf of [Creditor].
4. Defendant is engaged in the collection of debts from consumers using the mail and telephone. Defendant regularly attempts to collect debts alleged to be due to another. Defendant are “debt collectors” as defined by the Fair Debt Collections Practices Act (“FDCPA”), 15 U.S.C. § 1692-a(6).
5. By letter dated August 14, 2000, Defendant has attempted to collect a debt from the Plaintiff. The Plaintiff received the letter on August 20, 2000. This complaint and summons was the first notice of debt received by the Plaintiff from the Defendant.
6. The alleged debt claimed in the letter was incurred for personal, family or household services.
7. The Defendant’s letter violated numerous provisions of FDCPA §1692g, including but not limited to the following:
a. The letter did not contain the statement that unless the Plaintiff, within thirty days after receipt of the notice, disputed the validity of the debt, or any portion thereof, that the debt would be assumed to be valid by the Defendant;
b. The letter did not contain the statement that if the Plaintiff notified the Defendant in writing within a thirty day period that the debt, or any portion thereof, was disputed by the Plaintiff, that the Defendant would obtain verification of the debt or a copy of a judgment against the Plaintiff, and that copy of such verification or judgment would be mailed to the Plaintiff by the Defendant.
8. As a result of the foregoing violations of the FDCPA, the Defendant is liable to the Plaintiff for a declaratory judgment that the Defendant’s conduct violated the FDCPA, actual damages, statutory damages, and cost and attorneys fees as allowed under law.
WHEREFORE, Plaintiff prays this Court as follows:
1. For actual and statutory damages against the Defendant pursuant to 15 U.S.C. § 1692k;
2. That the costs of this action including the Plaintiff’s reasonable attorneys fees be taxed against the Defendant pursuant to 15 U.S.C. § 1692k and such other statutory and legal authority that may apply;
3. For a trial by jury on all issues so triable;
4. For such other and further relief for the Plaintiff as this Court deems just and appropriate.
This the ______ day of July, 2001.
______________________________________
NC State Bar No. 17443
of MANNING, FULTON & SKINNER, P.A.
P.O. Box 20389
Raleigh, NC 27619-0389
Telephone No. (919) 787-8880
VERIFICATION
I, [DEBTOR/PLAINTIFF], being duly sworn, hereby depose and say that I have read the foregoing COUNTERCLAIM and state that its contents are true and within my own personal knowledge, except as to those matters stated upon information and belief, and as those matters I believe them to be true.
This the ____ day of July, 2001.
___________________________________
[DEBTOR/PLAINTIFF]
Subscribed and sworn to before me
this the ____ day of July, 2001.
____________________________
Notary Public
My commission expires:_____________
[1] Interestingly enough the threat of criminal action against the debtor in an effort to collect the debt is not in itself a violation of the federal act unless the threat is legally invalid or the collector has no legitimate intention of following through on the threat. 15 U.S.C. §1692e(5) (characterizing as “false and misleading representations” “threat[s] to take any action that cannot legally be taken or that is not intended to be taken”).
[2] The federal act presents an interesting and unresolved anomaly with respect to North Carolina law. North Carolina is fairly clear that a creditor cannot collect attorneys fees as a part of the costs of collecting certain debts unless there is statutory authority permitting the recovery of attorneys fees as to the instrument in question. But the language of 15 U.S.C. §1692 permits the collection of amounts incidental to the sum owed unless the incidentals sought to be collected are either “expressly authorized by the agreement or permitted by law.” Does this mean that a collector does not violate the federal act in demanding the payment of attorneys fees as an incidental cost if the language of the lease allows for collection of the same but North Carolina law does not similarly permit such recovery?
[3] Generally speaking, most jurisdictions have held that the federal Act is a “strict liability” statute. See, e.g., Russell v. Equifax A.R.S., 74 F.3d 30 (2d Cir. 1996).
