Helping Clients Respond to Debt Collection Suits
Dealing with Debt Collectors Tip for your clients: Do not let debt collectors pressure you!
Dealing with Debt Collectors Don t let debt collectors pressure you into paying bills you cannot afford Give first priority to expenses that are necessary to keep a roof over your head, food on the table, and your job, and to cover unavoidable medical expenses that require prepayment (not old medical bills).
Dealing with Debt Collectors Don t let debt collectors pressure you into paying bills for which you have a legal defense to repayment. N i h h New payments might re-set the statute of limitations
Debt Buyers & Collection Lawsuits In today s marketplace, consumers often have complete defenses in collection cases.
Marketplace Changes & Consumer Defenses Explosive Growth In Debt Buying In early 90 s, debt buying was minimal By 2005, sales tripled to $125 billion; bought for pennies on the dollar
Marketplace Changes & Consumer Defenses Debt Buyers often purchase very old debt. Leads to lawsuits being filed beyond the statute of limitations Leads to mistaken identity as debt buyers rely on credit reports-- which h are riddled with errors and contain merged files -- to locate consumers
Marketplace Changes & Consumer Defenses Debt Buyers receive minimal information on the account: Often cannot even prove they own the debt, let alone prove the validity of charges and interest claimed Have no information about billing error disputes that may have caused the original creditor to stop collection
Marketplace Changes & Consumer Defenses Identity Theft on the Rise. Been called one of fastest growing crimes In 2006, over 8,000 Pennsylvania,, y residents notified the FTC that they were ID-Theft victims
Marketplace Changes & Consumer Defenses Predatory Credit Practices. Creditors aggressively offer credit. Engage in practices designed to load up enormous interest charges and fees.
Marketplace Changes & Consumer Defenses Ruth Owens s Story: May 1997: $1963 balance stopped using credit card 5/97-5/03: $3,492 payments May 2003 Lawsuit: $5564 How? 5/97-5/03: Fees and Interest Over-limit Fees: $ 1,518.00 Late Fees $ 1,160.00 Credit Insurance $ 369.62 Interest & Fees $ 6,008.66 Total $ 9,056.28 This court is all too aware of the widespread financial exploitation of the urban poor by overbearing credit-card companies. [Ms. Owens] has clearly l been the victim of plaintiff's unreasonable, unconscionable and unjust business practices. Discover v. Owens, 822 N.E.2d 869 (Ohio Mun. 2004).
If your client has been sued Client should: Get legal l advice. Consider the big picture: Bankruptcy if this is the tip of an iceberg of debts? Collection Proof?
If your client has been sued What to do depends on the facts, client s objectives, and the law. Options will also depend on what court the case was filed in.
Municipal /Magisterial District Court or Court of Common Pleas? Collectors can file in either court. Many clients can defend d in Municipal i Court/ MDC without a lawyer. Common Pleas procedures are more complex and usually require a lawyer.
In Municipal Court Client does not need to file written response, but must attend hearing. Client can file a Notice of Defense. Continuances Should client negotiate a payment agreement? (to discuss later)
In Municipal Court Know what to expect Who is there when client arrives at court Role of the Trial Commissioner Trial before a judge case might be continued if judge is not available lawyer will try to use client to prove collector s case attitudes of judges vary
Defaults in Municipal Court New procedures could limit defaults: Plaintiff is required to attach last statement or last invoice and copy of contract-or-affidavit if documents are not available at time of filing. If affidavit is submitted, Plaintiff must later present documents to trial commissioner. Requirements do not apply if case goes before a judge.
In the Court of Common Pleas Written response is required to avoid default. This will usually require a lawyer. Options are: File Preliminary Objections File Answer Should client negotiate a payment agreement? (To be discussed later)
In the Court of Common Pleas Arbitration hearing is scheduled about 8 months from case filing. b h ll k Arbitration hearing will not take place if there is a default.
Defending Collection Lawsuits Plaintiff the creditor or debt buyer has the burden of proof Must prove: 1. The right to sue. 2. The defendant is responsible for the debt. 3. The defendant owes the exact amount of money claimed in the complaint.
Defending Collection Lawsuits Defendant can win case if: Plaintiff iff does not prove its case Or Defendant has a valid defense (does not owe the money)
Defenses Not a defense: The reason defendant d fell behind on the debt The reason defendant cannot pay debt now
Defense: No Standing Debt buyer must prove that it owns the debt. Must show a continuous unbroken chain of assignments from the original creditor. Must prove the assignment through proper p documentation not simply pya bill of sale of thousands of accounts; it must reference the specific account at issue.
Defense: Statute of Limitations For contracts: 4 years 42 Pa. C.S. 5525 Contracts under seal that are not goods : 20 years 42 Pa.C.S. 5529(b) Cell phone and long distance bills: 2 years 47 U.S.C. 415(a)
Defense: Statute of Limitations i i When does it start? From Default: the date of the missed payment It is Not: Date creditor accelerates the debt Charge-off Date accounting practice, generally 180 days after delinquency Date debt buyer purchases account
Defense: Statute of Limitations Certain actions by consumer can revive the statute of limitations Acknowledgement Doctrine - unequivocal acknowledgment of debt; payment one example Payment must be directed at debt at issue Must be equivalent of promise to pay on demand, not indicating a mere willingness to pay in the future If payment was intended by consumer to be the final amount even if collector believes more is due, SOL continues to run for balance collector is seeking Payment of principal does not revive SOL for interest payments that are disputed Huntingdon Fin. Corp. v Newton Artesian Water Co., 659 A.2d 1052 (Pa. Super. Ct. 1995)
Defense: Statute of Limitations i i Tips for Determining i Date of Default: Examine collector s documents Can be inferred from charge off date (180 days prior) Look at credit report for date of last payment; but do not confuse with charge- off date; also, collectors have been known to re-age a debt by reporting incorrect date of first delinquency
Other Defenses Amount of Debt is Wrong Mistaken Identity Identity Theft Authorized User Only Unconscionability Capacity to Contract Usury Accord and Satisfaction
Impact of a Court Judgment Judgment is a lien on property Creditor has right to have sheriff take property and sell it, but Often does not happen Bank accounts- with exempt income (SS, SSI) cannot be garnished No wage garnishment in PA, except for a few special kinds of debt (child support, student loans, judgments for damage to a rental unit) Most at risk: defendants with nonexempt income
What about collection proof clients? Can be targets for debt collection abuse; scared into signing unaffordable judgments by agreement Risk of frozen bank accounts even with exempt funds Legal representation ti also can help: Remove a source of stress for client Preserve assets for the future (judgment liens) Stop systemic abuse of justice system
When to negotiate a work-out agreement Good if: debt is recent, consumer definitely owes it and can afford to make some payments Bad if: consumer cannot afford to pay it or has higher priority debts; there are defenses
Negotiating a work-out agreement Goal of workout is to negotiate a Lower balance Lower interest rate and fees Lower payments Not to make payments on continually escalating debt which h is what often happens with unrepresented, unadvised defendants
Tips and Tools for Debt Collection Litigation Defense Joseph DeCristopher, Esq. North Penn Legal Services
Creditors Theories of Recovery 1. Contract. 2. Account Stated. 3. Quantum Meruit/ Unjust enrichment.
1. Contract Relatively straightforward in closedend credit transactions Collector must prove: Standing (real party in interest) Existence of a Binding Contract/Terms of Contract Breach: the consumer s default Collector s Damages
1. Contract More complex in open-end transactions where indebtedness varies over time (i.e., credit cards, phone service, cable, etc.) Must show both: The contract, and Proof of the balance (by showing the charges and credits that resulted in balance due)
2. Account Stated A cause of action for an account stated is often used by collectors suing on credit card or open account debts because it does not require proof of the written contract between the parties or an itemization of each individual charge in an open-end end account
Challenging Account Stated Claims Erik Hansen, Esq. North Penn Legal Services
3. Quantum Meruit/ Unjust Enrichment A quantum meruit claim is made out where one person has been unjustly enriched at the expense of another. 1. Plaintiff conferred a benefit on defendant, 2. Defendant accepted and retained the benefit, and 3. It would be unjust for defendant to retain the benefit without payment. Wiernik v. PHH U.S. Mortg. Corp., 736 A.2d 616, 622 (Pa. Super. Ct. 1999). Query: Should a debt buyer who has paid pennies on Q y y p p the dollar for the debt by entitled to claim unjust enrichment as a means of collecting the entire amount on the account?
Quantum Meruit/ Unjust Enrichment Because almost all consumer credit transactions are based on an explicit contract, and because there is no unjust enrichment claim where an express contract exists, Coldwell Banker Philly Rubin Real Estate v Romano, 422 Pa. Super. 319, 329-30, 619 A.2d 376, 381-382 (1993), a creditor generally has no claim for unjust enrichment in a consumer credit transaction. The fact that a collector cannot prove the terms of the contact does not alter the fact that a contract exists.
Usury as a Defense PA Statutes: Loan Interest and Protection Law (LIPL) General usury cap of 6% for loans under $50k, 41 P.S. 201 Unless the lender is authorized by another law to charge a higher rate, 41 P.S. 601
Usury as a Defense PA Statutes: Consumer Discount Company Act: Lenders licensed by the PA Banking Dept. can charge interest at a discount rate that roughly translates into 24% APR (9.50 per $100 borrowed for first 48 months; 6 per $100 borrowed for remaining months) 7 P.S. 6231
Usury as a Defense PA Statutes: Goods and Services Installment Act (GSISA) Retail credit cards for goods and services, not cash advances Interest is whatever parties contract for, except for credit cards for gas purchases which carry a 15% rate cap
Usury as a Defense Defense would NOT apply to national banks because federal banking law preempts state interest rate restricts BUT a PA Banking Dept. interpretive letter regarding the CDCA suggests that PA s interest rate caps will apply to debt buyers
Usury as a Defense Non-bank assignee of credit card account will have to have its own independent authority to charge and receive the interest and fees Question #6, pp 17-20 at 19-20 and Question #8 at 20-21 If the credit card involves cash advances, the GSISA can t be that safe harbor. Question #6, p.19-20
Usury as a Defense Debt Buyer cannot get around these requirements by simply charging no more than 6% on a loan balance. If the loan balance includes interest and other fees that exceed six percent per year, the debt buyer needs to have its own independent authority to collect. (Question #9, p. 21-22 at 22).
Usury as a Defense A cautionary note! Some case law in the 7th Cir. and Indiana and Minnesota state courts that held that debt buyers enjoy the same preemption p as national banks when they buy debts made by national banks (FDCPA manual 11.8.2). Those cases appear to be specific to the states' usury laws, although Judge Posner's economic argument in Olvera v Blitt & Gaines could be persuasive here.
Strategies for Arbitration Hearings Peter D. Schneider, Esq. Community Legal Services
Fair Debt Collection Practices Act: Turning the Tables
Questions?
Acknowledgments National Consumer Law Center s Collection Actions: Defending Consumers and Their Assets Great Resource For Attorneys www.consumerlaw.org
Acknowledgments National Consumer Law Center s Surviving Debt Great resource for consumers and their advocates www.consumerlaw.org