Debt Collection Laws

January 3, 2019
By Cornerstone Staff

*As of this writing – these are accurate. Cornerstone Support is not responsible for decisions based on this web content – please consult legal counsel before implementing based on information in this guide*

Debt Collection Laws

If you’re in debt collection, then you are well aware of the importance of following the debt collection laws within the industry.

In this article, we’ll break down some of the most important rules within the Fair Debt Collection Practices (FDCPA), as well as why the act was needed in the first place.

Then, we’ll discuss some of the penalties debt collection agencies may incur for failing to follow the FDCPA and how “zombie debt” applies to the act.

Last, we’ll talk about the future of debt collection practices and then end with some of the more interesting and unique debt collection laws by state.

But first, here is a little background on the history of debt collection and debt collection laws over the years.

The History of Debt Collection

Way back in the day — in fact, as far as ancient Babylon — the earliest recordings of commercial debt collecting can be found.

Fast-forwarding to early colonial America, the writ of attachment was issued to ensure the repayment of debts.

This legal document stated the amount of debt a person owed and required the debtor to secure it with their property. If they didn’t have the property to cover the debt, they would be sent to debtors prison.

In addition to being highly unethical, this obviously wasn’t a great way to recover debts.

But, during the industrial revolution, more and more Americans started to own property — in turn expanding the market for secured loans. Unfortunately, during the Great Depression, creditors started to aggressively foreclose on debtors.

As a result, many Americans were left without homes and the banks started to get a bad reputation, causing even wealthy Americans to avoid taking out loans.

It wasn’t until the 1980s that modern collection agencies were created — which turned out to be a much more effective way of handling debts.

Unfortunately, some collection agencies were abusing their power, and as a result, the Fair Debt Collection Practices Act was created.
Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act was then amended in 2010 to help regulate the collections industry to ensure that the process of collecting money from individuals in debt was done so in an ethical manner.

The act outlines the five key reasons for the inclusion of this act, starting with abusive practices:

Abusive Practices

Prior to the act, there was a large amount of abusive, deceptive, and unfair debt collection practices by many debt collectors. A national law was needed — especially because many of these abusive debt collection practices contributed to a number of personal bankruptcies, loss of jobs, and invasions of individual privacy.

Inadequacy of Laws

There were no existing laws and procedures in place to protect consumers at the time.

Available Non-Abusive Collection Methods

Unfortunately, there weren’t many methods outlined for reaching out to those who possessed debt other than these unfair and harmful methods.

Interstate Commerce

Abusive and over-the-top collection practices that are carried on to a substantial extent in interstate commerce and through means and instrumentalities of such commerce. The act was created under the belief that even if an abusive debt collection practice is intrastate in nature, it directly affects interstate commerce.

Overall, the intent behind the laws and guidelines within the act is to ensure that debt collectors who refrain from using abusive debt collection practices are not completely disadvantaged — as well as promote consistent state action to protect consumers against any abuses.

And, of course, to try and eliminate abusive debt collection laws practices across the board.

Who and What Does the FDCPA Apply to?

Where many people get confused about the FDCPA is who exactly the law applies to.

For example, if you owed money to a local contractor for work they did on your home and they contacted you with a reminder to pay them, they are not considered a debt collector under the act, and therefore the laws described in the FDCPA to not apply to them.

However, if the contractor used a third-party debt collector to attempt to get the money owed to them, then the act is in play — as it only applies to third-parties.

The types of debt that are covered by FDCPA include credit card debt, medical bills, student loans, mortgages, and other household debt.

Key Takeaways and Essential Laws of the Act

Where, When, and How Debt Collectors Can Contact Consumers

A couple of the key factors within the FDCPA include when, where, and how third-party debt collectors can contact debtors.

As outlined explicitly in the act, debt collectors are not allowed to contact a debtor before 8 am and after 9 pm.

“In the absence of knowledge of circumstances to the contrary, a debt collector shall assume that the convenient time for communicating with a consumer is after 8 o’clock antemeridian and before 9 o’clock postmeridian, local time at the consumer’s location” (S. 805)

In addition to this, the debt collector should avoid contacting a debtor (or consumer) at times or places that are inconvenient to the consumer.

For example, if the consumer’s place of employment does not allow personal calls and the debt collector is aware of this fact, then they should not be contacting the consumer during the hours that they are at work.

If the debt collector is made aware of the fact that the consumer has an attorney and has knowledge of, or can easily ascertain their name and address — or other information that’s needed to communicate with them — then the collector must contact the attorney first.

If the attorney does not respond in a reasonable period of time — or they have given consent to direct communication with the consumer — then the collector may contact the consumer.

Unfair Practices

The following are considered unfair or “unconscionable” means of collecting debt from a consumer, as outlined in S. 808

Collecting any amount of money, unless such amount is authorized by the agreement creating the debt or permitted by law.

The acceptance by a debt collector from any person of a check or other payment instrument postdated by more than five days unless such person is notified in writing of the debt collector’s intent to deposit such check or instrument not more than ten nor less than three business days prior to such deposit.

The solicitation by a debt collector of any postdated check or other postdated payment instrument for the purpose of threatening/instituting criminal prosecution.

Threatening to deposit or actually depositing any postdated check prior to the date on such check.

Causing charges to be made to any person for communications by concealment of the true purpose of the communication. Such charges include, but are not limited to, collect telephone calls and telegram fees.

Threatening to take or taking any nonjudicial action to effect dispossession or disablement of property if:
there is no present right to possession of the property claimed as collateral through an enforceable security interest;
there is no present intention to take possession of the property; or
the property is exempt by law from such dispossession or disablement.

Communicating with a consumer regarding a debt by postcard.

Penalties For Violation of the FDCPA

If a debt collector fails to comply with the provisions outlined in the act, they are liable to the consumer and have to pay for the damages of their actions.

This includes the following:

  • The debt collector must pay for any actual damage sustained by such person as a result of their failure to comply.
  • In the case of any action by the individual, such additional damages as the court may allow — but not exceeding $1,000 or
  • in the case of a class action, (i) such amount for each named plaintiff as could be recovered under subparagraph (A), and (ii) such amount as the court may allow for all other class members, without regard to a minimum individual recovery, not to exceed the lesser of $500,000 or 1 per centum of the net worth of the debt collector; and in the case of any successful action to enforce the foregoing liability, the costs of the action, together with a reasonable attorney’s fee as determined by the court. On a finding by the court that an action under this section was brought in bad faith and for the purpose of harassment, the court may award to the defendant attorney’s fees reasonable in relation to the work expended and costs.

Keep in mind, a debt collector may not be held liable in any action brought under this subchapter if the debt collector shows by a preponderance of the evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.

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Zombie Debt – What it is and Why it Matters

Recently, a new form of debt collectors has started to emerge within the industry.

If a consumer has debt that a company eventually wrote off as “uncollectible” — either due to not being able to reach the consumer or simply not getting them to pay — sometimes another debt collector will purchase that debt for a small percentage from the original company.

This is known as “zombie debt,” as the debt has seemingly risen from the grave to become relevant once more.

This can actually be a profitable business model because a zombie debt collection pays such a small amount for the original debt. For example, if an original debt was $15,000 and they paid 5% ($750) for it, then getting the debtor to pay even a small portion of the debt would be profitable.

However, if the debt is too old (past 6 years), then it has passed the statute of limitations and the debtor is no longer legally required to pay it. In fact, under the FDCPA, a debtor cannot be sued to collect the debt after six years and after seven years, the debt must be removed from credit reports.

Some states even have a shorter statute of limitations on debts.

When it comes to this kind of debt, the collector who has purchased the debt must provide the consumer with written proof of the debt’s validity or judgment the consumer — in addition to the name and address of the original creditor if the debt was resold.

The FDCPA clearly states that the new debt collection agency must provide the consumer with all of this information, or they may be subject to fines.

Future of Debt Collection (Robocalls, Text, And Emails)

If you’ve been paying attention to the latest workings of the FCC, you’d have seen that the Commission was intent on driving robocalls away from American consumers’ phones. In fact, in the summer of 2019, the FCC gave mobile network providers more power to block robocalls from reaching consumers.

However, for many collection agencies, this may be a problem,

“We strongly support tailored efforts to combat illegal and fraudulent robocalls which are a huge problem for all of us who are consumers,” Leah Dempsey, ACA International’s senior counsel and vice president of federal advocacy, said in a statement to Fast Company.

“However, consumer harm results when legitimate business calls are blocked or mislabeled and people do not receive critical, sometimes exigent information they need. We have urged the FCC to provide guidance on how to immediately correct any faulty blocking or mislabeling of calls.”

And therein lies the issue — as many debt collection calls may end up being blocked despite their legality.

However, the Consumer Financial Protection Bureau has recently released a proposal to allow debt collectors to text and email as much as they want on a weekly basis, meaning that this could be a new avenue for collectors to reach consumers.

This proposal has gotten pushback from consumer advocates, so it is unclear at this time what will end up happening.

One thing is for certain, as new technologies become available, debt collection advocates and consumer advocates will both be going back and forth on establishing the legality of certain devices — as well as how often — for contacting consumers.

If you’re in the debt collection industry, it’s crucial that you pay attention to what’s going on, as new proposals will continue to be introduced each year.

Unique and Interesting Laws State by State

While the FDCPA affects every collection agency, when it comes to getting the proper licensing for your agency, it is left up to the states.

Here is the current list of states that require licenses, ones that do in certain circumstances, and states that do not require licensing for debt collection.

License Required

Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, City of Chicago, Indiana, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Jersey, New Mexico, New York City, City of Buffalo, North Carolina, North Dakota, Oregon, Puerto Rico, Rhode Island, South Dakota, Tennessee, Utah, Washington, West Virginia, Wisconsin, Wyoming.

In Certain Circumstances

Kansas, Louisiana, New Hampshire, Ohio, Pennsylvania, Texas

No License Required

California, Georgia, Kentucky, Mississippi, Missouri, Montana, New York, Oklahoma, South Carolina, Vermont, Virginia

Contact Cornerstone Support to Make Sure That Your Agency is Up-to-Date

Because each state has the right to enact its own set of collection licensing requirements, it can be extremely difficult for agencies that want to be compliant nationwide to do so on their own. In order to ensure that your agency survives this licensing gauntlet, it’s imperative that you team up with a licensing support company — otherwise you risk costly misunderstandings or accidental oversights in the process.

Hiring Cornerstone Support to manage your licensing implementation and maintenance allows your business to focus on the tasks that make it successful as Cornerstone’s experts manage the complexity of implementing and maintaining licenses.

Here at Cornerstone Support, we offer a three-step process to ensure that you are compliant with the licensing requirements for the states you’re operating in.

Develop a Licensing Strategy

First and foremost, we’ll work with you to develop a strategy to get you on your way to meeting all your licensing requirements. This will involve audits, consulting, and gap reports to develop a strategy to protect both you and your clients while maximizing profits. Without a strategy, you’re likely to miss key requirements which can come back to haunt you in the form of heavy fines and possible termination of your business.

Implement the Strategy

The next step is to implement the strategy. We help you through this process by walking your company through new licenses from the initial concept to the full certificate based on debt collection laws. Because every collection agency is different and is operating in different states, we tailor our services to fulfill your needs, leaving no stone unturned.

Maintain the Licenses

Our job doesn’t stop once you receive your licenses. Your licenses must be constantly renewed and we offer a full-service license renewal team. Why is this important for the success of your agency?

While we keep track of renewal deadlines and other details, you can focus on your business to ensure things are running smoothly. When your company encounters a corporate change, lean on Cornerstone to properly report/relicense with all the jurisdictions impacted by the change.

Since 1998, thousands of collection agencies have called upon the services of Cornerstone Support for all their licensing needs. We have extensive experience within the industry and you can rest assured that we’ll help you navigate the tricky and sometimes overwhelming process of seeking licenses for your agency.

Our services allow you to focus on the tasks that make your business successful while our experts handle the difficult processes to implement and maintain your licenses.

To get started, contact us today!

We are excited to hear from you and learn more about your organization and how we can help take your agency to new heights!


Cornerstone Staff

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