Debt Collection Laws Explained
Debt collection activities are governed by a patchwork of federal, state, and even local laws. The Fair Debt Collection Practices Act or FDCPA is the primary federal law governing debt collection. Among other things, the FDCPA prohibits debt collectors from harassing, abusing, or otherwise engaging in unfair means to collect debts. The FDCPA also provides certain protections for debtors, such as the right not be harassed or intimidated by a collector, to dispute the amount of the debt, and to ask that the debt collector cease all communication with the debtor .
Other applicable laws may include the Fair Credit Extension Uniformity Act (FCEUA), Revised Uniform Consumer Credit Code (UCCC), credit consumer protection acts, the Unfair Trade Practices and Consumer Protection Acts, and various statutes governing limitations on debt collections and garnishment. Many of these laws apply only to "debt collectors" which may not include law firms collecting debts on behalf of clients.
How Law Firms Fit into Debt Collection
Many law firms and lawyers act as debt collectors for creditors, some as their primary business. Smaller law firms may implement a "debt collection" division to maximize compensation received on defaulted debts.
Lawyers who engage in the debt collection industry and law firms who operate a collection division must be cognizant of state and federal law. The Federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692, et seq., is the consumer protection statute that regulates debt collection practices. Certain states, like New York, have their own debt collection statutes. See, e.g., N.Y. Bus. & Prof. Law, Art. 29-H, § 801, et seq. Lawyers who practice debt collection must be cognizant of those laws in order to avoid civil penalties.
The FDCPA defines a "debt collector" as "any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts . . ." 15 U.S.C. § 1692a(6). In 1986, the Supreme Court clarified who qualifies as a "debt collector" subject to the FDCPA. In Heintz v. Jenkins, 514 U.S. 291 (1995), the Court held that a lawyer who regularly engages in debt collection activities falls within the realm of the FDCPA:
Our interpretation . . . avoids a "loophole" that would frustrate the FDCPA’s ability to curb the abusive collection practices of creditors and their attorneys alike. . . . The FDCPA’s purpose of curbing abusive collection practices would be thwarted if the law allowed a creditor to avoid the law’s proscriptions by hiring as its lawyer a full-time debt collector.
Though it is unclear whether the FDCPA is a strict liability statute (i.e., a violation of the FDCPA occurs regardless of intent), the Supreme Court’s language suggests that a "technical violation" of the FDCPA can serve as the basis for an FDCPA violation. Heintz, 514 U.S. at 295. There is no FDCPA "litigation exemption" for law firms and lawyers.
Not every act of a lawyer or law firm constitutes debt collection activity. For example, a law firm whose primary function is not debt collection but which occasionally or incidentally collects on a debt does not fall within the ambit of the FDCPA. In Taylor v. Perrin, Landry, deLaunay, Dartez & O’Byrne, L.L.C., 103 F.3d 1232 (5th Cir. 1997), the Fifth Circuit Court of Appeals held that a law firm did not qualify as a "debt collector" under the FDCPA when its representation did not arise "solely from the prospect of collecting a debt." Id. at 1236; see also Kaltenbach v. Shearson Lehman Bros., Inc., 961 F.2d 572, 577 (5th Cir. 1992) ("If a law firm’s ‘principal purpose’ is to handle claims other than debt collection, then it is not a ‘debt collector.’").
Debt Collectors and Lawyers: What’s the Difference?
The decision of Outreach v. Sultanci, decided August 27, 2012 by the Seventh Circuit Court of Appeals, gave us another opinion on whether law firms can properly be considered debt collectors. But before jumping to whether a law firm is actually a debt collector, we must consider that debt collectors and lawyers have different roles in our society.
It is common for large commercial businesses to handle large collections matters internally to reduce the costs of hiring a third party debt collector or law firm. However, it is the common practice in consumer collections to outsource collections matters to third party debt collectors or law firms. For example, a consumer receives a debt collection letter from a law firm regarding an alleged delinquent account. When the consumer makes a payment to the law firm it is most likely applied to the account. The law firm mails out additional dunning letters seeking to collect the consumer debt.
When a law firm acts as a third party debt collector there is more oversight by the legal profession to ensure there are not abuses of consumers or violations of consumer protection statutes such as the Fair Debt Collection Practices Act (FDCPA). When a third party debt collector pursues collection of a consumer debt, the debt collector is monitored (or should be) by the CFPB and consumer law attorneys to ensure there are no violations of the FDCPA. When a law firm pursues collection the debt collector is subject to the duty of competence and diligence under the ABA Model Rules of Professional Conduct. Additionally, all collections stunt at the law firm to a consumer must be monitored by a licensed attorney. In Illinois, the attorney must review every form letter or email sent to a consumer.
So most consumer law attorneys would prefer that any consumer matter be handled by a law firm under the premise that lawyers are more competent to handle any potential collection matter. When third party, nonlawyers are used to handle consumer collections there is greater potential for abuse. Such abuse can come in the form of aggressive letters or emails to consumers without follow-up from a licensed attorney.
Ultimately, it is the consumer’s choice whether his or her debt is handled by a lawyer or non-lawyer debt collector. Though neither the CFPB, the FTC, or any state attorney general will draw a line in the sand on what is a proper length phone call when a debt collector calls, it is always better when a consumer knows their collections case was handled by a firm subject to the rules of ethics, including the duty of competence. A consumer can feel confident seeking representation at a law firm where all debt collection tasks requiring an attorney’s decision are reviewed by a licensed attorney. No one can say that is not an ethical consideration.
How Lawyers Need to Comply with Debt Collection Laws
Compliance with Federal and State Law
Should a law firm use the collection process as an extension of its practice, it becomes subject to the requirements of the Fair Debt Collection Practices Act (FDCPA), the collection laws of each state in which the firm collects, all fifty-one jurisdiction-by-jurisdiction rules for attorney conduct, and much more. Fortunately, most, if not all of these requirements, can be satisfied through the careful use of generically drafted documents and approved collection agencies.
There are a number of states that require collection lawyers to register with state administrative offices. Maine requires registration with the Maine Bar, Maryland and New Hampshire require registration with the Attorney General’s Office of Consumer Protection, Missouri requires registration with the Department of Insurance, and North Carolina, Pennsylvania, and South Carolina, among others, require registration with their Courts. All states have their own rules delineating what conduct is considered unethical, if not outright unprofessional for attorneys and law firms.
The ethical rules for attorneys must be reviewed by any law firm planning to engage in debt collections, whether directly by the firm or through a collection agency (which are also required to be licensed and bonded). The relevant ABA Model Rules are the Model Rule of Professional Conduct 1.2(a), which requires the lawyer to "abide by a client’s decisions concerning the objectives of representation." More specifically, Model Rule of Professional Conduct 1.3 requires that "[a] lawyer shall act with reasonable diligence and promptness on behalf of a client." Even a cursory review of the new Model Rules of Conduct reveals that there are a myriad of professional responsibility issues that attorneys are going to run into if they choose to engage in debt collection, such as the model rules regarding competence (Model II 1.1), Scope of Representation and Allocation of Authority Between Client and Lawyer (Model Rule 1.2), Confidentiality of Information (Model Rule 1.6), Conflict of Interests: Current Clients (Model Rule 1.7), and Conflicts of Interest: General Rule(Model Rule 1.9).
If a law firm accepts fees for legal work performed for a creditor client in the collection action, then the law firm may not receive a contingent fee from the creditor for collections on the delinquent account. Certain states go even further, and will not allow attorneys to receive any fee for any work done in a collections practice, unless in certain specified circumstances where providing free legal services to debtors in need is expressly prohibited.
In many states, only licensed collection agencies can collect past due accounts. In the jurisdictions where attorneys cannot collect past due accounts, a law firm can refer all of its past due accounts to collection agencies like Law Offices of Barry C. Burak, P.C., that are adept to dealing with the unique legal issues surrounding collections for law firms.
Pros and Cons of Firms as Debt Collection Lawyers
For all the advantages a law firm has over a traditional collection agency, there are certain considerations a creditor should weigh. Law school trains lawyers in specific areas of the law, so unless the creditor is sure a collection attorney practices Fair Debt Collection Practices Act law, that attorney may not be the best choice. A traditional collection agency specializes in debt collection and must comply with federal and state FDCPA laws at all times. To that end, they are usually covered by insurance policies that cover collector’s liability and often work with licensed attorneys. They also concentrate exclusively on collecting debts, which can give them an advantage concerning nationwide collections and the most up to date policies that result. Lawyers, on the other hand, tend to cross various areas of the law, so often they may not be as knowledgeable in the FDCPA and lender laws. Also, attorneys are usually covered by their firm’s malpractice insurance, so that protection may or may not be available to a creditor. An experienced law firm debt collector will know how to leverage the FDCPA to encourage payment, but while they have greater negotiating power than a traditional agency, they can also cost more, too. Some organizations have a philosophy about whether or not to hire a lawyer for any reason. In some cases, they may think that they spend money on a lawyer and in the end; they still have to write-off the debt. In other situations , another law firm may have the client as a debtor. Regardless of the hiring criteria, a creditor should consider the advantages of employing a law firm as a debt collection agency. The law firm’s training goes beyond normal collection. They also help with discharging debts in a bankruptcy. This ensures that the creditor is not being held liable under the state law. The attorney is also able to determine if your bankruptcy petition is an obvious tactic to avoid paying the debt. The creditor can be assured they get the best plan for recovering the money owed and will be legally protected from a bypass. A collection attorney will have a relationship with the judges and trustees. Many of these collection attempts are within the legal system. The best law firms are familiar with how different judges and trustees react and respond to various collection strategies. Law’ is always changing. Because the law changes frequently, law firms that are always in court proceedings have better collection strategies. Additionally, the creditors have someone familiar with every type of collection strategy, and lawyers have the connections to arrange for the best approaches per debtor. Many collection attorneys have extensive negotiations experience. Collection agencies often send their clients to attorneys for negotiation processes. The personnel at these collection agencies receive formal and informal negotiation education. Attorneys have access to additional support staff and resources that agencies may not have on hand.
What Happens to Debtors When Firms Collect Debt
Law firms found to be operating as debt collectors, either primarily or secondarily, are still subject to many provisions of the FDCPA; The Federal Trade Commission (FTC) has gone after law firms engaged in debt recovery and collection activity. For example, the FTC brought a case against several law firms that sent demand letters on behalf of payday lenders. The letters stated that if no payment was made by a certain date, further action could be taken against the borrowers. In this case, the FTC alleged that these letters were debt collection attempts and the law firms acted as debt collectors. These (and other cases) show that law firms acting as debt collectors risk being subjected to practice act standards for debt collectors.
Specific statutes apply to attorneys in the context of debt collection activity to ensure that debtors are adequately protected. While law firms may have more institutional knowledge about debt collection than a collection agency, they have been accused of using the same type of illegal practices. The AGs Office has also prosecuted numerous cases where non-attorney employees working for a law firm from appearing to be debt collectors.
Case Examples of Law Firms as Debt Collectors
The role of law firms as debt collectors has been tested in several cases, with varying outcomes. In one widely cited case, a class action was filed against the Muir Law Firm in Florida for violations of the FCCPA. The plaintiffs alleged that the law firm had not disclosed its status as a law firm and was collecting for a fee only. The court denied the law firm’s motion to dismiss the class action, stating that "the mere fact that a client has delinquent accounts does not justify a blanket statement that the law firm is acting solely as a collection agency, as opposed to being a law firm collecting for its clients." Muir v. Paul, 2003 Fla. App. LEXIS 20731, at *7 (Fla. Dist. Ct. App. Dec. 29, 2003). (The case ultimately settled).
Following Muir, the Florida federal district court in McCorriston v. L.W.T. Corp., 2009 U.S. Dist. LEXIS 96932 (M.D. Fla. 2009) (McCorriston II) adopted language in a law review article articulating a "two-prong test" for determining when a law firm is protected from becoming a debt collector under the FDCPA. This "two-prong test" involves (1) whether the firm is a law firm, and (2) whether the law firm was formed for the purpose of collecting debts. This decision in McCorriston II did not consider the Muir decision, nor did it expressly analyze the predecessor to the now-repealed safe harbor provision of the FCCPA. Accordingly, McCorriston II created a new test for determining when a law firm is protected from becoming a debt collector under the FDCPA. McCorriston II, 2009 U.S. Dist. LEXIS 96932, at *8.
More recently, in Weston v. Flagstaff Group, LLC, the U.S. District Court for the District of Massachusetts weighed in on the issue, noting that "most (but not all) courts have held that a law firm is not necessarily excluded from the definition of a debt collector under the FDCPA merely because it is a law firm or because it is hired by a creditor to help collect a debt." 2015 U.S. Dist. LEXIS 63325, *10 (May 15, 2015). Weston noted that "[i]n order to fall within the exception for debts ‘incurred in the ordinary course of business,’ however, the debt collector must be acting for its ‘client’ in seeking to collect the debt, not for itself." Id. at *12, citing McCorriston I, 321 F. Supp. 2d at 1179. Weston also considered McCorriston II’s two-prong test discussed above. It found that, "[i]n this case, the phone call at issue was made at the behest of MCM, on behalf of MCM, and in MCM’s interest. . . . Id. at *13. The court concluded that "[t]he fact that MCM and [the attorney] entered into a ‘legal services agreement’ and that MCM paid the firm at its hourly rates and even shared contact information with the firm do not change the fact that the firm was not acting in the interests of its own legal clientele – MCM – when the firm’s representative called Weston." Id. at *14-15. Thus, the defendant firm was not "exempt" under the two-prong test because it was not acting for its client – MCM – when the firm’s representative called Weston. Id. at *15.
Summary: Key Factors to Count On
In this article, we discussed the FDCPA in detail and addressed the key aspects of the Statute. We also examined the extent to which a law firm can legally act as a debt collector under the FDCPA. With its exceptions to the definition of a debt collector under the FDCPA and current FCC Cases and Orders addressing whether law firms may be debt collectors, the state of the law is far from clear. The bottom line is that the exceptions to the definition of a debt collector under the FDCPA and the FCC’s decisions to date suggests that law firms are, in fact, subject to the requirements of the FDCPA when collecting debts on their own behalf. However, law firms should consider taking steps to limit their exposure to liability under the FDCPA. For example , the law firm should only collect its own accounts receivable aged more than 30 days on its own behalf. By collecting only aged accounts receivable, the law firm is less likely to be acting as a debt collector. Moreover, the law firm should immediately outsource the collection of any aged accounts receivable over 60 days from initial placement. Collecting aged accounts receivable in this manner will provide the law firm with a consistent practice and will ensure that it does not stray into the realm of debt collector liability. In addition, law firms should consider, among other things, they may use their attorney status to assist them in collecting aged accounts receivable.