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Legal Speak

Neither Borrower Nor Lender Be?

Published February 3, 2010 2:36 PM by Tony DeWitt

In common usage a "shylock" is a money-lender who lends money at an exorbitant rate and who employs collection tactics that are neither legal nor genteel. The term originates from Shakespeare's Merchant of Venice, where the lead character takes security for his loans in terms of a "pound of flesh."

While much has been written recently about credit card companies and big banks that issue credit cards, less has been written about a completely different group of fringe moneylenders who, like Shylock, would like nothing more than to get their pound of flesh.  They are called "third tier" collectors and some background is necessary to understand them.

Let's suppose Tom goes to his local bank and gets a credit card with a $500 credit limit. Over time that limit goes up to $10,000 because Tom makes his payments on time. Then the loss of his job due to layoffs or tough economic times makes it hard for Tom to make his payments.  Most local banks that issue cards will freeze Tom's credit and lower his borrowing ability, but will usually accept less than the full amount if Tom is truly struggling. This is the advantage of dealing with a bank in your own back yard.

Larger "mega banks" that issue credit cards do not have ties to a particular community, and treat every cardholder as just another one of several million customers. So when payments are late, the card gets cancelled, and if payments are not caught up, frequently the matter is turned over to a collection agency if the in-house collectors can't induce payment.

Most collection agencies are run by basically good people who have a tough job:  convince someone without enough income to make ends meet to pay some of that precious income over to them. Many set up payment plans and monitor debtors compliance with frequent encouragement and phone calls. These are good people with a  tough job. Most do it well, and the vast majority conform to the Fair Debt Collection Practices Act, the federal law that governs their conduct.

When a collection agency can't get a debt paid, one of two things happens. If the debt is of an amount that will support a lawsuit (usually more than $1,000), the debtor gets sued in their local court, their limited wages get garnished, and the bank gets its money over time. Often, however, and sometimes even with significant accounts over $5,000, the bank simply writes off the card debt as "bad debt" if it thinks that the chances of collecting the debt from the debtor are very small. The bank no longer attempts to collect the debt, and in many cases the debt is reported to the IRS as income because the debtor is relieved of paying the obligation.

This is where the third (and very ugly) tier of debt collectors come in. These are speculators who are gambling on making huge profits on debts the banks don't want to try to collect. It works like this. Contract law allows a party to assign their rights to a third person.  Thus a bank can assign its right to collect on a credit card account to a third party. So Acme Credit Solutions (to use a fictional name) buys Tom's credit card account (where Tom owe's $3,000 in principal, and another $3,400 in interest) from Big Ol Megabank for the sum of $100. The bank assigns its right to collect to Acme. Even though the bank quit trying to collect two years ago, the new owner of the debt starts sending letters and phone calls offering to settle the debt for half of the $6,400 it says Tom owes. Tom, who now has a new job and is working hard to right his financial ship, is aghast! He doesn't have $3,200 to pay Acme.

After about six weeks of collection calls Acme sends the file to its collection lawyer who decides that $6,400 is worth the time to collect. He sues Tom in the local circuit court.

Most of the people who get sued for credit card debt either never show up for the hearing (where the collector takes a default judgment) or if they do show up, they don't argue about the debt and the collector takes a consent judgment. The effect is the same:  their wages are going to be garnished for a very long time until the debt is paid in full. The only really good thing is that by getting a judgment the debtor now has to pay only 9% simple interest instead of 21% compound interest on the unpaid amount. Still it may be ten years or more before the debt is paid, and another seven before the event is removed from the debtor's credit report. The impact of a bad credit report on future employability, and on the ability to buy reasonably-priced insurance is significant.

But, now lets rewind this story and plug in the facts of an actual case, which because it is still in litigation cannot be disclosed by name.  In many cases there are defenses to paying old debts called statutes of limitation. But because debtors don't know about them, they often make the mistake of making payments.

Karen and Don got a credit card from a major home store while they lived in North Carolina. After a job loss, in 2004, they stopped paying on the card. In 2006 they moved to Missouri and got new jobs and bought a house. One day in 2008 they got a phone call from Acme Financial Group suggesting they would take half of the $5,000 they owed in exchange for full settlement of the debt.    Knowing their rights under the Fair Debt Collection Practices Act, Karen asked the collector to verify the debt.  It sent an account statement, which does not satisfy the requirements of the statute. She again demanded that the collector show that it was authorized to pursue the debt, since she had never had any dealings with Acme.

Then one bright sunny morning in 2008 they had a sheriff show up at their door with a summons. They were being sued in their county for breach of contract. Unlike the other ten thousand people served that year by sheriffs all over Missouri, they hired an attorney.

The attorney quickly ascertained that the debt was barred by the statute of limitations. Although Missouri has a long statute of limitations (five years on a credit card debt, and 10 years on a promissory note), the debt was created in North Carolina, and was breached in North Carolina. The right to sue first arose in North Carolina, and the statute of limitations in North Carolina is three years. The law is clear. If a creditor has a right to pursue an action in one state and fails to take action in that state within the time allowed by law, they cannot sue in another state in order to take advantage of that state's statute of limitations.

Karen's lawyer spotted something else critical in the petition filed by Acme. It did not say when the debt had been created, when the last payment was made, or when the breach occurred. It did not mention that the debt was created in North Carolina.  Instead it said simply that Karen and Don owed the money and needed to pay it. In other words, it was designed from the outset to hide key facts that would have alerted a debtor or the debtor's attorney to a valid defense.

Karen's attorney filed a counterclaim.  A counterclaim is a lawsuit that asserts a claim against the plaintiff - in this case Acme Financial Group - for money damages. Karen's attorney said that Acme had violated the Fair Debt Collection Practices Act by suing for a debt it could not legally collect. The lawyer looked at the court filing system and found that Acme had filed over 1300 lawsuits in the last 18 months against debtors like Karen and Don. So the attorney made the counterclaim a class action complaint.

Across the country every year thousands of consumers are sued on debts that the law would normally prevent from being collected by the statute of limitations. If consumers take no action to challenge the lawsuit, the creditor gets a default judgment and in most cases even if they later hire a lawyer they often cannot get the judgment overturned. It is a collection lawyer's secret:  leave out the dates and collect on the defaults.

The take away from all of this is very simple: if you get sued for any reason, see a lawyer. Even though you may think you owe the money, the law may provide you with a defense that prevents the lawsuit from being successful. Better to pay an attorney $200 than to pay a bank $6,400 you don't need to!

If you are asked to pay money - especially a small amount - in order to stop phone calls, do not do it. Paying money on an old debt - one barred by the statute of limitations - restarts the clock. The collections person may tell you he is trying to just get something in to show your good faith, but he is actually tricking you. Never send money to anyone who is a collector unless and until it can be demonstrated that a court has said you owe the money.

One final word needs to be mentioned. Recently, with the economy having hit a rough patch, one of the few growth industries in this country is debt collection. A collector does not have to be a lawyer. His conduct is regulated by the Federal Trade Commission, but often these collectors do not care about these regulations.

If a creditor tells you he is going to send the sheriff out to arrest you, or threatens you with jail over a debt, that is unlawful and a violation of the Fair Debt Collection Practices Act. If a creditor tells you that the state will use evidence of non-payment of bills to take away your children, that too is a violation. Collectors have been known to threaten to come to a person's house with a gun if payment was not sent. All of these activities are unlawful, and may violate the criminal law depending on the jurisdiction.  If you run into one of these collections persons get a lawyer right away. There is a good chance that a collector who acts like this is going to be paying you money, not the other way around.

And remember: if money worries are ruining your life and souring your relationships, the Consumer Credit Counseling Service and related agencies are there to help.

posted by Tony DeWitt
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Thank you soooo much!!! Your information is veryyyy helpful and has served to ease some of my enormous stress and anxiety over my debt that I cannot afford to payoff at this time.  Thank You for your detailed advice and for taking the time to use example scenarios!!!

Anonymous July 12, 2012 7:28 AM

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About this Blog

    A.L. "Tony" DeWitt, RRT, CRT, JD, FAARC
    Occupation: Attorney
    Setting: Jefferson City, Mo.
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