Chapter III. Fair Debt Collection Practices Act (FDCPA)

• Jurisdiction: United States

III. Fair Debt Collection Practices Act (FDCPA)

One of the most effective pre-bankruptcy planning tools is effective debt collection. When customers do not pay, companies have a range of options in collecting debt. A first step is usually to try to collect debts internally or through third parties that collect in the name of the creditor itself. This may involve simply mailing a reminder that money is owed or placing a call when an account is in delinquency. Where internal efforts fail, companies often turn to third-party lawyers and debt collectors.

Given how common this practice is, it is no surprise that debt collection is a big industry in the U.S. Nearly 300,000 employees work as collectors for creditors or third-party debt-collection agencies.¹ Third-party debt collection is an $11.4 billion industry that employs more than 130,000 people across approximately 8,500 collection agencies in the U.S.² According to a CFPB survey of U.S. consumers, about one-third of consumers with credit files — or about 70 million Americans — were contacted by a creditor or third-party debt collector attempting to collect a debt in the past year.³

To avoid common pitfalls, companies should be thoughtful in determining how to collect debt. Practically, a company should prepare all the necessary documents before sending a debt out for collection so that the debt collector or attorney has all the necessary information and can effectively build a case. In particular, a company should gather all terms and conditions agreed upon by the customer, all invoices, proofs of delivery, and any communication about the order or the debt with the customer.

The company should also be aware that third-party collectors are subject to particular scrutiny from regulators. The primary law that governs debt collectors is the Fair Debt Collection Practices Act (FDCPA).⁴ This chapter summarizes the key provisions in and applications of the FDC-PA with the goal of explaining the legal constraints within which debt collectors operate. As described more fully below, the FDCPA aims to eliminate abusive practices in the collection of consumer debts, promote fair debt collection, and provide consumers with an avenue for disputing and obtaining validation of debt information to ensure its accuracy. The Act creates guidelines under which debt collectors may operate, defines the rights of consumers, and prescribes penalties and remedies for violations of the Act.

A. Which Debts Are Covered?

The FDCPA applies to consumer debt. The term "debt" is defined under the statute to mean any "obligation of a consumer 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."⁵ It does not apply to the collection of corporate debt or to debt owed for business or agricultural purposes. Because a covered debt must arise from a "transaction," personal debts arising out of child support, tort claims or personal taxes are also excluded.⁶

B. Who Is Covered?

To be liable under the FDCPA, a person must be a "debt collector." A "debt collector" is defined under the Act as any person who regularly collects, or attempts to collect, consumer debts for another person or in-stitution.⁷ The Supreme Court recently held that the law does not apply to a company that purchases the debt of another and then collects on it.⁸The FDCPA was limited to third-party collectors of debts because, unlike creditors, "who generally are restrained by the desire to protect their good will when collecting past due accounts," independent collectors are likely to have "no future contact with the consumer and often are unconcerned with the consumer's opinion of them."⁹

The statute also applies to attorneys, who "regularly," through litigation, try to collect consumer debts.¹⁰ Attorney debt collectors have been found to warrant closer scrutiny under the FDCPA. This is because courts have noted that "[a] debt collection letter on an attorney's letterhead conveys authority" and consumers are inclined "to more quickly react to an attorney's threat than to one coming from a debt collection agency."¹¹ Law firms also may restrain an attorney's actions, as firms have been found to be jointly liable for the actions of an attorney working for the firm.¹² Thus, many companies choose to use attorneys for debt collection in order to ensure that their collectors will be acting in full compliance with the FDCPA.

C. Affirmative Disclosure Obligations

A debt collector must identify himself as a collector. He must disclose in the first written communication with the consumer that "the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose" and in all other communications that the communication is from a debt collector.¹³

The...