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Why Collecting Time-Barred Debts Hurts Consumers


The FDCPA Defense Blog recently published a post decrying the Consumer Financial Protection Bureau and FTC's position regarding debt collectors attempting to collect on time-barred debts (debts that are too old to sue on).

In short, the federal agencies tasked with enforcing the Fair Debt Collection Practices Act and other consumer protection statutes think that collecting time-barred debt is a bad thing for consumers.

I agree with the CFPB and the FTC.

The position has a bit more dept than that, but the above is the gist. If debt collectors disclose that the debt is time-barred, it's a good first step. I believe (and the CFPB and FTC agree) that debt collectors need to also disclose the effect of voluntarily paying old debts.

The FDCPA Defense Blog rolls out the same arguments that we see whenever regulators want to regulate the industry that they are tasked with regulating.

1. "The CFPB wants consumers to make informed decisions not to pay their debts"

This is a classic example of using charged language to set the tone of the conversation. Most people want to pay debts that they owe. Consumers aren't an army of deadbeats that want to steal money from creditors. What the CFPB wants is for consumers to make informed decisions regarding their financial affairs. (See how that charged language cuts both ways?)

The CFPB and the FTC have done extensive studies regarding the debt collection and debt buying industries. 99% of the time, if a debt is too old to collect, it is no longer held by the original creditor. There are companies that purchase charged-off debts from account originators. These debt buyers rarely have enough documentation to prove what is owed on the purchased accounts. More often than not, the accounts are sold with no assurances as to the quality of the accounts sold.

This is a big problem. Should consumers pay debts that they owe? Yes. Should they pay any entity that shows up, claiming it owns the underlying debt? No, not without credible proof that the debt is actually owed. The CFPB and FTC want debt buyers to disclose when a debt is time-barred because making a payment on that debt re-starts the statute of limitations on the debt. In some states, like Illinois, simply promising to pay can renew the statute of limitations.

Once the SOL is revived, the debt buyer can sue to collect the debt. In Illinois, if a judgment is obtained, that judgment will collect interest at a rate of 9%. Wages can be garnished. Bank accounts can be garnished. Judgment liens can be filed against the consumer's home. Knowing that paying on a time-barred debt can expose the consumer to some rather severe legal consequences is of the utmost importance if a consumer is to make an informed decision regarding his or her legal rights.

2. People defaulting on debts makes credit more expensive for everyone.

Once a debt is time-barred, the original creditor no longer holds that debt. Debt buyers do not issue credit. If a debt buyer doesn't collect one cent on an account, that does not increase the cost of credit for anyone. In fact, any "increased cost of credit" was already incurred when the original creditor charged-off the account. Moreover, the charge-off may result in a tax break.

Arguing that debt buyers not collecting money increases the cost of consumer credit is absurd. Debt buyers pay credit originators cash for the accounts that they purchase. That money offsets (although not fully) the uncollected funds that the creditor charged-off.

The CFPB and FTC aren't suggesting that consumers shouldn't pay their debts. They are, however, suggesting that consumers should know all of the facts about the legal status of a debt and the rights that they may waive by paying that debt. Surely, some consumers will take advantage of offers to settle time-barred debts. Many of those offers include steep discounts on the balance allegedly owed. However, asking consumers to take actions without fully understanding their consequences is unconscionable.

This is not a situation where less information is good; that's just what the creditor defense industry wants you to think.