Court Ruling Impact - Debt Collection Settlements Are Dead; Long Live Litigation

Joann Needleman

The recent case of McMahon v. LVNV Funding et al, 2014 U.S. App. LEXIS 4592 (7^th Cir., 2014) held that a letter from a non-attorney debt collector on a time barred debt was false, deceptive and misleading because it used the word “settlement.”  “Settlement,” the court reasoned, implied a threat of litigation, even though the letter made did not contain an express threat.

Although the issue of resolving disputes dates to the caveman, I think we have come a long way from clubbing our adversaries.  Thinking back to my law school days, I recall my professors telling me “litigation involved getting prepared for the settlement conference.” I cannot recall a court room I’ve appeared in where a judge does not ask “where are we with settlement?” or “what are we doing to settle the case?”

Before McMahon, a debt collector’s use of statements like “seizure,” “fines,” “costs,” “penalty,” “suit,” or “legal action” were clear signs of threatened litigation.  Now mere silence along with a desire to resolve a legitimately owed debt has become actionable under the Fair Debt Collection Practices Act (FDCPA).

The Seventh Circuit Court of Appeals, by adopting the joint amicus brief filed by the Federal Trade Commission and Consumer Financial Protection Bureau in McMahon, has set a terrible precedent. McMahon not only discourages settlement, it makes an offer to settle a defaulted debt the equivalent of a threat of litigation.

Discouraging settlement of disputes goes against the basic principles of a civilized society. A great man once said, “Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser — in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man.” Abraham Lincoln, July 1, 1850.

The conclusion to be made here is — why bother? Why bother working with consumers to assist them along the better path of stabilized credit and financial security? Why make any effort to settle before litigation when a court deems it the same as threatening litigation? Instead, just sue.

This post originally appeared on the Consumer Financial Services Blog, run by ARM defense firm Maurice & Needleman.