Eliminating the Collection of Time-Barred Debt: Where is the Consumer Protection?

Joann Needleman

The recent frenzy regarding the collection of time-barred debt has gone from the sublime to the ridiculous. What is highly touted as consumer protection is in actuality greater consumer harm. Allowing consumers to avoid financial obligations that they do not otherwise dispute is not only bad social policy, it further stagnates credit availability thus denying consumers the opportunity to improve their financial well-being.

The latest rub comes from the National Consumer Law Center in the report, Zombie Debt: What the CFPB Should Do about Attempts to Collect Old Debts. In it, the NCLC concludes that the collection of ALL time-barred debt should be banned, including requests for payment outside of litigation.

The NCLC supports this proposition mostly by citing the FTC’s report, The Structure and Practices of the Debt Buying Industry (Jan. 2013), and a New York Times Article, “Paper Boys: Inside the Dark, Labyrinthine, and Extremely Lucrative World of Consumer Debt Collection.”

The FTC report was clear that no conclusions were made about the accuracy of the information obtained when a debt was purchased.  Furthermore, the FTC acknowledged that a debt beyond the applicable statute of limitation does not distinguish the debt.

As for the New York Times article, a salacious look into the debt buying world of Buffalo, NY makes for great reading but is hardly evidentiary support to otherwise eliminate a creditor’s ability to seek repayment of a legitimately owed debt.

The Consumer Financial Protection Bureau has been critically looking at this issue in various symposiums, in amicus briefs and in the Advance Notice of Proposed Rule Making for Debt Collection.  They, unlike the NCLC, have not called for an outright ban as they have no authority to do so even under Dodd-Frank, which authorizes the bureau to ensure that all covered persons or service providers are not committing unfair, deceptive, or abusive acts or practices.

What statute of limitations applies derives mostly from state statute, an area where the CFPB, and the NCLC for that matter, have no authority. Except for Wisconsin and Mississippi, these statutes do not make it unlawful to collect a time-barred debt, instead when the limitations period expires only the judicial remedy of a judgment becomes unavailable. The creditor’s right to demand payment still remains. And most of these statutes are not self-executing. Only a court can declare the limitations period has expired.

The common ground is that no one wants to see nor advocates for any consumer to be confused or taken advantage of when it comes to their rights regarding time-barred debt. However, that the NCLC suggests an outright ban on the collection of time-barred instead of disclosure takes the decision-making away from the consumer. In the alternative, the NCLC suggests that the only appropriate disclosures should state something to the effect that, “Paying this debt will not remove it from your credit report, but will only show that the account has been paid” or “Paying this debt may not improve your credit record or score.” Such statements are simply irresponsible and suggest that maybe the NCLC really does not want to see an improvement in consumers’ lives.

A recent study by the Pew Charitable Trusts suggests, among other things, that the delayed recovery in consumer spending is probably a reflection of constrained consumer credit. The NCLC fails to recognize that we all live in a credit eco-system and their failure to acknowledge that fact makes their suggestions and recommendations ironically harmful to those they are trying to protect. Decisions on whether to extend credit is based upon past credit history. A past credit history that shows a lack of payment means either a lack of credit or a very high cost of credit.With credit comes opportunity and responsibility and the NCLC suggests neither.

Making the informed decision to resolve one’s legitimate debts, no matter how old, may be the single most important decision for any consumer in order to achieve upward mobility.  Providing excuses that ring hollow is simply not consumer protection.

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

Joann Needleman is Vice President of Maurice & Needleman, P.C., where she is the Managing Attorney of the firm’s Pennsylvania office. Joann has extensive litigation experience in state and federal courts, successfully defending creditors against claims brought under the Fair Debt Collection Practices Act, Fair Credit Reporting Act and, in Pennsylvania, under the Fair Credit Extension Uniformity Act. She provides counsel, consultation and litigation services to financial institutions, law firms and debt buyers throughout the country. Needleman also currently serves as the elected President of the National Association of Retail Collection Attorneys (NARCA).