In a disappointing turn, the Seventh Circuit Court of Appeals held on March 11, 2014 that two settlement offers on time-barred debts plausibly violated the FDCPA’s prohibition on misleading communications. The appeal, McMahon v. LVNV Funding, LLC, 2014 U.S. App. LEXIS 4592 (7th Cir., March 11, 2014), consolidated the cases of McMahon and Delgado, two district court opinions which considered whether collection letters, which failed to disclose the debts as time barred, run afoul of the FDCPA. The Seventh Circuit answered in the affirmative.
In McMahon, the text of the letter read as follows:
This account has been listed with our office for collection. This communication is from a debt collector. This is an attempt to collect a debt and any information obtained will be used for that purpose.
An Opportunity: We are pleased to extend to you an offer to settle your account in full for $233.99. This represents a savings of 60% off your balance.
Unless you notify this office within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will assume this debt is valid. IF you notify this office in writing within 30 days from receiving this notice that you dispute the validity of this debt or any portion thereof, this office will obtain verification of the debt or obtain a copy of a judgment and mail you a copy of such judgment or verification. If you request of this office [sic] in writing within 30 days after receiving this notice this office will provide you with the name and address of the original creditor, if different from the current creditor.
Delgado involved a very similar letter which read as follows:
Dear Juanita Delgado,
This company has been engaged by RESURGENT CAPITAL SERVICES, LP, the servicer of the account, to resolve your delinquent debt of $2404.13. Please submit your payment and make your check or money order payable to Capital Management Services, LP, to the above address.
Unless you notify this office within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will assume this debt is valid. If you notify this office in writing within 30 days from receiving this notice that you dispute the validity of this debt or any portion thereof, this office will obtain verification of the debt or obtain a copy of a judgment and mail you a copy of such verification or judgment. If you request this office in writing within 30 days after receiving this notice this office will provide you with the name and address of the original creditor, if different than the current creditor.
Capital Management Services, LP is authorized to accept less than the full balance due as settlement of the above account. The settlement[*8] amount of $721.24, which represents 30% of the amount presently owed, is due in our office no later than forty-five (45) days after receiving this notice. We are not obligated to renew this offer.
For your convenience, this settlement may be made online at: www.cms-trans.com. For other payment options, please contact Capital Management Services ... .
This is an attempt to collect a debt; any information obtained will be used for that purpose. This communication is from a debt collector.
Neither the letter in McMahon or Delgado informed the reader that the debt was time-barred under the Illinois statute of limitations nor did it disclose when the debt was incurred. However, neither letter included a threat of litigation on the debt, a fact that was deemed of the utmost importance in the Third and Eighth Circuits. The Third and Eighth Circuits have both specifically considered whether the sending dunning letters on time-barred debts violates the FDCPA. Both Circuits answered in the negative, unless the letter was accompanied by a threat of litigation. See Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 33 (3rd Cir. 2011); Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767, 771 (8th Cir. 2001).
In considering the rationale of its sister circuits, the Seventh Circuit noted that the FTC has found that nondisclosure of the fact that a debt is time-barred may deceive a consumer in at least two ways; first, because most consumers do not know or understanding their legal rights with respect to the collection of time-barred debt, attempts to collect on such debt may create a misleading impression that the consumer has no defense to a lawsuit; and second, consumers often do not know that in many states the making of a partial payment on a stale debt actually revives the entire debt even if it was otherwise time-barred.
The Seventh Circuit found the position advocated by the FTC to be more persuasive. Importantly, the Court clarified that it is not automatically improper for a debt collector to seek repayment of time-barred debts. However, if the “debt collector uses language in its dunning letter that would mislead an unsophisticated consumer into believing that the debt is legally enforceable, regardless of whether the letter actually threatens litigation (the requirement that the Third and Eighth Circuits added to the mix), the collector has violated the FDCPA.”
As to the McMahon and Delgado letters, the Court found that an unsophisticated consumer who read the dunning letters could have been led to believe that her debt was legally enforceable because they did not state otherwise. “In other words, the letters misrepresented the legal status of the debts, in violation of the FDCPA.” In fact, the Court found that the inclusion of an “offer of settlement” made the letters worse because a “gullible consumer who made a partial payment would inadvertently have reset the limitations period and made herself vulnerable to a suit on the full amount.” Further, the term “settlement” or “offer to settle” is commonly used in a civil lawsuit to describe a communication from one party to the other---- an agreement to end the lawsuit before a judgment is rendered. Thus, “a settlement offer on a time-barred debt implies that the creditor could successfully sue on the debt.”
Given the wide implications of the McMahon decision, now is the time to review your collection letters if you collect on time-barred debt. A debt collector must now include language about the time-barred status--- or possible time-barred status--- of a debt to comply with the law in the Seventh Circuit.
For more information, or for a review of your collection letters, contact Nicole M. Strickler at 312-334-3442 or firstname.lastname@example.org.