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Debt Buyers Beware! Post-Charge Off Interest May Lead to Class Action Liability

Tempting for many debt purchasers is the prospect of adding post-charge off interest or fees to a purchased debt. After all, upon acquisition of a debt a purchaser legally “stands in the shoes” of the predecessor creditor. Meaning, the buyer generally inherits that creditor’s rights to invoke the provisions of the original agreement between the creditor and debtor. In that many credit agreements typically include provisions allowing the imposition of interest and even the addition of late fees and collection costs, relying on those agreements to beef up the balance of the debt can be an attractive prospect. As a recent case has shown, however, debt purchasers should be wary of the shoes they step into. In McDonald v. Asset Acceptance LLC, 2013 WL 4028947 (E.D. Mich. 2013), a group of plaintiffs filed a class action complaint arguing that a debt purchaser illegally attempted to collect post-charge off interest in violation of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. Specifically, Plaintiffs alleged that while the original agreement between the original creditors and the debtors allowed for the imposition of interest, the creditors waived the right to collect interest once the debts were charged-off. A credit account is characterized as “charged-off” when it is treated as a loss and the creditor receives a tax deduction under the Internal Revenue Code. See, Victoria J. Haneman, The Ethical Exploitation of the Unrepresented Consumer, 73 Mo. L. Rev. 707, 713-714 (2008). Because a debt purchaser, as an assignee, “stands in the shoes” of the original creditor when it attempts collect on accounts, Plaintiffs argued that the waiver of interest by the original creditors foreclosed the purchasers’ right to subsequently add interest.

The McDonald Court explained that the propriety of the debt purchasers’ imposition of interest depended on whether the original creditors waived the right to impose interest prior to sale. The original creditors testified that as a normal course and practice they ceased from charging post-charge off interest due to cost of continuing to assess the charges. The Court also noted that the contracts of sale between the debt purchaser and creditors excluded post charge-off interest from the definition of “current balance” or “unpaid balance” in the agreements. The court found that the original creditors “intended to waive the right to collect interest on Plaintiff’s accounts” by taking “decisive and unequivocal acts to forgo the imposition of interest for strategic business reasons.” McDonald, 2013 WL 4028947 at *10. Further, the Court decided that the purchaser had no legal right or ability to retract the waiver made by its predecessor in interest. The Court held that the practice constituted violations of § 1692f(1) and § 1692e(2) (A) of the FDCPA and certified a class of consumers subject to the illegal imposition of interest. Importantly, the Court also denied the purchaser the use of the bona fide error defense explaining that ignorance of the law does not afford a debt collector a defense under the FDCPA. Id. at *13.

The lesson learned from this case is that a debt purchaser must thoroughly review not only their purchase of sale contract but also the general business practices of the creditor in regards to charged-off debt. For further information on this issue and others affecting the credit and collection industry, contact attorney Nicole M. Strickler, (312) 334-3442.