Personal financial challenges can be daunting. Struggling to pay bills is tasking enough, but when you throw in having to deal with aggressive debt collector calls, letters, even legal actions, it can become overwhelming, and often confusing.
Federal and state laws regarding how debts can legitimately be collected exist to level the playing field. And some state laws are “fairer,” or more protective, than others. New York has been pushing for changes to its existing debt collection laws for the past few years, but those past efforts have failed to be enacted into law. Last month, the General Assembly for New York showed they remain committed to stronger consumer protection by passing the Consumer Credit Fairness Act.
There are many elements to the Consumer Credit Fairness Act to like. Here are just a few:
1. New York residents would get notice from the court clerk when a legal collection action has been filed against them.
2. Creditors, collectors and debt buyers would be required to bring much more to the court at the initiation of a lawsuit in order to substantiate claims of indebtedness, such as:
- The name of the original lender.
- Original account number (last four digits).
- When the debt was last paid.
- Itemization of the amount being sought in the collection suit (original balance, collection fees, finance charges, attorney costs).
3. Cutting the current statute of limitations time frame for legitimately filing a lawsuit to collect from 6 years to 3.
All of the above, and more protections found in the bill, will go a long way in reigning in some of the worst “mill style” collection lawsuits and consumer abuses I outlined in a prior article — debt collectors doth protest too much.
So, what’s not to like?
The potential for unintended consequences can be found with a literal interpretation of some of the language in the bill, set beside known realities of the different collection stages unpaid debts pass through. Consider this language:
“When the period within which an action may be commenced under this section has expired, the right to collect consumer credit debt is extinguished as well as the remedy.”
Assume you have a credit card debt you were not able to pay. This language basically says three years from the date you first missed a payment, you can no longer legitimately be sued for the debt in New York.
Then consider the section in the bill defining the right to collect:
“‘The right to collect consumer credit debt’ shall mean any attempts by the creditor, third party purchaser, or other authorized third party to collect such debt including, but not limited to, calls, mail or other attempts to collect.”
This language in the bill goes much further than limiting the time frame a creditor or debt collector has to sue you. This section basically cuts off ALL communication from debt collectors after the 3-year statute of limitations has passed.
What’s the catch?
The unpredictable aspects that the above language may bring to New York residents with collection accounts could include:
- More immediate tax implications from 1099-Cs issued on forgiven debt.
Uncollected debts that pass a 3-year SOL will become nearly valueless in the debt markets if traditional collection methods, like phone calls and letters, are eliminated. If there is an absence of any meaningful bid to purchase NY debts outside of a 3-year SOL, lenders and buyers could react by sending 1099-C the following January after the SOL expires. Being taxed on forgiven debt when the amount forgiven exceeds $600 is normal. The tax consequences are part of the life cycle of a debt. Not everyone will end up paying the tax, or only owe a portion of tax, if they can fit certain insolvency measures allowed for in the tax code. But many will end up owing the tax, and much sooner than would normally occur today, if at all.
- Unpaid collection accounts will still remain on the credit report for 4 years after a 3-year SOL, based on the federal Fair Credit Reporting Act.
This could prove problematic for people with debts that pass the SOL, and whose debts are forgiven and treated as income, who later seek to refinance a home, or are looking to purchase a home after their personal finances have recovered.
With debts still being reflected as owed on the credit report, the unpaid balances could impact debt-to-income calculations used to meet loan underwriting standards. There is also next year’s implementation of the qualified mortgage rules that will come into play.
Based on my experience working with consumers to resolve older collection debts, some people will face a catch-22; the credit report accurately shows unpaid debts, but those debts are deemed uncollectible.
When it comes to resolving old debts in order to accomplish new financial goals, like home ownership, the process is fairly straight forward. Predictable policies for working out payoffs with lenders and established debt buyers on collection accounts makes things easier for underwriters, brokers and loan officers, and even for people to resolve on their own.
While I can emphatically support many of the enhanced consumer protections found in the Consumer Credit Fairness Act, I see the definition of the “right to collect” as having the potential to impede a stronger housing recovery in New York, and hitting already struggling consumers with an unexpected tax liability.