Companies that purchase charged off consumer debts owed by California residents will have some new and stricter guidelines to follow starting on Jan. 1, 2014. The changes are outlined in California’s Fair Debt Buying Practices Act. Most of the new rules resulting from the Act will be applied to debts purchased after the enactment date.
There are good reasons for people struggling with unpaid bills in California to welcome these protections. And from the perspective of a debt and credit geek like me, the Act can help Californians map a more predictable path to resolving old bills. Here are some of the highlights.
Debt buyers have not been expressly prohibited from suing to collect on time-barred debts, aka accounts that pass the statute of limitations (SOL) to file a legitimate suit. Generally, it has been the responsibility of the consumer, once a collection lawsuit is filed, to raise the SOL as a defense. Moving forward, debt buyers will be prohibited from filing collection lawsuits on debts past the SOL in California (credit card SOL is 4 years from date of last activity in California). But more than just a clearly worded prohibition, the Act contains a provision for a debt buyer suing on time-barred debt to be held liable for the violation “including, but not limited to, the amount of any judgment obtained by the debt buyer as a result of a time-barred suit to collect a debt from that person.” I call that a deterrent!
Don’t get me wrong, debt buyers can and do legitimately file lawsuits to collect debts they purchase. I should point out that the Act clearly states in SECTION 1(e): “This act is not intended to affect the legal enforceability, or collectability, of a charged-off consumer debt, but is intended to impose enforceable standards upon the collection and litigation of consumer debt…” But having set standards that can be enforced will help people who are dealing with past due bills — in the hands of a debt buyer – to clearly understand the nature of the debts owed, and be better prepared to resolve them. And if a debt buyer does sue in order to collect, much of the following will soon be required to be part of their original filing with the court, which has not been the case prior to the new rules.
Debt Buyers Will Have to Provide Certain Information
Debt buyers must possess some of the following information in order to make a written statement to collect:
- An accurate account of the balance of a debt at charge-off, and the nature and reason for any post-charge-off interest and fees. While this part of the Act does not “require a specific itemization” it does require those items be broken out separately. I expect this will curb the questionable practice of inflating balances in collection.
- The date the account went into default, or the date of last payment. Knowing this date will help consumers understand how much risk remains that they can still be sued for a debt, and should also assist in helping to better understand any valid post charge-off interest and fees.
- The name and address of the charge-off creditor (the original lender), and of any previous purchasers of the account. This will help people to clearly identify whether the debt is their own, which has not always been easy to determine when debt buyers resell debts to other companies.
- The debt buyer must have access to a copy of the agreement evidencing a debt. This can include “the most recent monthly statement showing a record of a purchase transaction, last payment, or balance transfer…” Providing consumers this type of documentation is typically something debt collectors and debt buyers are already accustomed to in order to meet their obligations when responding to debt validation requests under existing federal laws (the Fair Debt Collection Practices Act). But there is more.
Consumers have long been able to request validation of a debt using federal consumer protection laws. Debt collectors are required to respond to those requests, and if they should wish to continue their collection efforts. The Fair Debt Buying Practices Act will now require the collector to provide information relating to the above bullet items within 15 days of receiving a consumer’s written request. And collection efforts must cease until the request has been met.
New Written Collection Notice Disclosure
Debt buyers will have to include the following notice in their first collection notice to California borrowers:
“You may request records showing the following: (1) that [name of debt buyer] has the right to seek collection of the debt; (2) the debt balance, including an explanation of any interest charges and additional fees; (3) the date of default or the date of the last payment; (4) the name of the charge-off creditor and the account number associated with the debt; (5) the name and last known address of the debtor as it appeared in the charge-off creditor’s or debt buyer’s records prior to the sale of the debt, as appropriate; and (6) the names of all persons or entities that have purchased the debt. You may also request from us a copy of the contract or other document evidencing your agreement to the debt.
“A request for these records may be addressed to: [debt buyer’s active mailing address and email address, if applicable].”
I should again point out that most of the larger and sophisticated debt buyers are prepared to meet these kinds of requests from a consumer they are collecting from, but that has not always been the case, and still isn’t in too many instances.
There are also additional requirements for debt buyers to prominently display in collection notices when debts are time-barred from suing in order to collect, and that convey their ability to continue reporting collection accounts to the credit reporting agencies.
Documenting Settlement & Payment Agreements
Negotiating a settlement where you pay off the balance to a debt buyer should always be documented. During the past few years it has become more common for them to provide documentation of the agreements you reach. But some large debt buyers still make it difficult to get agreements from them in writing. The Act goes so far to require that any payment arrangement, where you agree to monthly terms to pay off your debt, be outlined in a written monthly statement. Here’s the key section of the Act related to documenting payments and agreements:
“(b) A debt buyer that receives payment on a debt shall provide, within 30 calendar days, a receipt or monthly statement, to the debtor. The receipt or statement shall clearly and conspicuously show the amount and date paid, the name of the entity paid, the current account number, the name of the charge-off creditor, the account number issued by the charge-off creditor, and the remaining balance owing, if any. The receipt or statement may be provided electronically if the parties agree.
(c) A debt buyer that accepts a payment as payment in full, or as a full and final compromise of the debt, shall provide, within 30 calendar days, a final statement that complies with subdivision (b). A debt buyer shall not sell an interest in a resolved debt, or any personal or financial information related to the resolved debt.”
I expect larger debt buyers like Midland Funding LLC and Portfolio Recovery and Associates to be prepared for all of the changing rules that will take effect in just a few short weeks from now. There are, in fact, additional changes at a national level that will come next year that may shake up the debt collection industries. But California is way ahead of most other states with setting, and then hopefully enforcing, debt buyer standards that protect consumers in that state.