The sale and re-sale of debt can lead to collection contacts, threats of suit, and even suit on time-barred debt—that is, debt where the statute of limitations for collection has expired. This article examines new Consumer Financial Protection Bureau (CFPB) debt collection rules and supplementary information that relate to suits, threats of suit, and collection contacts for time-barred debt. The article also examines other existing law in the area, that applies in addition to the CFPB rules, and exclusively applies until the rules go into effect.
New CFPB Rules Interpreting the FDCPA
The CFPB has just issued two sets of final rules amending federal Fair Debt Collection Practices Act (FDCPA) Regulation F, 12 C.F.R. part 1006. The first set is available at 85 Fed. Reg. 76,735 (Nov. 30, 2020), and the second set was announced on December 18, 2020, but is not yet published in the Federal Register. Both sets of rules are scheduled to go into effect November 30, 2021, although, with a change in administration, that date or the rules’ content could change. Both sets of rules are summarized in a recent NCLC article, The FDCPA Year in Review: 2020, and more detail is found in two NCLC recorded video presentations and slide decks—for the first set is found here and for the second set is found here.
Suits and Threats of Suit on Time-Barred Debt
A provision of the December 18th CFPB rules prohibits debt collectors from bringing or threatening to bring a legal action to collect a time-barred debt, to be codified at 12 C.F.R. § 1006.26(b). The provision prohibits a collector from initiating or threating to bring a time-barred collection action. A violation of this prohibition is a violation of the FDCPA, and successful litigants can recover actual and statutory damages and attorney fees. The prohibition on suing or threatening to sue on time-barred debt is consistent with existing FDCPA law that reaches the same conclusion. See NCLC’s Fair Debt Collection § 184.108.40.206.1.
Existing case law holds that a threat to bring suit on a time-barred debt need not be explicit; implicit or vague representations can be actionable, if viewed as a threat by the least sophisticated consumers. Some courts find a collector’s offer to settle a debt is deceptive where the statute of limitations has run, because a settlement implies the collector is giving up the right to sue on the debt, and the collector should first disclose that the limitations period prevents the collector suing. See NCLC’s Fair Debt Collection § 220.127.116.11.1.
The CFPB rule provides that a collector violates this provision whether or not it knows that the debt is time-barred. See CFPB’s supplementary information at 42, 56, and 57 (references are to version that is linked here). This is consistent with existing law—the FDCPA is a strict liability statute; the consumer need not prove that the collector knew the limitations period had expired. See NCLC’s Fair Debt Collection § 3.2.4.
The CFPB in the supplementary information points to the potential availability of a bona fide error defense under 15 U.S.C. § 1692k(c), but courts should follow the Supreme Court’s decision in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich L.P.A., 559 U.S. 573 (2010), to interpret this defense as only applying to factual errors, not legal ones. See NCLC’s Fair Debt Collection § 12.2.3.
The final rules exclude proofs of claim filed in a consumer’s bankruptcy proceeding from the provision prohibiting the filing or threatening to file an action on a time-barred debt. This is consistent with the Supreme Court decision in Midland Funding, L.L.C. v. Johnson, 137 S. Ct. 1407 (2017), that time-barred proofs of claim do not violate the FDCPA because the special protections offered by the bankruptcy process distinguish this situation from that of a collection lawsuit.
Collection Contacts Concerning Time-Barred Debt
A common misconception is that expiration of the statute of limitations extinguishes a debt. This is only the case in three states—Mississippi, North Carolina, and Wisconsin. See Miss. Code Ann. § 15-1-3(1); N.C. Gen. Stat. § 58-70-115(4) (applies only to debts owned by debt buyers); Wis. Stat. § 893.05. In those three states, collection contacts on time-barred debt violate the FDCPA. See NCLC’s Fair Debt Collection § 18.104.22.168.1.
In the other states, after the limitations has run, a debt is not extinguished, and collectors may continue to contact the consumer, seeking payment short of filing or threatening litigation. The CFPB rules do not prohibit collection contacts for time-barred debt. But the CFPB’s supplementary information for the December 18th rules (at page 62 of this linked version) states that such collection contacts cannot be unfair or deceptive:
a debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of a time-barred debt. Nor may a debt collector use unfair or unconscionable means to collect or attempt to collect a time-barred debt.
See also NCLC’s Fair Debt Collection § 22.214.171.124.1. Some of the ways collection contacts on time-barred debt can violate the FDCPA are discussed immediately below.
Disclosure That Debt Is Time-Barred and That Consumer’s Actions Can Revive the Limitations Period
One concern with collection contacts for time-barred debt is that the contacts may result in the consumer making a small payment or acknowledging the debt, which in many states results in revival of the limitations period—the statute of limitations starts to run anew, allowing the collector to sue on the debt. As the CFPB states in its 2016 analysis that led the 2020 final rule:
The Bureau believes that most consumers are unaware of the potential legal consequences of making a payment or acknowledging a debt in writing. Indeed, many consumers may find it counterintuitive that making a payment—which they believe ought to have positive consequences for them—may actually have negative consequences. The proposals under consideration would require disclosures whenever a debt collector seeks payment on time-barred debt and limit the collection of debts that can be revived. The purpose is to help ensure that consumers are neither deceived nor treated unfairly in connection with the collection of time-barred debt.
[Outline of Proposals 22 (July 28, 2016)]
The CFPB’s 2016 outline considered requiring, when collectors contact consumers on time-barred debt, disclosure that the collector could not sue on the debt. The 2016 outline also considered allowing collection contacts on time-barred debt only if the collector waived its right to sue on the debt should the consumer make a partial payment or acknowledge the debt. The CFPB’s 2020 supplemental proposed rulemaking included specific time-barred debt and revival disclosures. See 85 Fed. Reg. 12,672 (March 3, 2020). The final rule does not contain any of these provisions.
The CFPB’s 2020 supplementary information to the December 18th rules does state (at p. 63 of the version linked here):
Depending on the circumstances associated with the collection of a specific time-barred debt, a debt collector may decide that, to avoid violating the FDCPA and the final rule, the debt collector needs to disclose information to consumers about the debt collector’s ability to sue and the possibility of revival and, in that case, the debt collector may do so.
Existing FDCPA case law also finds that it can be deceptive to collect on time-barred debt without disclosing the fact that the collector cannot sue on the debt and that partial payment or acknowledgment will revive the limitations period. See NCLC’s Fair Debt Collection § 126.96.36.199.1.
In addition, both CFPB and FTC consent orders require major debt buyers to provide disclose that a debt is time-barred. See, e.g., Bureau of Consumer Fin. Protections v. Encore Capital Group, Inc., ¶ 9 (S.D. Cal. Oct. 15, 2020) (final judgment and order approving joint motion for entry of stipulation); U.S. v. Asset Acceptance, L.L.C., § IV ¶ D (M.D. Fla. Jan. 31, 2012) (consent decree). A number of states and municipalities also require disclosure if a debt is time-barred. See Cal. Civ. Code 1788.14(d) (West); Conn. Gen. Stat. § 36a-805(a)(14); N.C. Gen. Stat. § 58-70-115(1); Tex. Fin. Code Ann. 392-307(e) (West); W. Va. Code 46a-2-128(f); 940 Mass. Code Regs. § 7.07(24); N.M. Code R. § 188.8.131.52; N.Y. Comp. Codes R. & Regs., tit. 23, § 1.3; Rules of City of New York Dep’t of Consumer Affairs (6 R.C.N.Y. ch. 2, subch. S) § 2-191(a); 6 Vt. Code R. 104.05(a); Code of the City of Yonkers § 31-162.1(b).
A number of states also legislate that partial payment or acknowledgment of a debt does not revive the limitations period if the debt is already time-barred. See NCLC’s Collection Actions § 184.108.40.206. Other states and municipalities require disclosure that partial payment or acknowledgment of the debt may result in revival. See N.C. Gen. Stat. § 58-70-115(1); Nev. Rev. Stat. § 649.332(2)(a)(2) (applies only to hospital debts); 940 Mass. Code Regs. § 7.07(24); N.M. Code R. § 220.127.116.11; N.Y. Comp. Codes R. & Regs., tit. 23, § 1.3; 6 Vt. Code R. 104.05(a); Rules of City of New York Dep’t of Consumer Affairs (6 R.C.N.Y. ch. 2, subch. S) § 2-191(a).
Misrepresentations in the Collection of Time-Barred Debt
A number of misrepresentations concerning credit reports are particularly relevant to time-barred debt. When collecting on time-barred debt, to create leverage for payment, collectors may represent that non-payment will damage or even ruin the consumer’s credit rating or score. Federal law prevents consumer reporting agencies (CRAs) from reporting “obsolete” debt, typically debt more than seven years old. See NCLC’s Fair Credit Reporting Chapter 8. It is thus deceptive and an FDCPA violation to represent that the collector’s reporting of a seven-year-old debt will damage the consumer’s credit rating or that, where the seven years is almost up, that the collector’s reporting of the debt will affect the consumer’s credit rating for many years.
The FDCPA also prohibits a collector from providing a CRA information the collector knows or should know is false. This includes a collector indicating to a CRA that a debt is more recent than it actually is, thus preventing the seven years from running as it should. See NCLC’s Fair Debt Collection § 7.11.2.
If a time-barred debt has already been reported to a credit bureau as in default for several years and already turned over for collection, it is deceptive to threaten that non-payment of time-barred debt will ruin a consumer’s credit rating. At this point, any consumer payment or non-payment will have only minimal impact on the consumer’s credit rating.
Other potential misrepresentations concerning time-barred debt involve other consequences of nonpayment. Collectors may represent that continued failure to make a payment on a debt will lead to the creditor or merchant deciding to refuse to offer further goods or services to the consumer. This is deceptive if this is not the case or if the refusal has already happened. It is also deceptive to claim that a consumer will be barred from access to a particular hospital for non-payment of a debt owed to that hospital. Federal law requires a hospital emergency room to accept a patient irrespective of failure to pay past bills. See NCLC’s Collection Actions § 9.3.3. Similarly, any other threatened action that the collector does not intend or legally cannot take is an FDCPA violation. See NCLC’s Fair Debt Collection § 7.8.
Collection of Time-Barred Debt Where Debt Not Owed
Because of the age of the debt, it is particularly possible that a consumer does not owe the time-barred debt being collected or does not owe the amount sought; collection on a debt not owed or collection of an incorrect amount can be an FDCPA violation. See NCLC’s Fair Debt Collection § 8.4.
That a debt is time-barred increases the likelihood that the collector is contacting the wrong consumer. The consumer owing the debt often has moved at least once since the consumer’s last contact with the original creditor, and the collector has limited information to locate the consumer. As a result, it is not uncommon for the debt buyer to demand payment from the wrong consumer who happens to have a similar name.
Time-barred debt often has passed from the original creditor to a debt buyer, and in many cases has been sold and re-sold a number of times. The current owner may have little information on a debt and may seek collection of the full amount even where the consumer has made a payment or settled the debt with a prior owner of the debt.
Most collectors now scrub their portfolios looking for accounts that are discharged in bankruptcy, but errors still crop up, particularly for old, time-barred debt. Seeking collection on a debt discharged in bankruptcy can be an FDCPA violation.
Statute of Limitations Law in a Nutshell
Determining the applicable statute of limitations is a several step process, and may produce a time period significantly shorter than the forum state’s limitations period for breach of a written contract. For example, while a consumer may be sued on a credit card debt in Illinois that has a ten-year limitations period for breach of a written contract, the applicable limitations period instead may be Illinois’s five-year period for breach of a non-written contract or Delaware’s three-year limitations period for written or non-written contract breaches. Calculation of the statute of limitations is discussed comprehensively in NCLC’s Collection Actions § 3.7 and is summarized below. A separate issue, not discussed here, but examined at NCLC’s Collection Actions § 13.6.2, is the applicable limitations period to enforce a court judgment.
With rare exceptions (such as federal student loans that by federal law has no limitations period), the applicable limitations period will be determined by state, not federal law. See NCLC’s Collection Actions § 3.7.2. Where a collection lawsuit is based on a contract that includes a choice of law provision, states differ as to whether the applicable statute of limitations is provided by the state chosen in the contract, the forum state, or the one of the two with the shortest limitations period. See NCLC’s Collection Actions § 18.104.22.168.
Most states have a “borrowing” statute that provides that the applicable limitations period is based on the law of the state where the transaction occurred, or the shorter of the limitations period as to the forum state or the state where the transaction occurred. This has a significant implication where a court finds that non-payment of a credit card obligation occurs where the card issuer (not the cardholder) resides or payment is to be sent. This may result in credit card debt having the shorter of the limitations period between the forum state and the card issuer’s state of residence or payment. See NCLC’s Collection Actions § 22.214.171.124.
Once it is determined which state’s law applies, the next question is which of a state’s various limitations periods applies to a particular cause of action, such as a state’s limitation periods for written contracts, for non-written contracts, for credit sales, for enforcement of a note, or for quantum meruit. When a collector files suit, the statute of limitations is separately computed for each claim and is based on the nature of that claim and which of a state’s various statute of limitations applies to that type of claim. See NCLC’s Collection Actions § 3.7.4. The limitations period can have expired for some claims and not for others.
For the collector to use the limitations period for a written contract—a period that generally is among the longest in a state—the collector must be able to prove the consumer entered into a written contract. If not, it must base its case on some other theory, such as quantum meruit or account stated, which may have a shorter limitations period.
Where a claim is based on breach of a credit card agreement, a number of courts find that a shorter limitations period for non-written contracts applies, since the credit card transaction does not involve a fixed written contract. In another example, even though a long limitations period for a written contract would seem to apply to an installment sales agreement, courts find that the UCC’s four-year period for sales transactions applies instead. See NCLC’s Collection Actions § 3.7.6.
Questions also may arise as to when a limitations period begins to run, such as for credit card debt—e.g., when the first payment is missed, the last payment is made, or when the debt is accelerated. See NCLC’s Collection Actions § 3.7.7.
Partial payment or acknowledgment of a debt may “revive” the limitations period—that is start it running again from the beginning. But there are a number of reasons why this may not be the case. For example, a limitations period in some states is not revived once it has expired, or where the consumer’s action does not demonstrate an intent to recognize that the remainder of the debt is due. See NCLC’s Collection Actions § 126.96.36.199.
During certain periods of time, such as the consumer being in the military or while the consumer’s bankruptcy is pending, the running of the limitations period is “tolled” or paused. See NCLC’s Collection Actions § 188.8.131.52. While state law may provide that the limitations period is tolled when the consumer is out-of-state, this should not apply in a number of situations, such as where service of process is available out-of-state, and this ground for tolling may even be unconstitutional. See NCLC’s Collection Actions § 184.108.40.206.3. States differ as to whether a limitations period is tolled during the pendency of a collection action that is voluntarily dismissed or dismissed for lack of prosecution. See NCLC’s Collection Actions § 220.127.116.11.6.
A recent example of tolling in some states relates to the COVID-19 epidemic that closed courts for a period of time. Typically, when a state establishes tolling in response to the epidemic, the tolling only allows for a case being timely filed if filed shortly after the courts re-open, even if the limitations period otherwise expired while the court was closed. Only a few states pause the running of all limitation periods during the time the state’s courts were closed, thus extending the limitation periods for all suits eventually filed. See NCLC’s Collection Actions § 18.104.22.168.5.