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Collection Actions: 13.3.12.2.2 Court does not have authority to issue the award

A judgment is void if the court has no subject matter jurisdiction over the matter.231 Lack of subject matter jurisdiction can be shown when the type of case or the amount awarded is beyond the powers of a court—for example, when a small claims court has authority only to issue judgments up to $10,000 but issues an award for $11,000. When state law views proper venue as jurisdictional, filing the action in an improper venue should also provide a basis to set aside the default judgment.

Collection Actions: 13.3.12.2.4 When an unlicensed plaintiff cannot use the state’s courts

In some states, a debt buyer must register with the state in order to use the state’s courts.238 If an unregistered debt buyer obtains a default judgment, the judgment may be void ab initio and can therefore be set aside even if the consumer’s motion is not timely.239 Similarly, certain state statutes limit a party’s access to the courts when that party lacks a license or because certain entities (such as debt collection agencies) cannot collect debts in the state’s courts.

Collection Actions: 13.3.13 “Any Other Reason That Justifies Relief”

Federal Rule of Civil Procedure 60(b)(6) provides that a default judgment can be reopened for “any other reason that justifies relief.” There is no one-year time limit on the consumer’s ability to raise this reason as a ground for relief, as long as the motion is brought within a reasonable time.242 This ground to set aside a judgment is an attractive alternative for a consumer when more than a year has elapsed and it is no longer possible to set aside the judgment for excusable neglect.

Collection Actions: 13.4 Resisting or Setting Aside Confirmation of an Arbitration Award

At one point, hundreds of thousands of arbitration proceedings a year were initiated to collect consumer debts. Creditors and debt buyers took advantage of arbitration provisions in credit agreements to bring collection actions not in court but before arbitrators. The National Arbitration Forum (NAF) was, practically speaking, the exclusive forum for these arbitrations, and there were widespread allegations that the NAF was biased in favor of the collectors or even had interlocking ownership with collection attorneys.

Collection Actions: 5.3.2.1 Generally

There are a number of situations in which a consumer can be wrongfully sued on charges that the consumer did not authorize. An identity thief can open an account in the consumer’s name or make charges on an account opened by the consumer. Someone finding a lost credit card or gaining access to a credit card number can use it without authorization.

Collection Actions: 5.3.2.4 Consumer Actions After Discovering Identity Theft

Both to protect the consumer from future unauthorized charges and to bolster the consumer’s defense in a collection action, the consumer should report the identity theft to local law enforcement and to at least one reporting agency to put the account on a fraud alert. That agency is obligated to inform other agencies of the identity theft and those agencies must also put the account on a fraud alert.128

Collection Actions: 5.3.3.1 Distinguishing Authorized Users from Joint Account Holders

Those using credit cards or other open-end credit can be put into two different categories—account holders and authorized users. A credit account is in the name of one or more account holders, who applied for and agreed to be obligated on that account. The account holder can authorize others, who are called authorized users, to use the account. This distinction is important because account holders are liable on the amount owed on an account,131 while authorized users generally are not liable for most charges on the account.

Collection Actions: 5.3.3.2 Liability of Authorized User for Account Owner’s Obligations

The staff interpretations to Regulation Z (Truth in Lending Act) indicate that whether authorized users are liable for their own charges or on the account generally is a matter of state law.139 State law generally limits the liability of authorized users, holding that an authorized user is not liable for debts incurred by the account holder or others.140 Authorized users can be viewed as agents using the card for the principal, who is the cardholder.

Collection Actions: 5.3.3.3 Authorized User’s Liability for Own Charges

Collectors who seek to hold an authorized user liable for that user’s own charges (as opposed to charges by others on the account) create an immediate practical problem for themselves. Some credit cards have separate numbers for each user, allowing segregation of charges by user (however, a debt buyer may not have access to that information). But other credit card accounts keep the same number for all users and it may be impossible for the card issuer to then segregate charges made by one particular user from other charges on the account.

Collection Actions: 5.3.4.2 Community Property States

In community property states, debts incurred after marriage and before separation are generally treated as community debts, even if only one spouse is obligated on the contract. If a credit card is issued in one spouse’s name only, a collector can reach community property to pay for charges incurred during the marriage.152

Collection Actions: 5.3.4.3 Necessaries Statutes and Liability for Spouses’ Debts in Non-Community Property States

In non-community property states, one spouse’s property generally cannot be taken to pay the other spouse’s debts. However, many non-community property states have necessaries statutes that make spouses liable for certain of the other spouse’s debts. These statutes are examined in more detail in §§ 9.7.1–9.7.4, infra, in the context of medical debt, to which they are most applicable.

Collection Actions: 5.3.5 Liability of Family Members for Decedent’s Debts

A decedent’s estate is liable for the decedent’s debts, and those debts may have to be paid ahead of distributions to those inheriting from the estate. But family members, even those who inherit from an estate, do not become liable for the debts of an individual just because that individual is deceased.

Collection Actions: 5.3.6 Liability of Guarantors

Particularly where business debts are involved, an individual may be asked to act as a guarantor. In general, guarantors are liable when the principal obligor fails to pay. However, the creditor must produce sufficient evidence of the guaranty.

Collection Actions: 5.4.1 Contractual Prejudgment Interest Requires Proof of Contract and Interest Rate

If a collector cannot prove a contract, it cannot recover contractual prejudgment interest. If it proceeds under an “account stated” theory, it may be able to recover the interest charges accrued up to the statement of account, if included in that statement, but no contract-based interest beyond that. There is no proof of a contract, so no proof of a contract rate. The same is true as to actions based on a quasi-contract.

Collection Actions: 5.4.2.1 Card Issuers Typically Stop Seeking Prejudgment Interest

After the consumer’s default, the originating creditor is likely authorized to continue charging interest, either pursuant to the contract or pursuant to a state statute authorizing prejudgment interest at a specified rate. Card issuers typically charge a rate provided by the contract until they charge off the debt (under accounting standards, this is typically when the debt is 180 days past due195), and then discontinue charging this interest.

Collection Actions: 5.4.2.3 Seeking Statutory Prejudgment Interest When There Is No Right to Contractual Interest

If a card issuer does not send periodic statements, and later justifies this by the fact that it has charged off the debt and will not charge additional fees or interest, this should include all prejudgment interest—whatever the source—pursuant to the contract and pursuant to statute.217 A debt buyer stepping into the shoes of the card issuer similarly cannot charge contractual or statutory interest, meaning it cannot seek a specific amount of prejudgment interest in its demands on the consumer, whether by communication or court complaint.

Collection Actions: 5.4.3.2 When Does the Right to Prejudgment Interest Begin to Accrue?

Even assuming that a collector can prove that it can charge either contractual or statutory prejudgment interest, it must also show the dates within which it is entitled to that interest. If the originating creditor or another prior owner of the debt has charged prejudgment interest for a time period, the collector cannot assess additional contractual or statutory prejudgment interest for the same time period.