A ruling earlier this year by the US 11th Circuit Court is causing a minor uproar among attorneys who represent debt collectors. At the heart of the kerfluffle is the question of whether the relatively new 1996 Fair Debt Collection Practices Act supersedes bankruptcy law (the basis for which goes back hundreds of years). Now, there is no reason why a legislative act cannot turn upside down 300 years of case law; it happens from time to time. But most parties agree that in order to do so the legislative act must clearly define its goal. Of course, the courts are brought in to interpret the meaning and applications of our laws, and ever since the 1803 Marbury vs. Madison US Supreme Court decision US courts have held that they have the power of judicial review (the authority to interpret and direct the application of legislated or treaty law).
Judicial Review: A Power the US Courts Gave Themselves
The implications of Judicial Review were not fully appreciated for over 50 years, until the Dred Scott decision (in which the courts decided that slaves did not have the legal rights of citizens). By then it was too late to prevent the courts from engaging in judicial review. No one had thought to challenge the court’s earlier interpretation of the constitution (and it should be noted that those earlier Supreme Court justices were all alive when the Constitution was drafted, debated, and adopted). Judicial Review has been criticized and praised for the past 160 years, and we need not delve into all the political maneuverings behind such esoteric discussion.
Time-Barred Debt: An Old Debt with No Legal Teeth
The point of this year’s review of law is to restrict the ability of debt-claimants to pursue consumers into bankruptcy, specifically on what is called “time-barred debt”. A time-barred debt means that the claimant’s legal right to pursue collection has expired. The courts are no longer obligated to enforce the claimant’s rights (if there are any). Creditors are not necessarily the good guys or the bad guys. Some creditors are really bad guys, but some debtors are really bad guys too. Most of the time everyone sort of falls into the middle of the spectrum, where creditors may be working hard to receive money owed them and debtors may be unable to pay. The government tries to work things out (not to everyone’s satisfaction).
Time-barred debts are so old that all statutes of limitations which once upheld them no longer apply. But any debt discharged in a bankruptcy is deemed uncollectible. Enter into this fray the so-called Junk Debt Buyers. These companies did not exist 30 years ago. They exist for only one reason: to prey upon consumers who have been unable to pay their debts.
Junk Debt Buyers: Predators on the Hunt for Vulnerable Consumers
One of the worst junk debt buyers is LVNV Funding. That is just one of many operating names or legal entities associated with the group of people who have been harassing consumers for over a decade with default judgments and a cat-and-mouse strategy of avoiding the restrictions of the Fair Debt Collection Practices Act. The FDCPA forbids any single creditor from hounding you or ignoring your refusal to talk with them. Under the law you as the consumer have the right to send a “validation letter” demanding that the creditor who has contacted you show you proof within 30 days that they are trying to collect a valid debt. If they fail or refuse and continue to contact you they are violating the law.
The Sherman Companies (aka LVNV Funding) and others like them get around this law by transferring responsibility for collection from attorney to attorney, debt collector to debt collector. You may be contacted by someone new every 1-2 months. The pursuit is both endless and legal because LVNV Funding itself is not trying to directly collect the debt. Also, they imply that they are legally owed the debt.
But Does the Debt Really Exist?
Most if not all attorneys will tell you that a debt continues to exist after it has fallen off your credit record (7 years in the United States). In accounting terms that is not necessarily true. A debt may cease to exist when:
- A creditor goes out of business
- The debt is discharged in a bankruptcy
- The creditor forgives the debt
- The creditor charges off the debt (converts it to an expense)
People confuse forgiving a debt with charging off a debt. With debt forgiveness the creditor states clearly and plainly that it considers the matter settled and no longer has any interest in the debt.
With a charge off the creditor moves the debt from its Accounts Receivable ledger to its Expenses ledger. The Internal Revenue Service then allows the creditor to take a tax deduction against the charged-off debt. As far as the creditor and the IRS are concerned the debt no longer exists.
That’s right: in accounting terms a charged-off debt no longer exists, at least after the books are closed at the end of the creditor’s accounting year. Of course, books can be re-opened and expenses converted back to assets but that rarely happens. As far as the accountant is concerned, that “Bad Debt Expense” has been dealt with and life goes on.
Creditors: They Have Data You Have Long Forgotten
Creditors, of course, have a long memory. They can (and do) keep files of who paid their debts, how long they took, and whether they want to deal with those customers again. Some years ago a lot of customers of the old Rich’s Department Stores found out to their dismay that their bankruptcies in which debts to Rich’s were discharged were still being held in the Macy’s (formerly Federated Department Stores, which bought Rich’s) databases. Some of these bankruptcies went back 2 or more decades.
This is perfectly legal, up until the data is sent out to credit bureaus again (which is what happened by accident). They cannot legally report old debts that have expired under the 7-year and 10-year (for bankruptcies) rules for reporting consumer debt, but sometimes it happens. These old debts were converted to expenses long ago and therefor no longer exist as accounting assets.
So why do the retailers remember them? Because they don’t want to extend credit to you again. They may do that but they don’t have to and they may take a much harder line in issuing credit to you. It’s all legal and as long as they don’t dump old data there is no harm to you.
But Junk Debt Buyers Love This Old Data
Companies like LVNV Funding buy up lists of old debts from any company willing to make money from them. The courts have been ambivalent about whether consumers are obligated to pay these debts, probably because most consumer lawyers don’t know enough about accounting practices to dispute these claims in accounting language. At best, if a creditor feels a charged-off debt is only worth 6% of original value then anyone who buys that debt is entitled to only 6% of the original debt (assuming they paid that much for it).
Some courts have been holding the junk debt buyers to at least this minimal standard, or they have tried to. But there are other problems with this reasoning. For example, what is to prevent the original creditor from selling the same list of old debts to more than one junk debt buyer? Absolutely nothing. They are not transferring legal rights to assets they own because those assets (the “accounts receivable” balances) no longer exist; they were converted to “Bad Debt Expense” long, long ago in a prior accounting age.
Junk debt buyers don’t care about that because they know most consumers can’t differentiate between real debt and fake debt. Any “charged off” debt no longer exists; any company that charges off debt and continues to try to collect it after using it to reduce their taxes is committing tax fraud. Unfortunately, the IRS doesn’t forbid companies from selling lists of old charged off debts.
What Has Debt Collection Attorneys Upset
So much for the background of this sordid industry that preys on vulnerable consumers. Why are their law firms upset? Because a recent ruling by the 11th District Court in Crawford v. LVNV Funding, LLC, et al. (In re Crawford), 758 F.3d 1254 (11th Cir. Jul. 10, 2014) . The court overturned a decision by two lower courts:
…holding that the filing of a proof of claim for a time-barred debt constituted violations of Section 1692e, which prohibits “any false, deceptive, or misleading representation or means in connection with the collection of any debt” and Section 1692f, which prohibits a debt collector from using “unfair or unconscionable means to collect or attempt to collect any debt.”
This is significant as it is a sign from the 11th district that consumers are being unfairly pursued by junk debt buyers. Unfortunately the court’s decision does not go far enough because they need to declare that these debts really do not exist. That’s the missing piece in this puzzle: the courts have yet to deal with the question of whether any debt can still be called a debt after it has been converted to an expense and used as a tax deduction.
But this ruling, which has been cited by a few courts outside the 11th District, is a step in the right direction. Investors form companies like LVNV Funding don’t have any legal basis for claiming to own billions of dollars in consumer debt that was charged off years ago, other than the courts’ tacit acceptance of these claims without requiring proof. In fact, some courts have ruled (or simply railed) against the Sherman Companies and other predators by pointing out that they bring no documentation establishing proof of a prior financial relationship with consumers.
LVNV Funding removed hundreds of thousands of these bogus claims from consumer credit files after losing a significant case in Maryland a couple of years ago. But while that action finally gave relief to many consumers whose credit had been unfairly hurt by these false claims, it did not prevent the Sherman Companies from acquiring new lists of names and debts and continuing on with its shady practices.
Since I am not being hounded by these junk debt buyers I don’t know if they are now fabricating invoices en masse but in one case they were caught doing so. Submitting false documents to a court just makes their behavior worse, and when the courts catch them doing this they are not kind to the junk debt buyers. Unfortunately they continue to get default judgments against consumers who don’t know what to do when these bogus and very upsetting collection letters arrive.
If you can talk with a consumer attorney, you should do so. Ask about the option of presenting to the court evidence from accounting text books about how charging off debt converts it from an asset to an expense, and that the expense is then used as a tax deduction. If more courts address this issue, sooner or later the junk debt industry will be forced to stop pursuing fictitious debts.
The courts can change how they interpret the law when given proper information. You can be sure that the attorneys who represent the junk debt industry are not going to explain all this to the courts.