Offering to settle a time-barred debt violates FDCPA

The debt collector in Buchanan v. Northland Group, Inc., No. 13-2523 (6th Cir. Jan. 13, 2015) made a settlement offer to the debtor to resolve an unpaid debt without disclosing that the statute of limitations had run on the debt. The debtor sued claiming that the letter falsely implied that the debt collector could enforce the debt in court. The debt collector moved to dismiss contending that the offer could not plausibly mislead an unsophisticated consumer into thinking her lender could enforce the debt in court. The district court dismissed, but it was reversed on appeal. The Sixth Circuit agreed with the debt collector that under Michigan law a debt remains a debt even after the statute of limitations has run on enforcing it. Legal defenses are not moral defenses and a creditor remains free, in the absence of a bankruptcy order or something comparable preventing it from trying to collect the debt, to let the debtor know what the debt is and to ask her to pay it. It also conceded that a settlement offer with respect to a time-barred debt does not by itself amount to a threat of litigation. Yet, the letter did not disclose that the statute of limitations had run on the debt, which would have provided a complete defense to any lawsuit to recover the money, and it did not say that a partial payment on a time-barred debt restarts the statute-of-limitations clock under Michigan law. From this a jury could possibly conclude that the letter was deceptive and misleading. Moreover, the debtor was prepared to submit expert testimony from a professor of psychology who would testify about consumers’ understanding of time-barred debt. The court also noted that the Federal Trade Commission and the Consumer Financial Protection Bureau, which are charged with enforcing the FDCPA, are in the midst of studying this precise problem. Thus, At this preliminary stage of the case, it seems fair to infer that, if the agency deems these same questions worthy of further study, [debtor] deserves a shot too. Finally, the court observed that dictionaries’ definition of settle refers to concluding a lawsuit so an unsophisticated consumer could understand a settlement offer to imply that the underlying debt is enforceable in court. The unsophisticated debtor, who could not afford the settlement offer, might also assume from the letter that some payment is better than no payment. But the general rule in Michigan is that partial payment restarts the statute-of-limitations clock, meaning that if the debtor paid anything less than the settlement offer he would be exposed to substantial new risk. Without disclosure, a well-meaning debtor could inadvertently dig herself into an even deeper hole. As pointed out by the dissent, the irony of the court’s decision is that if the debt collector had not made a settlement offer, but demanded payment of the full debt amount, there might have been no violation of the FDCPA.

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