Ending Litigation and Financial Windfalls on Time-Barred Debts

Abstract

The debt collection industry is booming, in part due to collection efforts on debts for which the statute of limitations on collections has run. A trap for unsophisticated debtors, debt collectors often attempt to collect time-barred debts through offers to settle those debts for a fraction of what is owed. In response, debtors typically exercise one of four options. First, some debtors simply pay the offered settlement amount, usually 10-40% of the total outstanding debt, thereby satisfying the debt in full. Second, those who wish to eliminate the debt but cannot afford the entire settlement amount will instead make a small payment as an installment, unwittingly reviving the statute of limitations on collections and making the entire debt judicially enforceable for years to follow via the partial payment rule. Third, some debtors simply disregard the settlement offer. This, in turn, can result in the debtor being sued on the debt, where results will range from the debtor owing nothing (in the event the debtor defends and asserts the statute of limitations defense) to a judgment exceeding the full amount of the debt (in the event the debtor does not defend and the matter is resolved by default judgment). Finally, some debtors sue the collector for unlawful collection efforts, where results will vary depending on the precise wording of the settlement letter and whether such an offer is deemed unlawful in the jurisdiction at issue. When a debtor exercises either of the first two options, the result is a windfall to collectors, who might otherwise be unable collect on the debt due to the statute of limitations. When a debtor exercises either of the final two options, already-overburdened courts are swamped with difficult cases that are unnecessary and easily avoidable. To ease the burden on courts and create financial outcomes that are roughly the same for all time-barred debts, this article proposes the following solutions: First, because the debt itself is still valid, debt collectors may attempt to collect on time-barred debts outside of court, as most courts have held; however, when doing so, the collector must provide warnings that inform the debtor that the statute of limitations has run on the debt and that any payment will revive the statute of limitations as to its entire amount. Along with these warnings, the collector must promise that it will not sue to collect on the debt, which will reduce the number of inappropriate default judgments in such cases, and must permit the debtor to pay the proposed settlement amount in installments and entering a repayment plan for only that amount, which, when elected, will negate the partial payment rule and prevent collection of a greater amount than what has been offered. As an additional layer of protection against any suit seeking to collect an old debt, this article proposes amendments to the Fair Debt Collection Practices Act (“FDCPA”) that plainly state, on the one hand, that filing suit to collect on a time-barred debt violates the FDCPA, and, on the other hand, that it is not unlawful for a collector to seek repayment on a time-barred debt outside of court, as long as the notices and promises proposed above are included in the collector’s written settlement offer. As a final layer of protection, this article proposes legislative and judicial solutions to combat existing rules that deem the statute of limitations defense waived unless asserted. Under this proposal, the burden of proof would shift from the debtor-defendant to the plaintiff to affirmatively establish that the debt at issue is not time-barred, which the plaintiff must prove with evidence before a judgment, default or otherwise, may be awarded. In addition, this article proposes that courts screen all motions for default judgments in consumer debt suits and dismiss those cases where the plaintiff fails to prove the suit is timely. In combination, these proposals will resolve the present circuit split on the lawfulness of collection efforts on time-barred debts, result in recovery on such debts that is roughly the same across all similarly-situated debtors, and ensure that most collection activity on time-barred debts occurs outside the judicial process, alleviating courts of this burdensome litigation.