Whether Debt Collectors Break The Law By Sending Letters On Debts Discharge In Bankruptcy

After a bankruptcy discharge, some debt collectors and mortgage servicers send collection letters that don’t distinguish between people who owe debts, those who have filed bankruptcy and even those who have received a discharge in bankruptcy. Instead, they send the exact same debt collection letter to everybody, and just add some boilerplate language that (so they argue) legalizes what would be an otherwise illegal attempt to collect a debt which had been discharged in bankruptcy.  The boilerplate disclaimer might look something like this:

THIS IS AN ATTEMPT TO COLLECT A DEBT and any information obtained will be used for that purpose.  However, if you are currently in bankruptcy or have received a bankruptcy discharge, this communication is not an attempt to collect a debt, but is being provided for informational purposes only.  

Federal law requires debt collectors to announce all attempts to collect a debt.  However, the law also prohibits debt collectors from collecting on debts that are not owed (such as those discharged in bankruptcy). This disclaimer is the Schrodinger’s Cat of debt collection: it says the letter both is and is not an attempt to collect a debt

Can debt collectors have it both ways?  Not according to at least one federal judge who analyzed the issue in Donnelly-Tovar v. Select Portfolio Servicing, Inc. from the United States District Court for the District of Nebraska:

If the letter is not an attempt to collect a debt, then it can only be an attempt to defraud or extort money from a person with no obligation to pay it or solicitation of a gift. A disclaimer stating that the letter “is not an attempt to collect a debt,” does not make that true, especially in view of indications on the face of the document that the communication is intended to obtain money and is connected to a present or former obligation to pay an indebtedness.

The collection letter at issue here is at best confusing to an unsophisticated consumer and at worst an intentionally misleading attempt to induce unsuspecting consumers into paying money on nonexistent debts. The court is troubled by the prospect that this case may involve a third-party debt buyer attempting to collect money from a consumer on a debt she does not owe.

Another federal District Court in New Jersey held, in relation to a similar letter, that:

In light of these various potential purposes, the least-sophisticated consumer would be confused as to whether Defendant was a friend or foe, and would accordingly be unsure as to what action to take. The Court finds that the Letter “appears to have been talking out of both sides of its proverbial mouth.”

The letter at issue in the New Jersey case, Gregory v. Home Retention Services, Inc. stated:

Home Retention, Inc. is a debt collector. Therefore, the following disclosures are required under various state and federal law. However, we would like to reassure you that we have been retained to assist Champion Mortgage with its efforts to reach customers who may be eligible for a Home Affordable modification Program. The true purpose of these letters is to obtain a more affordable payment for you.

Perhaps the clearest and most detailed explanation to date of this issue occurred in the federal Eleventh Circuit opinion of Reese v. Ellis, et al, a law firm:

The next question is whether the Ellis law firm’s letter and enclosed documents are an attempt to “collect” that debt. They are. The letter, which was attached to the complaint, states that the “Lender hereby demands full and immediate payment of all amounts due.” (Emphasis added.) It also threatens that “unless you pay all amounts due and owing under the Note,” attorney’s fees “will be added to the total amount for which collection is sought.” (Emphasis added.) Not only that, but one of the three documents enclosed with the letter specifically states that the law firm “IS ATTEMPTING TO COLLECT A DEBT,” and another states “THIS LAW FIRM IS ACTING AS A DEBT COLLECTOR ATTEMPTING TO COLLECT A DEBT.” In light of all that language stating that the law firm is attempting to collect a debt, the complaint sufficiently alleges that the notice is a communication related to “the collection of [a] debt” within the meaning of § 1692e.

Trying to avoid the unavoidable meaning of its statements, the Ellis law firm argues that the letter and documents are not debt-collection activity because the purpose was simply to inform the Reeses that Provident intended to enforce its security deed through the process of non-judicial foreclosure. See Ga.Code Ann. § 44-14-162.2 (requiring a party initiating a non-judicial foreclosure to notify the debtor “no later than 30 days before the date of the proposed foreclosure”). In other words, we should ignore the language in the letter and documents that demands payment on the promissory note in favor of what the firm says was the purpose (of the firm or of the letter and documents it sent, or both). If we will do that, the firm argues, we will see that the letter and documents were not an attempt to collect a debt within the meaning of § 1692e but merely an attempt to enforce a security interest.

That argument wrongly assumes that a communication cannot have dual purposes. Even if the Ellis law firm intended the letter and documents to give the Reeses notice of the foreclosure, they also could have—and did—demand payment on the underlying debt. Georgia law does not require a demand for payment of the debt to be included in a notice of foreclosure, but the law firm included one anyway. See Ga.Code Ann. § 44-14-162.2 (listing what must be included in a notice of foreclosure). The fact that the letter and documents relate to the enforcement of a security interest does not prevent them from also relating to the collection of a debt within the meaning of § 1692e.

The rule the Ellis law firm asks us to adopt would exempt from the provisions of § 1692e any communication that attempts to enforce a security interest regardless of whether it also attempts to collect the underlying debt. That rule would create a loophole in the FDCPA. A 1218*1218 big one. In every case involving a secured debt, the proposed rule would allow the party demanding payment on the underlying debt to dodge the dictates of § 1692e by giving notice of foreclosure on the secured interest. The practical result would be that the Act would apply only to efforts to collect unsecured debts. So long as a debt was secured, a lender (or its law firm) could harass or mislead a debtor without violating the FDCPA. That can’t be right. It isn’t. A communication related to debt collection does not become unrelated to debt collection simply because it also relates to the enforcement of a security interest. A debt is still a “debt” even if it is secured.

In an important footnote to the opinion, the Eleventh Circuit stated conspicuously that it was not deciding whether an attempt to enforce a security interest, unaccompanied by any demand for payment, would violate the FDCPA:

Because we hold that the Ellis law firm’s demand for payment on the promissory note was debt-collection activity within the meaning of the FDCPA, we do not reach the question of whether enforcing a security interest is itself debt-collection activity covered by the statute. That is, we do not decide whether a party enforcing a security interest without demanding payment on the underlying debt is attempting to collect a debt within the meaning of § 1692e.

So long as mortgage servicers around the country continue to both demand payment on bankruptcy-discharged mortgage notes while simultaneously denying any collection attempt if the note was discharged in bankruptcy, this issue will continue to percolate, and more courts will have to decide it.