Should Your Firm Expand Into Debt Collecting?
Following the Great Recession of 2008, many firms found it lucrative to expand their practices to encompass debt collection. They became "debt buyers," third parties who purchased the debt from the original creditor -- or even from another debt buyer -- and then tried to collect or obtain a settlement.
The business is lucrative -- consumers owe about $872 billion in credit card debt alone, according to NerdWallet. And consumers signed a contract to pay the debt back, so something is coming.
But federal and state laws designed to protect consumers from shady and abusive debt collection practices may open a firm up to additional liability that, in the end, may not be worth it.
The Fair Debt Collection Practices Act
Anyone who engages in debt collecting as their business is subject to the FDCPA, a federal law passed in 1996 to reign in shady debt collecting practices. Whether a law firm engages directly in debt collecting, or represents a person collecting a debt, the attorney is also required to obey the FDCPA.
The attorney is also liable if the debt collector violates the FDCPA and the attorney was representing the debt collector in the collection. The upshot is: If you're an attorney and you're even tangentially involved in debt collection, you could be exposed to liability under the FDCPA.
And even more regulation is coming. The Consumer Financial Protection Bureau recently filed a lawsuit against Georgia-based Frederick J. Hanna & Associates, which the CFPB claimed sent out thousands of lawsuits over debts that were unsubstantiated at best and outright fraudulent at worst, according to The Washington Post.
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What Else Could Go Wrong?
There will also be state laws you must comply with if you want to get into debt collecting. In Maryland, for example, debt collectors must be licensed by the state as collection agencies. And in California, a debt collector can't initiate a lawsuit until he's confirmed that the debt is valid and its collection is not time-barred. (In other states, the collector can file a lawsuit, and the onus is on the defendant to prove that the suit is time-barred; this is what made a lot of the "robo-signing" debt collection so lucrative.)
Increased regulatory scrutiny on debt collection means that attorneys must verify each and every debt to ensure that it's valid. Even if your state doesn't impose such requirements, a defense-side firm will make you think twice.
The rise of debt collection means a coextensive rise in debt collection defense practice, and the very first tool in their arsenal is to challenge the validity of the debt, followed closely by making sure that every piece of debt collection paperwork the law firm sends out conforms exactly to the letter of the law.
Purchasing outstanding debts could make a good addition to your practice -- or it could create a regulatory headache that's worth avoiding. There's an argument to be made that much of the early boom in debt collecting was due to the fact that the practice was somewhat unregulated. Now, with more oversight, that may no longer be the case.
Editor's Note, August 18, 2015: This post was first published in August 2014. It has since been updated.
- When is a Lawyer or Law Firm "Regularly" Collecting Debts Under the FDCPA? (Inside Arm)
- Debt Collection Law Firms Face Regulatory Scrutiny (The Wall Street Journal)
- 3rd Circuit Says Debt Collection Attorney Violated FDCPA (FindLaw's U.S. Third Circuit Blog)
- Debt Collectors' Unfair Robo-Signing Settlement Nixed by 6th Cir. (FindLaw's U.S. Sixth Circuit Blog)
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