Novation, Re-aging and Reviving Debt

This article is a companion article to Reviving Expired Debt through Trickery. Together they discuss a major hazard to pro se litigants and other persons dealing with debt collectors and banks without legal representation, namely the revival of debts that have (or would) expire due to statutes of limitations.

If you are troubled by debts – and specially if you are being troubled by debt collectors, you no doubt are aware that law and the passage of time eventually will put an end to most of those troubles. The debts themselves have statutes of limitations regarding collection, and there are other legal mechanisms that limit the time liability exists. Bankruptcy can also instantly expire a debt, of course, under certain circumstances. In addition, the FDCPA and Credit Reporting Act limits the length of time, and the circumstances under which, bad news can be reported to the public. If you sit tight long enough, then, and do not do anything regarding specific unpaid debts – while at the same time taking certain other, beneficial actions, you will eventually restore your credit rating.

Debt collectors hate all that. They do a lot to try to patch things together to keep it from happening.The result is a Frankenstein for the consumer.

Small Payments

Have you ever wondered why debt collectors are often willing to accept small, token payments from you in response to a collection call? There are at least three good reasons for this willingness. First, they know that if you accept responsibility for the debt and make a payment, however small, you will be much more likely to pay more at a later time. In his book, Influence, Robert Cialdini calls this the pressure of “consistency,” and its power to affect you should not be underestimated. Second, they know that if you accept responsibility for the debt and pay it, you are making a legal admission, of a sort, that the debt is yours. They will argue – likely with considerable effect – that you would not have made this payment if the debt was not yours, and some courts have admitted this as evidence of a debt’s legitimacy. And third, sometimes the payments can be used to extend the statute of limitations of the debt.

The FCRA prohibits deliquent accounts that are charged off or place for collection from being reported to the credit bureaus beyond 7 years plus 180 days from the date of first delinquency. Of course, if this delinquency is erased, it will start the clock running again. Under certain circumstances, your agreement to make a payment to a bill collector can restart the clock again in probably every jurisdiction. That is, if you and the bill collector agree that your payment will be accepted in lieu of any other penaties or payments for a certain time, this arrangement probably amounts to a “novation.”

Novations

Novations are agreements that supercede and replace previous agreements. They can refer to an agreement that transfers a debt to someone else and eliminates the original party’s liability (as in certain subleasing arrangements, for example), or they can refer to an agreement that substitutes on form (or amount) of debt for another one (as in court settlements, for example). If you agree with the debt collector that your payment will somehow wipe out or satisfy other debts, you may have worked a novation by the terms of any state’s laws. Notice that there should at least be some conscious give and take between debt collector and consumer under this approach – the agreed payments have to wipe out the delinquency.

Other forms of novation are a little more questionable or state-specific. Debt collectors will always argue that any payment made changed the nature of a delinquency and resulted in a period of “working things out.” They argue from this that – at least for some period of time — the statute of limitations is or should be “tolled” (put on hold) while the parties see whether they will be able to work things out. The law generally favors parties being able to settle their differences, and so this interpretation of the law, which takes some of the time pressure off the debt collector and allows it to be more flexible in negotiating, can be persuasive. Statutes of limitations are frequently tolled under various “equitable” conditions (meaning the courts have some ability to create and enforce these conditions). See, Estoppel, Claim and Issue Preclusion, for a more detailed discussion of this power and its uses.

And there is another, very questionable type of novation that has been accepted by many courts – the “account stated” theory of liability. In this theory, persons with an account to a creditor where they regularly receive statements are considered to be agreeing to the statements and accepting them as accurate unless they actively disagree with them. Failure to pay this amount then breaches a “new” agreement and has a statute of limitations independent of the charges that may have gone into that amount. In California, among other places, this can extend the statute of limitations considerably as well as reducing the burden of proof. (As an aside, I have developed a product that helps people being sued under this theory of account stated, which I consider an unjust and unwarranted misreading of the law). It is, in other words, a form of novation.

Re-Aging Debt

In addition to re-aging debt through novation or various equitable principles as discussed above, there is also a more devious, and blatantly illegal, method of changing the debt to extend the time for collection. That is simply to rewrite the date of first delinquency of the debt using a later date. This allows collection efforts to continue longer than legally allowed, and it also allows reporting to the credit bureaus to continue beyond the allowed seven years. This practice is apparently wide-spread, and it may be more effective than one would expect because consumers are sometimes not aware of statutes of limitations and reporting cut-off dates, and they are frequently not aware of their “first delinquency” dates.

Reviving Debt

After a debt has been discharged in bankruptcy or expired by a statute of limitations, it cannot be collected through the legal process. At least some courts have held, however, that a “moral” duty to pay remains and allows debt collectors to continue to pursue the debt (through extra-legal methods) presumably till doomsday. As anyone who has read my materials should know, I do not believe there is any “moral” duty to pay a debt collector – the duty is purely legal, and when this duty expires, so should the right of the debt collectors to pursue it. But at least some courts don’t see it that way, and this supposed “moral” duty is allowed to empower the debt collectors to make new agreements that revive old debts. Any attempt to make new deals that extend the life of a debt should be looked at with a dim view.