The Supreme Court has recently issued rulings very harmful to people with debt collectors harassing or suing them. Its ruling in Henson et al. v. Santander Consumer USA, Inc., No. 16349 (Slip Op. 6-12-17) (“Santander”), seems to try to negate application of the Fair Debt Collection Practices Act (FDCPA) to the vast majority of debt collectors. I expect this decision will make it far more difficult for debt defendants to obtain legal representation and will cause debt collectors to engage in more deceptive, dishonest and abusive behavior.
Fair Debt Collection Practices Act
When Congress passed the FDCPA, the corruption and destructiveness of debt collectors were so rampant that debt collection was considered a threat to the American way of life. The FDCPA was accordingly designed to prevent fraud, deception and unfairness in general in the collection of debts, with Congress going to so far as to name numerous specific actions as “per se” violations of the Act but also to include the more general description of “unfair” debt collection practices. The reason for identifying numerous specific practices, as well as including the more general rule, was to prevent debt collectors from changing the forms their actions took without changing what they were basically doing.
The Supreme Court has just reduced that Congressional intent to a farce, applying just half of the statutory definition of “debt collector” to a case and finding that, under that half of the definition, junk debt buyers were not debt collectors.
Real-Life Debt Collection
What happens in most debt collection is that creditors sell charged-off debt to debt buyers who exist entirely to collect that money by hook or by crook. Instead of hiring debt collectors to collect on debts and then paying them out of the proceeds, the creditors now get their money first and let the debt collectors take their money from the debtors. All that has happened is that nominal ownership of the debt has changed. In other words, debt collectors have assumed a different form to pursue the very same activities.
Henson et al. v. Santander Consumer USA, Inc.
The Supreme Court has said that it would not allow parties to elevate form over substance and evade the impact of laws only about twenty million times during the course of its existence. Santander cheerfully elevates form over substance to allow the same actors to perform the same abhorrent deeds that the FDCPA was designed to prevent.
One could also characterize the Court’s ruling as dishonest in that it only analyzed half of the definition of “debt collectors.” In looking at Section 1692a(6), the court examined the defining language as “any person… who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” The court’s decision then repeatedly referred to and emphasized the words “due another,” arguing that companies were only debt collectors if they fit that traditional form of collectors.
How the FDCPA Defines “Debt Collector”
Perhaps we should look at the part of the definition preceding the language in question to get a truer view of the statute’s clear intention:
The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.
Section 1692a(6) (underlined portion is the part ignored by the Supreme Court in Santander, italicized word “any” is for emphasis)
Doesn’t it seem reasonable to read “any debts” literally, so that if the principal purpose of a business is to collect debts, they’re a debt collector? Of course it does, and that would obviously include businesses that exist to purchase debts and collect on them. The Court opinion glibly slides over that, saying that “the parties haven’t much litigated that alternative definition of debt collector and in granting certiorari we didn’t agree to consider it, either.” Santander, Slip Op. at 5. In other words, the Supreme Court agreed to hear only so much of the case as allowed them to shove a dagger into the apparent heart of the FDCPA – not enough of the case to show what the FDCPA actually intended or to do justice.
In theory, the decision in Santander leaves open the possibility that this “alternative” definition would extend the meaning of “debt collector” to junk debt buyers. On the other hand, the decision looks to me like a court in search of a justification for a desired outcome, and it has to be viewed as a negative indication for the Court’s integrity. Particularly in the context of its decision in Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17) (see my article, “Opening the Floodgates of Bad Claims”), it shows actual hostility to the laws that protect consumers from debt collectors and a willingness to engage in intellectually dishonest games to destroy them. As a practical matter, it will likely be several years before the Supreme Court revisits the definition of “debt collector” and applies the entire definition to the question of junk debt buyers.
Pleading that a Junk Debt Buyer is a “Debt Collector”
The Supreme Court passed over the part of the definition of debt collector that defined businesses in terms of their “principal purpose” in favor of the “regularly collected” language. Why? Probably because debt defendants have normally found it very easy to prove that a company “regularly collected” debts – in fact, under prevailing Eighth Circuit law, for example, if a law firm represents collectors in as few as three to five cases per year it is considered to be “regularly collecting” debts. Under fact pleading rules, one must plead facts constituting a basis for your legal conclusion. So debt defendants routinely allege something like the following:
Heartless, Ruthless and Merciless, Attorneys at Law, represent debt collectors in dozens of lawsuits attempting to collect debts per year and are, accordingly, debt collectors, and
Heartless Debt Collector, Inc., regularly sues persons for debts purchased after default…
In other words, debt defendants have typically used the “regularly collected” language because it is easy to demonstrate as a matter of public record. Establishing a business’s “principal purpose” will be much more difficult. My attempts to find an authoritative definition for “principal purpose” of a business turned up zero cases. While I’m confident that there must be some cases that address the issue, it is certainly not many. The term “principal purpose” is frequently used in judicial decisions, but its use is primarily generic, as a synonym for “main” or “major.” I found no cases quantifying the term in any way.
The junk debt buyers, who purchase billions of dollars of debt for no other purpose than to collect it in any way they can, will argue that their “principal purpose” is to “service” that debt. In their lexicon that really means extort payment in as many ways, over as long a period, as possible. But they will claim all manner of beneficial purposes for their activities, and this will alter the nature of the proof required to establish that the company is a debt collector. Rather than being a matter of public record, information regarding a business’s “principal purpose” will be in the possession of the debt collector – and that means that parties attempting to obtain that information will encounter the same series of stone walls, delays and unethical and oppressive litigation strategies they encounter in all their other discovery attempts.
Considering the current ideology and integrity of the Supreme Court, of which debt collectors are very well aware, who knows what the courts will officially “believe?” As a debt defendant, you must now allege and attempt to prove that the debt collector’s main business is to collect debts, but the judicial wind will be in your face.
What Debt Defendants Should Do
Debt defendants have all the same defenses to debt lawsuits they ever did – or almost all of them. Santander applies very little to the defense of debt suits.
On the other hand, many and perhaps most lawyers are going to be scared away from taking debt cases. Many lawyers who have not closely examined Santander will simply regard the FDCPA as not applying to junk debt buyers – and that is almost all the debt collectors in litigation these days. These lawyers will decline to take debt defense cases or will charge much more, and accomplish much less, than they would have, because they will not think they can counterclaim on your behalf. Lawyers who have closely examined Santander and see the same things I do will have to charge more for their services and warn clients that chances of prevailing are not as good as they used to be.
This means that far more debt defendants will be on their own. The only way many of them will be able to have a defense at all will be if they defend themselves.
If you are currently involved in a debt lawsuit – with or without a lawyer, or as a lawyer on behalf of clients – and have a counterclaim, you should expect to see a motion to dismiss based on Santander. I believe you will want to amend your counterclaim to include the “principal purpose” language mentioned above. You will also need to conduct discovery designed to prove the company’s principal purpose.
Bankruptcy has been one refuge debtors have from debt collectors, but the Supreme Court has recently made things much worse. In Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17), the Court held that filing claims in bankruptcy court on debts that are beyond the statute of limitations does not violate the Fair Debt Collection Practices Act (FDCPA). If you are in bankruptcy or considering it, this is huge.
Opening the Floodgates to Bad Claims
What Bankruptcy Does
In general, if your debts get too bad, you can file bankruptcy and force all your creditors to stop contacting you. They have to file claims in your bankruptcy action, and the court will either grant those claims or deny them. The court then determines the amount of payments you must make, over what period of time, and you do your best to do that.
It isn’t an easy path, and in fact most bankruptcies are dissolved without “discharge.” That is, most bankruptcies end without accomplishing their purpose. Obviously, the less money you have to pay, and the shorter the period you have to make payments, the better your chances of getting what you wanted out of bankruptcy in the first place: a “fresh start.”
The dirty little secret of bankruptcy, though, is that if claims are not disputed, they are generally granted. In bankruptcy cases brought by poor people (you can bet Donald Trump never had this problem), the lawyers representing the bankrupts have little (personal) incentive to dispute wrongful claims because they’re being paid out of the scanty resources of their clients. There’s a U.S. trustee who is supposed to oversee the process and protect the bankrupt and legitimate creditors from bad claims, but guess what?
They often don’t. Likewise, the court should attempt to winnow out bad claims, but given the number of bankruptcies and their complexity, this often does not happen.
In most bankruptcies, allowing a bad claim means that it’s going to get paid (eventually) by the person filing for bankruptcy. Under current realities, that means a lot of bad claims get paid by poor people.
Enter the junk debt buyers to make things much worse. They buy vast amounts of LONG overdue debt – debt far beyond the statute of limitations – and file claims in bankruptcy cases. This bogs the bankruptcy courts, the trustees, and bankruptcy lawyers down. The more bad claims they file, the more get through because of carelessness. They should NEVER get through, because an unenforceable claim should ALWAYS be denied under bankruptcy rules.
Bad claims hurt the chances of the bankrupts to get their fresh start, hurt the chances of the legitimate creditors to get paid, and incidentally makes the whole process stink to high heaven of injustice. Concern about this obvious corruption of the entire process, incidentally, is not just liberal “blather.” The courts jealously guard their claims to legitimacy – legitimacy is essential to their ability to work at all. Allowing a bunch of hoodlums in fancy suits to steal wholesale from the poor damages the legal system at its very core.
The FDCPA used to offer some protection against that, but the Supreme Court negated that protection with its holding in Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17). In that case, the Court ruled that debt collectors could file claims in bankruptcy that would be illegal if filed in other courts.
Midland Funding, LLC v. Johnson
The relevant facts in Midland Funding are very simple. Midland, a junk debt buyer, was buying extremely old debts for very small amounts of money. They were using these debts, which were far beyond the statutes of limitations, as the basis for many claims in bankruptcy. Johnson opposed and had the claim in that case disallowed, and then filed suit in district court under the FDCPA, alleging that the claim had been unfair or unconscionable. The essence of Johnson’s claim was that filing obviously time-barred claims in a bankruptcy proceeding was an unfair debt collection practice.
The Supreme Court ruled that it was not.
There is no need to review (here) the tortured logic that effectively immunizes from consequences the intentional doing of something that never, under any circumstances, should be allowed. The state of the law simply is this: debt collectors can file obviously unenforceable claims in bankruptcy without worrying about the FDCPA.
There is perhaps one glimmer of light in this very bad decision. The Supreme Court was addressing “obviously outdated” claims. What Midland was doing was buying obviously unenforceable claims and hoping they would be overlooked and erroneously allowed. While this obviousness is one main way a debt collector’s intention to file outdated claims would be known, the obviousness was also a reason the Court found that the claims were not “deceptive.” What if the claims were known to be outdated by the debt collector but were not obviously so? Facts like that, or similar facts tending to show some actual intent to deceive would present difficult evidentiary issues, but the case could arise and might tip the balance in the other direction.
Conclusion
What the Midland Funding case means, in practical effect, however, is that even if you’re in bankruptcy you’re going to have to know and protect your own rights. Your lawyer has VERY LITTLE incentive to challenge bad claims, and the U.S. Trustee has VERY LITTLE time (or incentive) to do it. If the claims are allowed, you will be stuck paying them in all likelihood. That means that even if you file for bankruptcy you must be prepared to defend yourself against the debt collectors. You will AT LEAST need to know your rights, and you will very probably have to defend them pro se. You’re probably not going to get much help from your lawyer on this one.
https://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webp00Ken Giberthttps://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webpKen Gibert2018-06-05 18:13:182018-10-07 18:11:59Bankrupts Beware – FDCPA No Longer Applies to Claims
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https://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webp00Ken Giberthttps://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webpKen Gibert2018-06-05 17:58:542018-10-07 18:16:04Original Creditor or Someone Else – Who is Suing You?
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https://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webp00Ken Giberthttps://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webpKen Gibert2018-06-05 17:43:352018-10-07 18:20:23Give No Free Information – Beware the Hardship Application
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https://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webp00Ken Giberthttps://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webpKen Gibert2018-06-05 17:36:402018-10-07 18:26:14Never make a Partial Payment
Demanding verification of your debt will NOT prevent a default judgment if you get sued.
People in debt trouble hear a lot about debt validation, and that is a good thing. I have argued that even though verification requires little from the debt collector, it’s still a good idea to make the demand when you’re first contacted by a debt collector who is trying to harass you into paying. I think that requesting verification sends a signal to the debt collector that you will defend your rights. If you get sued by a debt collector – even if that’s the first you’ve ever heard from them – you must do more. You must answer the lawsuit by filing your answer in court.
Anything short of that allows the debt collector to get a default judgment, and that will effectively end your rights to fight the debt.
Conclusion
When a debt collector (or creditor) files suit against you, you will have to file an answer in court to avoid a default judgment. Many people think all they have to do is “dispute the debt and request verification.” The right to verification, however, applies only to collection efforts that are not part of a lawsuit. Don’t be a verification sucker – file an Answer and defend yourself.
https://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webp00Ken Giberthttps://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webpKen Gibert2018-06-05 17:32:142018-10-07 18:29:35Demanding Verification is NOT a Substitute for an Answer to Lawsuit
There is unfortunately little you can do in talking to student loan collectors. Most of the time, the debt collectors themselves really have little right to negotiate with you. The law behind student loans is that they are not dischargeable in bankruptcy absent “extraordinary” circumstances and “undue hardship,” and the cases discussing the issue have been extremely unpromising, to say the very least, about what circumstances must be in order for them to be “extraordinary.” “Undue hardship” has been interpreted to mean “no likelihood of ever being able to pay the debt,” an almost unprovable burden. On the bright side, there are increasing numbers of organizations and programs out there to help, and the lending institutions have not seemed eager to sue anybody.
One of the programs that might help you deal with student loans (not a negotiation) is an “income-based” payment (IBR) program. The plans call for a payment “cap” of a certain percentage of discretionary income and provide for loan “forgiveness” after a certain period of time. The program seems, at first sight, to be very reasonable, with a limit on payments and amount of time that will be required. They are for federal loans.
Another sort of help is available if you are doing some sorts of public or nonprofit service as your job, you may be able to get help from the federal government. Click here for the link that will take you to the government site discussing that help. This program is designed for only certain kinds of loans. Here’s what the government says about it:
Only loans you received under the William D. Ford Federal Direct Loan (Direct Loan) Program are eligible for PSLF. Loans you received under the Federal Family Education Loan (FFEL) Program, the Federal Perkins Loan (Perkins Loan) Program, or any other student loan program are not eligible for PSLF.
If you have FFEL Program or Perkins Loan Program loans, you may consolidate them into a Direct Consolidation Loan to take advantage of PSLF. However, only payments you make on the new Direct Consolidation Loan will count toward the required 120 qualifying payments for PSLF. Payments made on your FFEL Program or Perkins Loan Program loans before you consolidated them, even if they were made under a qualifying repayment plan, do not count as qualifying PSLF payments.
There are serious limits to the kind of help this offers, but for some people this will be a way out of difficulty. Click here for more information.
Another, similar program, the “Pay as You Earn” program, is, like the IBR program above, based on a type of financial hardship. The program provides for payment caps and loan forgiveness if your payments would be too much for you to be able to afford under the standards established by the program. You can find out about that here: Pay as You Earn.
For more help on student loans, you should check out the Project on Student Debt. If you aren’t sure what kind of loans you have, check out the National Student Loan Database System for Students and select “Financial Aid Review” for a list of all the federal loans to you. Click each individual loan to see who the servicer is for that loan (this is the company that collects payments from you). Remember that system shows only your federal student loans, however, and not your private or state student loans. Contact your school to see whether you have non-federal loans if you are in doubt about that, as they keep a record of them.
Unfortunately, there’s really very little or even no negotiating with debt collectors on student loans, as we said above. There seem to be no market pressures on them to settle at all – they aren’t worried about the debt expiring, the companies that issue the debt are large and government-subsidized, and “educational loans” are one of the last great sacred cows in our country.
The positive side of dealing with student loans, however, is that while the collectors will call and bug you, somebody in the collection department usually does seem to take notice of the actual financial reality you are facing. If you tell them that you do not have the money to pay, they will often – usually even, it seems, refuse to agree to partial payments – but then they usually don’t take any type of collection action, either, and they only very rarely sue anybody. The downside here is still significant, however, as the information might very well end up on your credit report and cost you that way. And eventually the lender might get around to suing you after all if they find out you have property, so they may create problems if you own your home.
https://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webp00Ken Giberthttps://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webpKen Gibert2018-06-04 22:10:002018-10-07 18:33:15Programs that may help with student loans
https://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webp00Ken Giberthttps://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webpKen Gibert2018-06-04 21:41:572018-10-07 18:36:42Things new debt litigants need to know
If your bills are adding up and the bill collectors are beginning to bug you, you need to start taking action to protect yourself.
This video goes through the reasons you should win if you get sued for debt and begins the discussion on how to send the right signals to the debt collectors to leave you alone.
https://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webp00Ken Giberthttps://yourlegallegup.com/wp-content/uploads/2025/04/logo-208x300.webpKen Gibert2018-06-04 21:25:522018-10-07 18:41:12What to do if you have debt troubles part 1
Sometimes debt collectors will attach an “identity theft affidavit” to the discovery they give you and “request” or suggest that you fill it out and file it with authorities. Or they invite you to send it to the debt collector so that it can file it with the authorities. Sometimes they try to get you to believe there is something in the discovery process that forces you to fill out such an affidavit. Sometimes they try to get you to believe they’re “just trying to help.”
They aren’t trying to help, and you don’t have to fill out such an affidavit. They want to make you think that denying you owe them money could turn into or be a crime.
I believe this practice violates the Fair Debt Collection Practices Act (FDCPA) and makes both the debt collector and its attorney liable to you under the Act.
Attaching an Identity Theft Affidavit violates the FDCPA
Attaching the ID theft affidavit violates the FDCPA because it deceptively attempts to create the impression that they can require that such an affidavit be filed. They want you to feel that you must swear – to the police – that your identity has been stolen or give up any claim that it may have been done. It increases the general “pressure” already created by the litigation itself. This exerts improper and unconscionable pressure on the debt defendant to give up on his defense and capitulate to the debt collector.
Let’s Get this Straight
If you allege that your identity has been stolen and maintain this as a defense to the action against you, you will eventually probably have to swear to it under oath. Eventually. If the matter goes to trial. Doing so falsely could subject you to criminal punishment. But lying in such testimony is probably not as big a deal as lying to law enforcement and filing a false charge. You’re less likely to be caught or punished for “mere” perjury – not that we suggest it, of course. Exerting pressure on you to file such a report is an attempt to raise the stakes of the litigation. Since most people understand that filing a report with the police is serious and could involve repercussions, they are hesitant to do so whether it would be justified or not.
And there are times when someone has stolen your identity in a way which would defeat your liability where you would not want to involve the police. Nor do you have to.
No Right to the Affidavit
The discovery process does not give any party the right to require another party to make a report to any governmental agency. The only way you could be forced to take such an action is by court order (possibly, under certain circumstances unlikely to occur in debt litigation – and certainly not as part of the discovery process). Discovery is a process of asking about and providing answers (or objections) to questions about documents or other information you have in your possession or control. Sometimes – but rarely – this can include making “compilations” of particulary complex data or records. Never can it require you to create or send a report of any sort to someone unrelated to the litigation (i.e., the police).
Deceptive
Knowing that forcing you to make a report on identity theft is far beyond their legitimate powers, the debt collectors will sometimes merely “include” it in their discovery packets – inviting you to draw the conclusion that you must file it with the police. In the case of a represented party against an unrepresented, unsophisticated party, this is probably an unethical practice for the lawyer to engage in. It is deliberately deceptive and blatantly tries to create a false impression on the part of someone vulnerable to misrepresentation.
Attempt to Collect a Debt
The FDCPA makes any debt collector liable when it uses unfair or deceptive techniques in its efforts to collect a debt originally owed to someone else. Simple attaching an ID theft affidavit to discovery is utterly deceptive, as it tries to take advantage of an unsophisticated litigant’s lack of knowledge – and fear – of the legal process to cause it to do something the debt collector has no right to ask. And of course this exerts pressure on the consumer to pay if for any reason he or she cannot truthfully file such a report. Making a false report to the police authorities is a crime. Being unwilling to file one makes no statement about whether or not the debt is legitimate or owed to the debt collector – but it knows that unsophisticated pro se litigants will think that it does. So these litigants will feel pressure to give up their cases – pressure applied under the disguise of the legal process but deriving no actual power from it.
That is the essence of an unfair debt collection practice.
Supreme Court Attacks FDCPA – Erodes Definition of Debt Collector
The Supreme Court has recently issued rulings very harmful to people with debt collectors harassing or suing them. Its ruling in Henson et al. v. Santander Consumer USA, Inc., No. 16349 (Slip Op. 6-12-17) (“Santander”), seems to try to negate application of the Fair Debt Collection Practices Act (FDCPA) to the vast majority of debt collectors. I expect this decision will make it far more difficult for debt defendants to obtain legal representation and will cause debt collectors to engage in more deceptive, dishonest and abusive behavior.
Fair Debt Collection Practices Act
When Congress passed the FDCPA, the corruption and destructiveness of debt collectors were so rampant that debt collection was considered a threat to the American way of life. The FDCPA was accordingly designed to prevent fraud, deception and unfairness in general in the collection of debts, with Congress going to so far as to name numerous specific actions as “per se” violations of the Act but also to include the more general description of “unfair” debt collection practices. The reason for identifying numerous specific practices, as well as including the more general rule, was to prevent debt collectors from changing the forms their actions took without changing what they were basically doing.
The Supreme Court has just reduced that Congressional intent to a farce, applying just half of the statutory definition of “debt collector” to a case and finding that, under that half of the definition, junk debt buyers were not debt collectors.
Real-Life Debt Collection
What happens in most debt collection is that creditors sell charged-off debt to debt buyers who exist entirely to collect that money by hook or by crook. Instead of hiring debt collectors to collect on debts and then paying them out of the proceeds, the creditors now get their money first and let the debt collectors take their money from the debtors. All that has happened is that nominal ownership of the debt has changed. In other words, debt collectors have assumed a different form to pursue the very same activities.
Henson et al. v. Santander Consumer USA, Inc.
The Supreme Court has said that it would not allow parties to elevate form over substance and evade the impact of laws only about twenty million times during the course of its existence. Santander cheerfully elevates form over substance to allow the same actors to perform the same abhorrent deeds that the FDCPA was designed to prevent.
One could also characterize the Court’s ruling as dishonest in that it only analyzed half of the definition of “debt collectors.” In looking at Section 1692a(6), the court examined the defining language as “any person… who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” The court’s decision then repeatedly referred to and emphasized the words “due another,” arguing that companies were only debt collectors if they fit that traditional form of collectors.
How the FDCPA Defines “Debt Collector”
Perhaps we should look at the part of the definition preceding the language in question to get a truer view of the statute’s clear intention:
The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.
Section 1692a(6) (underlined portion is the part ignored by the Supreme Court in Santander, italicized word “any” is for emphasis)
Doesn’t it seem reasonable to read “any debts” literally, so that if the principal purpose of a business is to collect debts, they’re a debt collector? Of course it does, and that would obviously include businesses that exist to purchase debts and collect on them. The Court opinion glibly slides over that, saying that “the parties haven’t much litigated that alternative definition of debt collector and in granting certiorari we didn’t agree to consider it, either.” Santander, Slip Op. at 5. In other words, the Supreme Court agreed to hear only so much of the case as allowed them to shove a dagger into the apparent heart of the FDCPA – not enough of the case to show what the FDCPA actually intended or to do justice.
In theory, the decision in Santander leaves open the possibility that this “alternative” definition would extend the meaning of “debt collector” to junk debt buyers. On the other hand, the decision looks to me like a court in search of a justification for a desired outcome, and it has to be viewed as a negative indication for the Court’s integrity. Particularly in the context of its decision in Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17) (see my article, “Opening the Floodgates of Bad Claims”), it shows actual hostility to the laws that protect consumers from debt collectors and a willingness to engage in intellectually dishonest games to destroy them. As a practical matter, it will likely be several years before the Supreme Court revisits the definition of “debt collector” and applies the entire definition to the question of junk debt buyers.
Pleading that a Junk Debt Buyer is a “Debt Collector”
The Supreme Court passed over the part of the definition of debt collector that defined businesses in terms of their “principal purpose” in favor of the “regularly collected” language. Why? Probably because debt defendants have normally found it very easy to prove that a company “regularly collected” debts – in fact, under prevailing Eighth Circuit law, for example, if a law firm represents collectors in as few as three to five cases per year it is considered to be “regularly collecting” debts. Under fact pleading rules, one must plead facts constituting a basis for your legal conclusion. So debt defendants routinely allege something like the following:
Heartless, Ruthless and Merciless, Attorneys at Law, represent debt collectors in dozens of lawsuits attempting to collect debts per year and are, accordingly, debt collectors, and
Heartless Debt Collector, Inc., regularly sues persons for debts purchased after default…
In other words, debt defendants have typically used the “regularly collected” language because it is easy to demonstrate as a matter of public record. Establishing a business’s “principal purpose” will be much more difficult. My attempts to find an authoritative definition for “principal purpose” of a business turned up zero cases. While I’m confident that there must be some cases that address the issue, it is certainly not many. The term “principal purpose” is frequently used in judicial decisions, but its use is primarily generic, as a synonym for “main” or “major.” I found no cases quantifying the term in any way.
The junk debt buyers, who purchase billions of dollars of debt for no other purpose than to collect it in any way they can, will argue that their “principal purpose” is to “service” that debt. In their lexicon that really means extort payment in as many ways, over as long a period, as possible. But they will claim all manner of beneficial purposes for their activities, and this will alter the nature of the proof required to establish that the company is a debt collector. Rather than being a matter of public record, information regarding a business’s “principal purpose” will be in the possession of the debt collector – and that means that parties attempting to obtain that information will encounter the same series of stone walls, delays and unethical and oppressive litigation strategies they encounter in all their other discovery attempts.
Considering the current ideology and integrity of the Supreme Court, of which debt collectors are very well aware, who knows what the courts will officially “believe?” As a debt defendant, you must now allege and attempt to prove that the debt collector’s main business is to collect debts, but the judicial wind will be in your face.
What Debt Defendants Should Do
Debt defendants have all the same defenses to debt lawsuits they ever did – or almost all of them. Santander applies very little to the defense of debt suits.
On the other hand, many and perhaps most lawyers are going to be scared away from taking debt cases. Many lawyers who have not closely examined Santander will simply regard the FDCPA as not applying to junk debt buyers – and that is almost all the debt collectors in litigation these days. These lawyers will decline to take debt defense cases or will charge much more, and accomplish much less, than they would have, because they will not think they can counterclaim on your behalf. Lawyers who have closely examined Santander and see the same things I do will have to charge more for their services and warn clients that chances of prevailing are not as good as they used to be.
This means that far more debt defendants will be on their own. The only way many of them will be able to have a defense at all will be if they defend themselves.
If you are currently involved in a debt lawsuit – with or without a lawyer, or as a lawyer on behalf of clients – and have a counterclaim, you should expect to see a motion to dismiss based on Santander. I believe you will want to amend your counterclaim to include the “principal purpose” language mentioned above. You will also need to conduct discovery designed to prove the company’s principal purpose.
Bankrupts Beware – FDCPA No Longer Applies to Claims
Bankruptcy has been one refuge debtors have from debt collectors, but the Supreme Court has recently made things much worse. In Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17), the Court held that filing claims in bankruptcy court on debts that are beyond the statute of limitations does not violate the Fair Debt Collection Practices Act (FDCPA). If you are in bankruptcy or considering it, this is huge.
Opening the Floodgates to Bad Claims
What Bankruptcy Does
In general, if your debts get too bad, you can file bankruptcy and force all your creditors to stop contacting you. They have to file claims in your bankruptcy action, and the court will either grant those claims or deny them. The court then determines the amount of payments you must make, over what period of time, and you do your best to do that.
It isn’t an easy path, and in fact most bankruptcies are dissolved without “discharge.” That is, most bankruptcies end without accomplishing their purpose. Obviously, the less money you have to pay, and the shorter the period you have to make payments, the better your chances of getting what you wanted out of bankruptcy in the first place: a “fresh start.”
The dirty little secret of bankruptcy, though, is that if claims are not disputed, they are generally granted. In bankruptcy cases brought by poor people (you can bet Donald Trump never had this problem), the lawyers representing the bankrupts have little (personal) incentive to dispute wrongful claims because they’re being paid out of the scanty resources of their clients. There’s a U.S. trustee who is supposed to oversee the process and protect the bankrupt and legitimate creditors from bad claims, but guess what?
They often don’t. Likewise, the court should attempt to winnow out bad claims, but given the number of bankruptcies and their complexity, this often does not happen.
In most bankruptcies, allowing a bad claim means that it’s going to get paid (eventually) by the person filing for bankruptcy. Under current realities, that means a lot of bad claims get paid by poor people.
Enter the junk debt buyers to make things much worse. They buy vast amounts of LONG overdue debt – debt far beyond the statute of limitations – and file claims in bankruptcy cases. This bogs the bankruptcy courts, the trustees, and bankruptcy lawyers down. The more bad claims they file, the more get through because of carelessness. They should NEVER get through, because an unenforceable claim should ALWAYS be denied under bankruptcy rules.
Bad claims hurt the chances of the bankrupts to get their fresh start, hurt the chances of the legitimate creditors to get paid, and incidentally makes the whole process stink to high heaven of injustice. Concern about this obvious corruption of the entire process, incidentally, is not just liberal “blather.” The courts jealously guard their claims to legitimacy – legitimacy is essential to their ability to work at all. Allowing a bunch of hoodlums in fancy suits to steal wholesale from the poor damages the legal system at its very core.
The FDCPA used to offer some protection against that, but the Supreme Court negated that protection with its holding in Midland Funding, LLC v. Johnson, No. 16-348 (Slip Op. 5-15-17). In that case, the Court ruled that debt collectors could file claims in bankruptcy that would be illegal if filed in other courts.
Midland Funding, LLC v. Johnson
The relevant facts in Midland Funding are very simple. Midland, a junk debt buyer, was buying extremely old debts for very small amounts of money. They were using these debts, which were far beyond the statutes of limitations, as the basis for many claims in bankruptcy. Johnson opposed and had the claim in that case disallowed, and then filed suit in district court under the FDCPA, alleging that the claim had been unfair or unconscionable. The essence of Johnson’s claim was that filing obviously time-barred claims in a bankruptcy proceeding was an unfair debt collection practice.
The Supreme Court ruled that it was not.
There is no need to review (here) the tortured logic that effectively immunizes from consequences the intentional doing of something that never, under any circumstances, should be allowed. The state of the law simply is this: debt collectors can file obviously unenforceable claims in bankruptcy without worrying about the FDCPA.
There is perhaps one glimmer of light in this very bad decision. The Supreme Court was addressing “obviously outdated” claims. What Midland was doing was buying obviously unenforceable claims and hoping they would be overlooked and erroneously allowed. While this obviousness is one main way a debt collector’s intention to file outdated claims would be known, the obviousness was also a reason the Court found that the claims were not “deceptive.” What if the claims were known to be outdated by the debt collector but were not obviously so? Facts like that, or similar facts tending to show some actual intent to deceive would present difficult evidentiary issues, but the case could arise and might tip the balance in the other direction.
Conclusion
What the Midland Funding case means, in practical effect, however, is that even if you’re in bankruptcy you’re going to have to know and protect your own rights. Your lawyer has VERY LITTLE incentive to challenge bad claims, and the U.S. Trustee has VERY LITTLE time (or incentive) to do it. If the claims are allowed, you will be stuck paying them in all likelihood. That means that even if you file for bankruptcy you must be prepared to defend yourself against the debt collectors. You will AT LEAST need to know your rights, and you will very probably have to defend them pro se. You’re probably not going to get much help from your lawyer on this one.
Original Creditor or Someone Else – Who is Suing You?
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Give No Free Information – Beware the Hardship Application
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Never make a Partial Payment
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Demanding Verification is NOT a Substitute for an Answer to Lawsuit
Don’t be a Verification Sucker
Demanding verification of your debt will NOT prevent a default judgment if you get sued.
People in debt trouble hear a lot about debt validation, and that is a good thing. I have argued that even though verification requires little from the debt collector, it’s still a good idea to make the demand when you’re first contacted by a debt collector who is trying to harass you into paying. I think that requesting verification sends a signal to the debt collector that you will defend your rights. If you get sued by a debt collector – even if that’s the first you’ve ever heard from them – you must do more. You must answer the lawsuit by filing your answer in court.
Anything short of that allows the debt collector to get a default judgment, and that will effectively end your rights to fight the debt.
Conclusion
When a debt collector (or creditor) files suit against you, you will have to file an answer in court to avoid a default judgment. Many people think all they have to do is “dispute the debt and request verification.” The right to verification, however, applies only to collection efforts that are not part of a lawsuit. Don’t be a verification sucker – file an Answer and defend yourself.
Programs that may help with student loans
There is unfortunately little you can do in talking to student loan collectors. Most of the time, the debt collectors themselves really have little right to negotiate with you. The law behind student loans is that they are not dischargeable in bankruptcy absent “extraordinary” circumstances and “undue hardship,” and the cases discussing the issue have been extremely unpromising, to say the very least, about what circumstances must be in order for them to be “extraordinary.” “Undue hardship” has been interpreted to mean “no likelihood of ever being able to pay the debt,” an almost unprovable burden. On the bright side, there are increasing numbers of organizations and programs out there to help, and the lending institutions have not seemed eager to sue anybody.
One of the programs that might help you deal with student loans (not a negotiation) is an “income-based” payment (IBR) program. The plans call for a payment “cap” of a certain percentage of discretionary income and provide for loan “forgiveness” after a certain period of time. The program seems, at first sight, to be very reasonable, with a limit on payments and amount of time that will be required. They are for federal loans.
Another sort of help is available if you are doing some sorts of public or nonprofit service as your job, you may be able to get help from the federal government. Click here for the link that will take you to the government site discussing that help. This program is designed for only certain kinds of loans. Here’s what the government says about it:
Only loans you received under the William D. Ford Federal Direct Loan (Direct Loan) Program are eligible for PSLF. Loans you received under the Federal Family Education Loan (FFEL) Program, the Federal Perkins Loan (Perkins Loan) Program, or any other student loan program are not eligible for PSLF.
If you have FFEL Program or Perkins Loan Program loans, you may consolidate them into a Direct Consolidation Loan to take advantage of PSLF. However, only payments you make on the new Direct Consolidation Loan will count toward the required 120 qualifying payments for PSLF. Payments made on your FFEL Program or Perkins Loan Program loans before you consolidated them, even if they were made under a qualifying repayment plan, do not count as qualifying PSLF payments.
There are serious limits to the kind of help this offers, but for some people this will be a way out of difficulty. Click here for more information.
Another, similar program, the “Pay as You Earn” program, is, like the IBR program above, based on a type of financial hardship. The program provides for payment caps and loan forgiveness if your payments would be too much for you to be able to afford under the standards established by the program. You can find out about that here: Pay as You Earn.
For more help on student loans, you should check out the Project on Student Debt. If you aren’t sure what kind of loans you have, check out the National Student Loan Database System for Students and select “Financial Aid Review” for a list of all the federal loans to you. Click each individual loan to see who the servicer is for that loan (this is the company that collects payments from you). Remember that system shows only your federal student loans, however, and not your private or state student loans. Contact your school to see whether you have non-federal loans if you are in doubt about that, as they keep a record of them.
For more information on student loans and repayment, check out consumer finance. If you are active-duty military, there may be benefits helpful to you under the Service Members Civil Relief Act. If you’re not in the military and have private loans, you have fewer options, but take a look at: Paying for College. For an article on reducing student debt without paying for it or click here for a free ebook on ways to get rid of student loans without paying for them
One of the options we found interesting was the public service type loan forgiveness program that also helps with state or private loans
Negotiating Student Loans with Debt Collectors
Unfortunately, there’s really very little or even no negotiating with debt collectors on student loans, as we said above. There seem to be no market pressures on them to settle at all – they aren’t worried about the debt expiring, the companies that issue the debt are large and government-subsidized, and “educational loans” are one of the last great sacred cows in our country.
The positive side of dealing with student loans, however, is that while the collectors will call and bug you, somebody in the collection department usually does seem to take notice of the actual financial reality you are facing. If you tell them that you do not have the money to pay, they will often – usually even, it seems, refuse to agree to partial payments – but then they usually don’t take any type of collection action, either, and they only very rarely sue anybody. The downside here is still significant, however, as the information might very well end up on your credit report and cost you that way. And eventually the lender might get around to suing you after all if they find out you have property, so they may create problems if you own your home.
Things new debt litigants need to know
What to do if you have debt troubles part 1
If your bills are adding up and the bill collectors are beginning to bug you, you need to start taking action to protect yourself.
This video goes through the reasons you should win if you get sued for debt and begins the discussion on how to send the right signals to the debt collectors to leave you alone.
Identity Theft Affidavits – Debt Collector Dirty Trick, Part 1
Sometimes debt collectors will attach an “identity theft affidavit” to the discovery they give you and “request” or suggest that you fill it out and file it with authorities. Or they invite you to send it to the debt collector so that it can file it with the authorities. Sometimes they try to get you to believe there is something in the discovery process that forces you to fill out such an affidavit. Sometimes they try to get you to believe they’re “just trying to help.”
They aren’t trying to help, and you don’t have to fill out such an affidavit. They want to make you think that denying you owe them money could turn into or be a crime.
I believe this practice violates the Fair Debt Collection Practices Act (FDCPA) and makes both the debt collector and its attorney liable to you under the Act.
Attaching an Identity Theft Affidavit violates the FDCPA
Attaching the ID theft affidavit violates the FDCPA because it deceptively attempts to create the impression that they can require that such an affidavit be filed. They want you to feel that you must swear – to the police – that your identity has been stolen or give up any claim that it may have been done. It increases the general “pressure” already created by the litigation itself. This exerts improper and unconscionable pressure on the debt defendant to give up on his defense and capitulate to the debt collector.
Let’s Get this Straight
If you allege that your identity has been stolen and maintain this as a defense to the action against you, you will eventually probably have to swear to it under oath. Eventually. If the matter goes to trial. Doing so falsely could subject you to criminal punishment. But lying in such testimony is probably not as big a deal as lying to law enforcement and filing a false charge. You’re less likely to be caught or punished for “mere” perjury – not that we suggest it, of course. Exerting pressure on you to file such a report is an attempt to raise the stakes of the litigation. Since most people understand that filing a report with the police is serious and could involve repercussions, they are hesitant to do so whether it would be justified or not.
And there are times when someone has stolen your identity in a way which would defeat your liability where you would not want to involve the police. Nor do you have to.
No Right to the Affidavit
The discovery process does not give any party the right to require another party to make a report to any governmental agency. The only way you could be forced to take such an action is by court order (possibly, under certain circumstances unlikely to occur in debt litigation – and certainly not as part of the discovery process). Discovery is a process of asking about and providing answers (or objections) to questions about documents or other information you have in your possession or control. Sometimes – but rarely – this can include making “compilations” of particulary complex data or records. Never can it require you to create or send a report of any sort to someone unrelated to the litigation (i.e., the police).
Deceptive
Knowing that forcing you to make a report on identity theft is far beyond their legitimate powers, the debt collectors will sometimes merely “include” it in their discovery packets – inviting you to draw the conclusion that you must file it with the police. In the case of a represented party against an unrepresented, unsophisticated party, this is probably an unethical practice for the lawyer to engage in. It is deliberately deceptive and blatantly tries to create a false impression on the part of someone vulnerable to misrepresentation.
Attempt to Collect a Debt
The FDCPA makes any debt collector liable when it uses unfair or deceptive techniques in its efforts to collect a debt originally owed to someone else. Simple attaching an ID theft affidavit to discovery is utterly deceptive, as it tries to take advantage of an unsophisticated litigant’s lack of knowledge – and fear – of the legal process to cause it to do something the debt collector has no right to ask. And of course this exerts pressure on the consumer to pay if for any reason he or she cannot truthfully file such a report. Making a false report to the police authorities is a crime. Being unwilling to file one makes no statement about whether or not the debt is legitimate or owed to the debt collector – but it knows that unsophisticated pro se litigants will think that it does. So these litigants will feel pressure to give up their cases – pressure applied under the disguise of the legal process but deriving no actual power from it.
That is the essence of an unfair debt collection practice.
This is Part 1 of this Article. Click here for part 2.