In a mashup of metaphors of the undead, the Maryland General Assembly has driven a silver stake into the heart of Zombie debt by its passage of SB 771, which was signed by the Governor as Chapter 579, Acts of Maryland 2016, and which will take effect on October 1, 2016. While a silver stake will kill a vampire, this silver stake may not kill the debt buying industry. It will, however, leave it in the hands of those best capable of performing complete due diligence on debt portfolios for sale.
“Zombie debt is just that—and old debt that won’t die off. It may be passed from one debt buyer to another, for years, until one day consumers are startled to find a collector demanding payment. . . Consumer and bankruptcy lawyers say zombie debt cases have grown along with the debt purchasing industry”, according to Eileen Ambrose in her article in the Baltimore Sun on May 6, 2007.
The most comprehensive data available about the age of debts being collected by debt buyers comes from a 2013 FTC study of the debt-buying practices by some of the nation’s largest debt buyers. This study found that nearly 25 percent of debt acquired from the original creditor and more than 60 percent of debt purchased from other debt buyers was over three years old at the time of purchase. More than 30 percent of the debt purchased from other debt buyers was over six years old.
This type of debt resulted in 30,000 to 40,000 suits a year in Maryland’s lower level trial court, the District Court. In 2010, a law firm that handled these types of cases failed, resulting in the dismissal of 27,000 cases. In March, 2011, a debt buyer agreed to drop more than 10,000 cases without admitting wrongdoing, to settle a class action lawsuit. In July 2011, the Chief Judge of the District Court ordered a stay on about 900 such cases, where the plaintiff had failed to secure a collection agency license. Due to the sheer volume of these cases, judges were not acting on them with full understanding and were acting on them inconsistently. Many consumers were not appearing in court and defending, resulting in judgments entered against them. The debt buyer would then pursue collection action including wage garnishment.
In response to these and other concerns, in early 2012, the Maryland Court of Appeals adopted rules proposed by its Standing Committee on Practice and Procedure. The rules defined consumer debt and imposed requirements for pursuing debt cases with more transparency to the consumer. Claimants in such cases under the new rules would need to provide proof of the debt, such as a signed document or a statement showing the account was used by the consumer. Debt buyers also needed to prove ownership of the debt, including the ownership trail and documentation of the purchase of the debt. More specificity was required as to the amount of the debt, including breakdowns between principal, interest and late fees.
However, the court did not have the ability to enact a full set of substantive reforms to protect consumers and to provide transparency because its authority is limited to passing procedural rules. To fill that void, Attorney General Brian Frosh spearheaded the successful effort to have comprehensive legislation considered by the General Assembly.
The new law imposes evidentiary requirements on a debt buyer or its collector. These requirements do not supplant the District Court rules established in 2012, but dovetail with them. First, there is a substantive legal requirement that the debt buyer or collector have the required documentation before beginning an action. If the judgment is to be entered by affidavit, it will be done so in accordance with the court rules. Otherwise, the court may not enter judgment unless the debt buyer or collector produces the required documents in accordance with the normal rules of evidence, even if the action is a small claims action.
The required documentation includes proof of the debt by producing a document signed by the debtor establishing the account, or a bill reflecting purchases and payments by the debtor, or an electronic printout from the original creditor establishing the existence of the account and showing purchases, payments or other actual use of the account or the credit card.
The debt buyer or its collector must produce a document evidencing the terms of the account with certain exceptions for credit card debt, including a requirement that there is no demand for interest or interest on the charge off balance.
The debt buyer or its collector are required to establish ownership of the debt including, a chronological list of all prior owners of the debt back to the original creditor and the date of each transfer, a copy of the bill of sale for each transfer in the chain, documentation of the identification and nature of the debt and, if there has been a charge off, the date of the charge off and the balance at that time, along with an itemization of any additional fees or charges claimed. All payments received after charge off must be accounted for and the date of the last payment must be provided.
If the debt has not been charged off, the debt buyer or its collector must provide an itemization of the claim giving credit for all payments made, a statement of the amount and date of the consumer transaction giving rise to the debt (or for multiple transactions, the amount and date of the last transaction) and the amount and date of the last payment.
Finally, the debt buyer or its collector must list all Maryland Collection Agency Licenses they hold. See generally, Section 5-1203, Courts Article.
Due to the onerous burdens placed on debt buyers and debt collectors, there was a lot of legislative wrangling over who would bear these burdens, i.e, who is the debt buyer. Exclusions were granted to:
- a check services company collecting an unpaid item
- a company that purchased the original creditor or is a successor by merger of the original creditor
- a bank, credit union or savings and loan association that is a merger successor to another bank, credit union or savings and loan association that had owned the debt
- a Maryland licensed mortgage loan servicer unless it collects or attempts to collect deficiency balances
- the finance company under a retail installment sales agreement
- a bank, credit union or savings and loan association that bulk purchases from another bank, credit union or savings and loan association all of a specific type of consumer debt of the selling institution.
See generally, 5-1201(I)(2) Courts Article.
At common law statutes of limitation are not favored and in most states, they do not extinguish the debt. They are traditionally an affirmative defense. Also, because common law supports the payment of just debts, reaffirmations or acknowledgment of the debt, or partial payment on account have typically had the effect of extending the statute of limitations. There have been inroads to these common law rules under the Federal Fair Debt Collection Practices Act. See for example, Limber v. Fed. Fin. Corp., 668 F. Supp. 1480, 1488 (M.D. Ala. 1987), where the court found that the defendant violated the FDCPA by filing a collection lawsuit after the statute of limitations had expired. The court reasoned that “time-barred lawsuits are, absent tolling, unjust and unfair as a matter of public policy, and this is no less true in the consumer context.” In addition, the CFPB has identified the collection of time-barred debt as one of the areas it will explore in its Supervision and Examination Manual (see http://files.consumerfinance.gov/f/201210_cfpb_debt-collection-examination-procedures.pdf), and devoted an entire section to time-barred debts in its Advanced Notice of Proposed Rule Making for debt collection (see http://files.consumerfinance.gov/f/201311_cfpb_anpr_debtcollection.pdf).
Maryland has not waited for further judicial or regulatory action. As of October 1, 2016, Section 5-1202 of the Courts Article will provide that any creditor of consumer debt (original creditor or debt buyer/assignee) may not initiate a collection action of a consumer debt after the expiration of the statute of limitations applicable to the action and that, once the statute of limitations has passed, any subsequent payment, and written or oral affirmation of the debt or any other activity on the debt may not revive or extend the Statute of Limitations.
This law will deserve much study from interested industry participants before its effective date but between the very heavy burdens placed on a debt buyer and the inability under any circumstance to extend a time limited debt, it seems clear that debt buyers purchasing debt in Maryland will feel staggered by that silver stake and, as is the way of things, only the strong will survive.
By: Jeffrey B. Fisher
EVP of Business Development
BP Fisher Law Group, LLP
If you would like more information concerning this or any other legislation in the states we service, please call Jeffrey B. Fisher at 301-778-1062 or send an email to firstname.lastname@example.org