On January 19, 2021, the Consumer Financial Protection Bureau (CFPB) published its final debt collection rules in the Federal Register, including 12 C.F.R. § 1006.26(b), which prohibits collections of time-barred debt.1 Under the new rules, collectors who sue or threaten to sue consumers for time-barred or "zombie" debts ? debts for which the statute of limitations already expired ? violate the Fair Debt Collection Practices Act (FDCPA). The new rule, however, does not prohibit the filing of proofs of claim in a bankruptcy proceeding for otherwise time-barred claims. The final rule is scheduled to take effect on November 30, 2021.
Who does the rule apply to?
The rule applies to third-party debt collectors, as the FDCPA generally does not apply to creditors seeking to collect their own debts. Thus, Section 1006.26(b) does not apply to lending institutions that recover, or seek to recover, their own collections.
What if a debt collector mistakenly believes the debt is not time-barred?
The new final rule adopts a "strict liability" standard under which filing or threatening to file suit constitutes a violation of the FDCPA. Under such a standard, collectors generally cannot avoid liability based on mistaken beliefs of law or fact.
However, the CFPB acknowledges that:
[A] debt collector who brings or threatens to bring a legal action against a consumer to collect a time-barred debt may, depending upon the reason for the debt collector's error, have a defense to civil liability.if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.
Nevertheless, the debt collector will have the burden of proving such a defense. The best strategy for debt collectors is to implement policies and procedures that prevent actual or threatened legal action for time-barred consumer debts.
Can debt collectors recover time-barred debt through other, non-litigation means?
Yes, depending on the jurisdiction. The CFPB acknowledges that "debt is not extinguished when the statute of limitations expires." Thus, "a debt collector still may collect the debt using non-litigation means." A "debt collector who is ultimately unable to determine with certainty whether a debt is time barred can avoid liability under § 1006.26(b) by refraining from bringing or threatening to bring a legal action while, in most States, continuing with non-litigation collection activities." Permissible debt collection practices vary by state. Assuming the jurisdiction at issue permits collections of time-barred debts by phone or mail, debt collectors can still use these means to collect these debts, as long as the collector does not threaten to bring an action in any such communications.
What if multiple statutes of limitations apply?
The CFPB acknowledges that for certain debts, multiple statutes of limitations may apply. The CFPB explains that for the purposes of Section 1006.26(a)(2), "[t]he applicable statute of limitations depends on the specific legal action the debt collector takes or represents that it will take." For example, for some debts, such as certain installment loans and secured debts, one claim associated with a debt may be time-barred while another claim associated with the debt is not. In such a case, the prohibitions in Section 1006.26(b) only apply to the time-barred claim. Debt creditors are free to litigate (or threaten to litigate) any other claims until the applicable statutes of limitations runs.
Does the new rule prohibit debt collectors from filing proofs of claim on time-barred debts in bankruptcy proceedings?
No, the final rule clarifies "that § 1006.26(b) does not prohibit the filing of proofs of claim in a bankruptcy proceeding." The CFPB made clear that its proposed rule conforms with the Supreme Court's decision in Midland Funding, LLC v. Johnson, 137 S. Ct. 1407 (2017), which held that filing a proof of claim on a time-barred debt in a bankruptcy proceeding does not violate Sections 807 or 808 of the FDCPA.
What constitutes a threat of legal action?
The CFBP declined to explicitly define what constitutes a threat of legal action. "Whether a particular action or statement constitutes a threat of legal action depends on the facts and circumstances of the particular case."
However, the CFBP clarifies that the final rule "prohibits not only explicit threats of legal action but also implicit ones." Thus, debt collectors must avoid statements or action that may mislead, confuse, deceive, intimidate, or otherwise misrepresent that a consumer's time-barred debt is legally enforceable.
Before the final rule takes effect on November 30, 2021, debt collectors should familiarize themselves with its parameters and make changes to debt collection policies and procedures as necessary to ensure compliance. If you have questions or concerns about the rule, our Bankruptcy & Financial Restructuring attorneys are here to help.
1. The CFPB's final rule can be found at https://www.govinfo.gov/content/pkg/FR-2021-01-19/pdf/2020-28422.pdf.
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