The Folly of the FTC’s Take on Statutes of Limitation

The Federal Trade Commission had an epiphany last week – debt collectors must disclose in their communications that a debt subject to a statute of limitations defense creates a “legal right” which prevents a creditor from filing a lawsuit. Read it here: FTC Press Release, 1/30/12.

It only took the federal agency 33 years of enforcing the Fair Debt Collection Practices Act (15 U.S.C. § 1692) (the “FDCPA”) to come to this conclusion. Quite a milestone and quite a reflection of our times.

Although I haven’t been working on FDCPA issues quite as long as my colleagues in Washington, I’ve had the opportunity to read the FDCPA, the FTC’s Staff Opinion Letters  and case law since at least 1988. I’ve tried a few FDCPA cases now and again and thought I had a good understanding of the Act. However, until last week I had no idea a debt collector must disclose the existence of a “legal right” that bars a lawsuit subject to a limitations statute. I make no apology for my lack of knowledge of this disclosure requirement and no one should have to.

The FDCPA has two sections which compel a debt collector to make specific disclosures: §§ 1692e(11) and g. Neither mentions anything concerning disclosure of a time-bar defense, let alone the existence of a “legal right” which bars a lawsuit. I searched the FTC’s Staff Opinion Letters and could not find a mention of those “legal rights”. I checked the rest of Title 15 (the Consumer Credit Protection Act) – and nada, no mention of the “legal right.”

So, what is the basis for this new disclosure of “legal rights” concerning a time-bar defense? The FTC explains it in its press release as thus:

“Most consumers do not know their legal rights with respect to collection of old debts past the statute of limitations.”

Still, no help on nailing down those elusive “legal rights.” Possibly, could the FTC shed some light on from where those “legal rights” spring?  There was a bit of silence when this question was posed during the FTC’s press conference last week. Finally,  David Vladeck, Director of the FTC’s Bureau of Consumer Protection said that the debt collector will have to ascertain this, since they are “in the best position” to determine the applicable legal rights. Now, how’s that for guidance!

In making its pronouncement last week, the FTC directed me to their newly issued publication “Time-Barred Debts: Understanding Your Rights When It Comes to Old Debts”. Oh good! Maybe now I might zero in those “rights!” No dice. The closest I could find to the FTC identifying the legal right in this new publication was here:

If you have old debts, collectors may not be able to sue you to collect on them. That’s because debt collectors have a limited number of years — known as the statute of limitations — to sue you to collect. After that, your unpaid debts are considered “time-barred.” According to the law, a debt collector cannot sue you for not paying a debt that’s time-barred.

Well, I am not as quick as my friends are at the FTC to say that a statement is misleading or false, but the aforesaid advice does not gel with my understanding of the state of the law of my home state, New Jersey.  But fine, I will do as the FTC directs and determine what applicable “legal rights” exist here in the Garden State “with respect to collection of old debts past the statute of limitations.”  This should take about five seconds.

1, 2 ,3 ,4 ,5.

OK, I checked with the New Jersey Supreme Court and they clearly state that a statute of limitation is not a legal right and it can be waived if not asserted in a lawsuit. See, Notte v. Merchants Mut. Ins. Co., 185 N.J. 490, 500 (2006).  (“Statutes of limitations . . . are not self-executing . . . the defense that a claim is time-barred must be raised by way of an affirmative defense, either in a pleading or by a timely motion, or it is waived . . . Therefore, until adjudicated time-barred, a stale claim filed after the expiration of the applicable statute of limitations is nonetheless valid.”).

You see, in New Jersey, one can bring the lawsuit and obtain the judgment on a claim subject to a time-bar defense, unless the defense (which the Court does not characterize as a “legal right”) is affirmatively asserted. So, if I am to take the FTC guidance literally (which after this past week’s pronouncement, who can?), New Jersey state law provides no “legal rights” which state that a debt collector or creditor “cannot sue you” on a debt subject to a New Jersey statute of limitation. In fact, New Jersey state law says a person can be sued on a claim subject to a time-bar defense. Id. 

Whoa! I guess the FTC just gave the green light to suits in New Jersey on debt subject to procedural limitations periods – after all the FTC’s latest publication says “[a]ccording to the law, a debt collector cannot sue you for not paying a debt that’s time-barred.” Well, there’s no such law in New Jersey! The very opposite is the law.

Most statutes of limitations are state (or if you happen to reside in Kentucky, Massachusetts, Pennsylvania, or Virginia, then Commonwealth) procedural rules – which are not substantive law, let alone “legal rights.” Wisconsin, Mississippi, North Carolina and New York City have laws or regulations which seem to say that once a debt remains unpaid after a certain time, both the right and the remedy to collect it are extinguished or disclosures of the debt’s time-barred status are required to be made.  But for those very few jurisdictions, a statute of limitation is a “procedural rule.” Procedural rules govern those arcane concepts of where to file a lawsuit or the time to file an answer to a lawsuit. Procedural rules typically do not confer “legal rights.”

I am sure the FTC disagrees with the conclusions reached here. And the FTC has got to be really upset with the New Jersey Supreme Court for allowing suits on time barred claims. (Look out Trenton, you may be the next to face a $2.5 million civil penalty).

In any event, I suppose debt collectors should consider that the FTC has determined the existence of a legal right which prevents the filing of a lawsuit subject to a time bar defense. Further, debt collectors should heed the FTC’s pronouncement that they are in the best position to identify this “legal right,” and should advise obligors of this legal right. What this legal right may be, when, where and how to do disclose it will likely be the subject of many lawsuits to follow.

Of course this sounds foolish, but how else can you make sense of the latest from Washington. After all, as the 19th century British Prime Minister Benjamin Disraeli said, “Debt is a prolific mother of folly. . .” Oh how right he was.

This information is not intended to be legal advice and may not be used as legal advice. Legal advice must be tailored to the specific circumstances of each case. Every effort has been made to assure this information is up-to-date. It is not intended to be a full and exhaustive explanation of the law in any area, however, nor should it be used to replace the advice of your own legal counsel. 

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Donald Maurice provides counsel to the financial services industry, successfully litigating matters in the state and federal courts in individual and class actions. He has successfully argued before the Third, Fourth and Eighth Circuit U.S. Courts of Appeals, and has represented the financial services industry before several courts including as counsel for amicus curiae before the United States Supreme Court. He counsels clients in regulatory actions before the CFPB, and other federal and state regulators and in the development and testing of debt collection compliance systems. Don is peer-rated AV by Martindale-Hubbell, the worldwide guide to lawyers. In addition to being a frequent speaker and author on consumer financial services law, he serves as legal counsel to DBA International and as chair of the ABA's Bankruptcy and Debt Collection Subcommittee. He serves on the governing Board of Regents of the American College of Consumer Financial Services Lawyers and on the Governing Committee of the Conference on Consumer Finance Law .