Risky Business: The Risky Side of Collections

How many times have you seen a notice on a collection letter that looked like the “Miranda” rights you hear on all the TV cop shows? That notice, and others like it, is just one of the intricacies of some federal and state laws covering debt collection that could haunt lawyers, managers and others helping associations collect overdue assessments. Not giving the right notice, not saying the right things, or even saying the right things to the wrong person, could end up leading to all sorts of unwanted civil liability under the federal Fair Debt Collection Practices Act (the FDCPA) or similar state laws like the Pennsylvania Fair Credit Extension Uniformity Act. Statutory damages are available even without any real damages, and the recoverability of attorneys’ fees makes the cases attractive to debtors’ lawyers. Though it was intended to protect debtors from unscrupulous collection practices, an increasing number of debtors and their attorneys have made these statutes a trap for the unwary.

The FDCPA was enacted in the late 1970s to counter a perceived growth in abusive collection practices. Explosive growth in consumer credit led to similar growth in collection agencies, and not all of them employed the kinder gentler approach to persuasion. When abuse and harassment spread among even those debtors who were not deadbeats and many who did not owe any money at all, Congress reacted with a strict consumer protection statute. Debt collectors were required to provide those “mini-Miranda” warnings that you read and limits were placed on how and when contact could be made with the debtors. To put teeth in the restrictions, the FDCPA provides for statutory damages of up to $1,000 for each violation. Put that in perspective: if a form letter has the wrong notice on it, and the debt collector sent out 100 such letters to different debtors, the potential damages are $100,000! Moreover, of course, there is the attorney’s fee provision, which authorizes an award of fees for a successful plaintiff. It would not seem that delinquent assessment collections should be viewed in the same light as the persistent and arrogant collector from Acme Collections who calls you at home before you leave for work in the morning, three more times while you are at work, and twice more for good measure after you get home. Or the high-pressure collector who threatens to garnish your wages and sell everything you own if you do not pay $237 on your credit card by this Friday. Those are the mild forms of the abuses that led to the FDCPA. While those kinds of tactics are rarely employed in the association world, the statue applies just the same. There are many potential pitfalls in the FDCPA, and everyone involved in debt collection should learn them well.  Just a few of them are:

* Limits on oral communications, i.e. only between certain hours and at certain places
* Mandatory disclosure of certain minimum information, i.e. the name of the creditor, the amount of the debt
* Mini-Miranda warnings
* Obligation to verify the debt on request
* Limits on communications with third parties

How does someone collecting delinquent association fees run afoul of the law’s requirements? It could be calling the unit owner about his delinquent account, and not making the mandatory written disclosure within five days. It could be sending a late notice or demand letter that does not have the required warning on it. It could be talking to the tenant about his or her landlord’s condo fees, or maybe even talking to the spouse or parent who is not an owner of the unit. FDCPA litigation has grown in recent years, as debtors and their lawyers have learned that the intricacies of the statute result in many innocent, technical violations. Innocent as they may be, the wrong words in a letter can be the basis of an award of $1,000 plus legal fees. Since the case is easy to prove – there is only one letter – many debtors’ lawyers see the FDCPA case as a slam-dunk. Now, maybe you will see those ads promising debtors relief from creditors have become more prevalent. Bankruptcy lawyers look at the debtors’ bills as a potential pot of FDCPA gold! Not only has an awareness of the FDCPA grown, there are other debtor protection statutes that could affect association collections. Also back in the 1970s, Pennsylvania actually made a number of collection practices a criminal offense. Filing small claims court cases, or negotiating payment plans on behalf of the creditor association are illegal, as are many other actions. More recently, Pennsylvania enacted the misleadingly titled Fair Credit Extension Uniformity Act. Rather than being an act to make sure people get treated fairly when seeking credit, as its name implies, it is actually a variation of the FDCPA. With a broad definition of debt collector, this new state law extends the range of risk to lawyers and managers involved in assessment collections. The FDCPA has not yet been applied to managers, but has been a source of concern for lawyers for sometime. In at least one other state, courts have applied the state’s version of the FDCPA to management companies and it remains to be seen if Pennsylvania courts will do the same. The prudent course is to assume that they will, and act accordingly. So, what should you do to avoid getting caught on the sword of the FDCPA or state law? First, only get involved in collections if you are committed to learning not only your clients’ rights but also your own obligations. Read the statutes. Learn their ins and outs. Make sure that the letters you send include the mandatory information and warnings. Remember that collection is not bullying, and debtors do not react to abusive tactics. Make sure that all of your contacts are documented, and that all of your written communications have the necessary warnings. Audit yourself – check all of your forms, your letters and all of your procedures. Educate your staff about how to deal with delinquent unit owners, and review your procedures with them regularly.

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