Federal law gives debtors two weapons against creditors, bankruptcy and the Fair Debt Collections Practices Act (FDCPA). The two do not always share an easy relationship, as evidenced by the upcoming U.S. Supreme Court case deciding whether chapter 13 debtors have FDCPA claims against creditors with stale debts, but generally where one law can’t protect debtors, the other picks up the slack. One area where bankruptcy may need to take a bigger role is when debt collectors buy defaulted debts from other creditors for a fraction of their costs. In fact, the U.S. Supreme Court will soon decide whether the FDCPA covers such debt collectors or if a debtor would be better off taking his or her case to a New York bankruptcy lawyer.
The case, Henson v. Santander Consumer USA, Inc., is actually a class-action lawsuit against Santander, the creditor. The petitioners borrowed money from CitiFinancial Auto to finance automobile purchases. They were unable to repay their debts and defaulted, and after CitiFinancial Auto repossessed their vehicles, it sold the deficiency balances to Santander for pennies on the dollar. Santander engaged in multiple behaviors that violate the FDCPA, e.g. misrepresenting its authority to collect on the debts and directly contacting debtors known to be represented by counsel. The petitioners sued under the FDCPA, but Santander responded that as a purchaser of defaulted debts, it isn’t a “debt collector” as defined by the statute, so it didn’t protect the debtors.
Specifically, the FDCPA defines a “debt collector” if it meets one of two conditions, one focused on people whose principal activity is collecting debt via interstate commerce or the mail, and the other being people who regularly attempt to collect debts. The FDCPA creates an exception for collection efforts for debts that are not in default. A “creditor,” by contrast excludes anyone who obtains a defaulted debt.
The petitioners argue Santander is a “debt collector,” and Santander argues it’s merely a “creditor.” The federal district court and Fourth Circuit Court of Appeals agreed that Santander is a “creditor.” More federal circuits’ rulings in similar cases side with the petitioners than Santander, so the Court has the opportunity to decide which position will rule. However, the Second Circuit’s position isn’t clear.
If the Supreme Court sides with the petitioners, then debtors who have defaulted on their debts will be able to take debt collectors to court for violating the FDCPA, which can lead to substantial damages in their favor. However, if the Court agrees with Santander, then more debt collectors—as commonly understood—will abuse their power, and debtors’ only recourse will be bankruptcy. “Creditors” that continue their collection efforts can find themselves in violation of a discharge order rather than the FDCPA.
More information on Henson v. Santander Consumer USA, Inc. can be found here.
Debtors are probably better off if the Supreme Court sides with the petitioners because it gives them more options than bankruptcy. Nevertheless, defaulted debts are serious impediments to a stable financial life. If you have defaulted on a debt, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
