A trap for unsophisticated debtors, debt collectors often attempt to collect time-barred debts through written offers to settle those debts for a fraction of what is owed. Debtors typically respond to such offers in one of four ways. First, some debtors simply pay the offered settlement amount, usually 10%–40% of the total outstanding debt, thereby satisfying the debt in full. Second, those who wish to eliminate the debt but cannot pay the entire offered settlement amount will instead make a small payment, unwittingly reviving the statute of limitations on collections and making the entire debt judicially enforceable for several years to follow. Third, some debtors simply disregard the matter, which often leads to a suit to collect the debt, where results range from the debtor owing nothing (if he defends and asserts the statute of limitations defense) to a judgment far exceeding the amount of the debt (if the debtor does not defend and the matter is resolved by default judgment). Finally, some debtors sue the collector for unlawful collection efforts, where results vary based on the precise wording of the collector’s offer letter and whether such an offer is deemed unlawful in the debtor’s jurisdiction.
When a debtor exercises either of the first two options, the result is a windfall to collectors, who might otherwise be unable to collect on the debt due to the statute of limitations. When a debtor exercises either of the final two options, already-overburdened courts are swamped with difficult and unnecessary cases.
This Article proposes a series of reforms designed to ease the burden on courts while generating financial outcomes that are roughly the same for all time-barred debts. For written attempts to collect time-barred debts, this Article proposes warnings informing the debtor that the statute of limitations has run on the debt and that any payment will reset the limitations period for its entire amount, as well as an opportunity for the debtor to pay the proposed settlement amount, and no more, in installments.
As an additional layer of protection, this Article proposes an amendment to the Fair Debt Collection Practices Act (FDCPA) plainly declaring that suing to collect on a time-barred debt violates the FDCPA, along with another amendment clarifying that it is lawful for a collector to seek repayment on a time-barred debt outside of court, but only if the notices and promises proposed above are included in the collector’s written settlement offer.
As a final layer of protection, this Article proposes changes to existing rules that deem the statute of limitations defense waived unless asserted. Under this proposal, a plaintiff attempting to collect an old debt would be required to prove, with evidence, that a debt is not time-barred in order to obtain a judgment, default or otherwise, in the case. As a backstop to this proposal, this Article further proposes that courts screen all motions for default judgments in consumer debt suits and dismiss those cases where the plaintiff fails to prove the suit is timely.
In combination, these proposals will resolve the present circuit split on the lawfulness of collection efforts on time-barred debts, make financial outcomes more uniform across similarly-situated debtors, and ensure that most collection activity on time-barred debts occurs outside the judicial process, alleviating courts of this burdensome litigation.