The collection of old, “zombie” debts — so named because debt that consumers have already resolved comes back to haunt them — has become a booming industry. The collection of old debts, particularly credit card debts, is causing consumers a great deal of suffering. A federal court affirmed a jury verdict in Montana, sending a strong message to debt collectors seeking to collect stale debt.
Timothy McCollough lives on Social Security after suffering a head injury. Despite Montana’s five-year statute of limitations, collectors sued him three times on the same credit card account that had been inactive for nearly a decade.
Being sued repeatedly on the debts aggravated McCollough’s medical conditions, causing him severe stress and headaches. At first he tried to defend himself, raising defenses including the statute of limitations and prior dismissals of the claims. Knowing that the statute of limitations had passed, the collector nevertheless served McCollough with legal papers that asked him to admit he still owned the money and could be sued for it. The legal papers did not inform McCollough that failure to respond in 30 days would be deemed an admission of the assertions in court. Eventually McCollough hired a lawyer who discovered that the collection law firm (Johnson, Rodenburg & Lauinger, or JRL) could not prove that the debt was owed and knew or should have known the statute of limitations had passed. It also could not produce the contract that it claimed allowed the collector to sue for attorneys fees. Instead, it sought to produce photo copies of other, nonbinding contracts that it asked to court to apply. Faced with the lawyer’s defense, the debt collector withdrew the collection efforts. McCollough then sued, alleging JRL had taken a “factory” approach to litigation that utilized questionable or unverified information contrary to state and federal law. During one 18-month period, for example, JRL filed 2,700 debt collection suits in Montana courts. The jury found that JRL violated the federal Fair Debt Collection Practices Act and state laws, and awarded McCollough $250,000 in compensatory damages, $60,000 in punitive damages and $108,000 in attorneys fees. JRL appealed.
AARP Foundation Litigation attorneys filed AARP’s friend-of-the-court brief, in conjunction with the National Consumer Law Center, on behalf of McCollough. The brief discussed the aggressive, often unlawful, tactics used by debt collectors; the dramatic growth of the debt-buying industry; the efficiencies in the debt collection industry that make it more profitable for debt collection agencies and their law firms to go after a greater number of debts of questionable validity; and the fact that the industry itself puts unsophisticated or desperate consumers on a treadmill of high-cost debt.
A federal appeals court agreed, upholding the jury award of damages for McCollough. The court found JRL violated federal law by failing to investigate the claim before filing suit, which was particularly egregious since the statute of limitations had already been flagged as a concern in the file. The court further berated JRL for its abuse of the court process in seeking admissions against a pro se debtor without even informing him of the impact of not responding to the requests.
What’s at Stake
A relatively new industry has emerged over the last generation in which collection agencies buy up and then try to collect delinquent debts. The problem is much of the debt being sold to debt buyers is legally uncollectible for a variety of reasons: they may be so old that the statute of limitations has passed; some were disputed, paid or otherwise resolved by the debtor; some have been paid or discharged in bankruptcy; some was never owed because it was incurred through identity theft. Unfortunately, consumers do not know how to protect themselves against the abusive practices of today’s abusive debt collection practices. Some pay money they never owed or unknowingly waive legal defenses to collection efforts. The vast majority of people sued for debt collection end up with default judgments entered against them. Unfortunately, aggressive collection of stale debt affects older people in greater numbers.
McCullough v. Johnson, Rodenburg & Lauinger was decided by the U.S. Court of Appeals for the Ninth Circuit.