The explosive growth in collection of old (“zombie”) debts has produced a range of abusive practices, many of which affect older people. New York’s highest court recently refused to allow a debt collector to collect on debts that exceeded the applicable statute of limitations.
A booming market has developed involving the collection of old debts, particularly credit card debt. Some of these are known as “zombie” debts because they keep coming back to haunt consumers who paid them off or otherwise resolved them years earlier.
As recently as a decade ago, few creditors tried to collect on old accounts, but a relatively new industry has emerged, in which collection agencies buy up and then try to collect such debts. The industry has expanded rapidly. The problem is that many of these debts are legally uncollectible, but consumers do not know that and succumb to abusive practices, even paying money they never owed or unknowingly waiving legal defenses to collection efforts. Other consumers don’t realize what is happening and end up with default judgments rendered against them in court.
In January 1999, Jared King sent a letter to Discover cancelling his credit card, enclosing his cut-up card, and asking for advice as to how to pay the card’s outstanding balance. One year later, Discover sold King’s debt to Portfolio Recovery Associates. In 2005 — almost five years after Portfolio acquired the debt and more than six years after King cancelled his card — Portfolio sued King in a New York court for the outstanding balance.
King, a resident of New York, pointed out the original contract specified that the contract would be governed by the State of Delaware, which has a three-year statute of limitations. Even if New York’s statute applied, King noted, that state’s six-year statute of limitations had run.
The New York Court of Appeals, the state’s highest court, agreed with King that Delaware law governed, when it ruled in Portfolio Recovery Associates v. King.
Attorneys with AARP Foundation Litigation filed AARP’s brief in the case. Consumer debt is becoming a spiraling problem for older people, and with increasing debt has come an increase in the number of debt collectors attempting to collect from people regardless of how meritless, illegal or time-barred their claims might be.
The brief detailed the growing market for debt, as increasingly aggressive debt collectors seek ever more high-pressure tactics. Old debts could not only be time-barred, but are often erroneous (having been paid or settled already), discharged in bankruptcy or the result of identity theft — all valid defenses for which evidence might disappear over time. Memories fade, documents are thrown out, witnesses disappear. The brief noted that Portfolio itself acknowledges that “older receivables typically are more difficult to collect” and therefore offers significantly less money for older debts than newer ones.
New York’s highest court agreed with AARP and with King. It ruled that the underlying transaction was governed by the three-year statute of limitations in Delaware, and could not be extended using New York’s six-year statute of limitations, simply because King is a resident of New York. The original creditor had only a three-year statute of limitations and could only sell the debt with the three-year statute.
What’s at Stake
Even at rock-bottom prices, old debts are snapped up by debt collectors because the transaction costs are so low that even if debt buyers recover a mere fraction of the debt they have bought, they can make a substantial profit. For example, if a debt buyer pays 25¢ for $100 in face value of debt, it recovers its costs and makes a profit if it convinces a consumer to pay only $1.00. Moreover, greater efficiencies in the collection of debts, paired with communications advances that have reduced transaction costs, have made it more profitable for debt collection agencies and their law firms to go after a greater number of debts including these debts whose validity is most questionable. Even when a debt collector violates the law, the chances of being caught are minimal and the consequences are cheap — and relaxation of strict legal standards invites abuses.
For these reasons, AARP’s brief argued, the strict requirements of the laws of individual states as well as federal debt collection laws must be scrupulously adhered to.
The ruling is a welcome one that should send a message to debt collectors about strict adherence to the relevant laws.
Portfolio Recovery Associates v. King was decided by the New York Court of Appeals, the state’s highest court.
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