Dealing with debt collectors has become a fact of life for millions of Americans. With mounting credit card bills, missed mortgage payments and deep medical debt, it’s not hard to understand why.
Karen Jerman’s experience was a little different from most. After fire destroyed her Cleveland-area home, Jerman used the insurance money she collected to pay off her mortgage. But somehow her lender, Countrywide Home Loans, lost track of things and hired a local law firm to handle a foreclosure against her. In notifying Jerman of the impending foreclosure, the firm said that if she wanted to dispute the debt, she’d have to do so in writing.
Jerman wrote a letter to contest the debt. Countrywide eventually acknowledged that she didn’t owe any money, and the law firm dropped the foreclosure proceedings. But Jerman filed a lawsuit against the firm, charging that it had violated a 1977 federal debt collection law when it made her dispute the debt in writing, something the law doesn’t require.
The U.S. Supreme Court sided with Jerman on April 21, rejecting the firm’s defense that it had made a simple mistake and did not intentionally violate the law. While the 7-2 decision features complex legal arguments and a study of Congress’ intent when it wrote the 1977 legislation, it boils down to a simple maxim: Ignorance of the law is no excuse.
Victory for consumers
With that, the court did much more than rule on the precise details of one Ohio woman’s unusual situation. Consumer advocates say the decision in Jerman v. Carlisle makes it easier for consumers to win suits against debt collectors, who cannot claim they didn’t know they were breaking the law when they made relentless phone calls, showed up at a place of work or threatened harm. The changed legal environment could rein in some of the industry’s most aggressive practices and offer protection to anyone who might someday be confronted by a debt collector.
“It would have been a really devastating blow to consumers if we had lost this case,” says Deepak Gupta, a staff attorney at Public Citizen Litigation Group, which drafted a friend of the court brief on Jerman’s behalf that was jointly filed by AARP, the National Consumer Law Center and other public interest advocates.
Kevin Russell, who argued Jerman’s case before the Supreme Court, agrees. A win for the collection industry “would have created an enormous incentive for debt collectors to go as close to the line as possible,” he says. “They could take a very aggressive view of the law, knowing that even if they crossed it [and acted illegally], they had this defense.”
That possibility, he says, would make a bad situation worse. Because debt collectors usually get paid a percentage of what they collect, Russell adds, “this is an industry that already has an enormous incentive to be very aggressive.”
The ruling disappointed officials in the debt collection industry. Debt collectors do their best to follow the law, says Valerie Hayes, general counsel and vice president of legal and government affairs for ACA International, a trade association for the credit and collection industry. But, she adds, they work within a tangled web of sometimes conflicting court opinions and federal and state regulations.
“We’re trying to comply with all the laws that are out there, and sometimes to comply with one, you may violate another,” says Hayes, whose organization filed a friend of the court brief on behalf of the Cleveland law firm.
The relationship between debt collectors and their targets is inherently fraught. People in debt are often juggling bills and deciding which payments to make and which to skip, while debt collectors try to squeeze out as much as they can from struggling individuals and families. In its annual report to Congress on the debt collection law, released on April 2, the Federal Trade Commission said it received 119,364 consumer complaints about debt collectors in 2009, up from 104,766 in 2008. The commission says it receives more complaints about debt collectors than any other industry, and cautions that its official tally likely understates the extent of consumer complaints about debt collectors.
“It’s an unpopular industry,” says Gupta, and it’s one that has a unique structure. “Every other industry wants to please its customers. But for debt collectors, the consumer is not their customer.”
For older Americans, the problem of debt is particularly acute. In its friend of the court brief, AARP reported that more than 684,000 homeowners over age 50 were either delinquent in their mortgage payments or in foreclosure in December 2007. The group said that Americans age 50 and older experienced the sharpest increase in bankruptcy filings of any age bracket from 1991 to 2007. In addition, 7 million older adults reported problems with medical debt in 2007, and between 2005 and 2008 the average amount of credit card debt held by older Americans increased by 26 percent.
That mounting debt leaves older people “particularly vulnerable to the abuses of debt collectors,” the AARP brief said. Advocates report that many older people believe they will go to jail if they receive a court summons, the brief said, and “older people may not remember or have documentation to show such debt has been paid, and may not recognize the name of the debt if it has been sold to a new creditor.”
Regulating the collectors
Congress passed the Fair Debt Collections Practices Act in 1977 with the goal of prohibiting “any harassing, unfair, or deceptive collection practice,” according to a Senate report at the time. “While unscrupulous debt collectors comprise only a small segment of the industry, the suffering and anguish which they regularly inflict is substantial,” the report said.
“It’s very hard to be a debt collector,” says Robert Hobbs, deputy director of the National Consumer Law Center and an expert on debt collection. “You’re calling people who don’t have very much money. That’s why they’re not paying their bills. You’re trying to get them to pay a medical bill instead of their rent or clothes for the first day of school.” But at the same time, he says, some debt collectors “engage in very abusive types of harassment of consumers, and create a lot of ulcers and sleepless nights.”
To prevent such abuses, the FTC publishes plain-English guidelines about what the 1977 law means, or should mean, in practice. For example, “A debt collector may not contact you at inconvenient times or places, such as before 8 in the morning or after 9 at night, unless you agree to it. And collectors may not contact you at work if they’re told (orally or in writing) that you’re not allowed to get calls there.” Debt collectors are generally prohibited from discussing your debt with anyone other than you, your spouse or your lawyer. In addition, collectors must send a written “validation notice” that includes how much money you owe, the name of the creditor to whom you owe it, and how to proceed if you don’t think you owe the money.
The debt collection law explicitly protects debt collectors from liability for minor clerical errors in their work, and the Cleveland law firm that brought the mortgage proceedings against Jerman tried to extend that protection to more serious violations of the law. Consumer advocates worried that excusing debt collectors from liability like that would create what Gupta’s brief called “a race to the bottom—it will reward illegality, allow creditors to hire the least scrupulous collectors, and drive ethical collectors out of business.”
The Supreme Court’s opinion, written by Justice Sonia Sotomayor, the court’s newest member, said that when Congress enacted the law, it didn’t intend to provide the kind of broader protection sought by the debt collection industry. Her opinion also made note of the “race to the bottom” argument, and concluded that it is “difficult to square such a result with Congress’ express purpose ‘to eliminate abusive debt collection practices by debt collectors, [and] to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged.’ ”
But at its essence, the opinion could be reduced to a simple bit of wisdom. As Sotomayor put it, “We have long recognized the ‘common maxim, familiar to all minds, that ignorance of the law will not excuse any person, either civilly or criminally.’ ”
Exceptions to the rule
There are some situations in which U.S. law makes an exception to that adage. Gupta’s brief says laws that do allow “ignorance” as a defense include those that “could become a trap for innocent, unsophisticated people” who may be unaware of complex regulations, such as rules on the use of food stamps or local registration requirements for ex-felons who move into town. In those situations, “there’s no way to know” about a law’s requirements, Gupta says. By contrast, he argues, debt collectors work in a regulated industry and should know the relatively easy-to-understand laws that govern it.
While the Supreme Court sided with Jerman and Gupta, the decision doesn’t mark the end of Jerman’s case. Her lawyer has asked the court to allow a class action lawsuit, to include others who had dealings with the same debt collector and also experienced violations of the law. And now that the firm has failed in its ignorance-of-the-law defense, a judge must rule on the merits of Jerman’s case, in essence determining whether sending the letter to Jerman violated the law.
Those who sided with Jerman at the high court expect that she will finally prevail. The debt collection firm “made what they said was an error and what we call abusive debt collection practices,” says Julie Nepveu, senior AARP attorney. “They clearly violated the law.”
Holly Yeager lives in Washington, D.C.