Last week, the U.S. Court of Appeals for the Seventh Circuit — which has federal appellate jurisdiction over the Indianapolis area — issued a consolidated opinion in two appeals involving federal debt collection law. This decision is a victory for consumers being pursued by collection agencies over debts that are untimely under the statute of limitations.
As the Seventh Circuit put it, “The underlying question presented by these two appeals . . . relates to the circumstances under which a dunning letter for a time-barred debt could mislead an unsophisticated consumer to believe that the debt is enforceable in court, and thereby violate the Fair Debt Collection Practices Act (FDCPA) . . . .”
McMahon v. LVNV Funding, LLC
The first appeal, McMahon v. LVNV Funding, LLC, involved a Illinois consumer who failed to pay a 1997 utility bill. In 2011, LVNV (a bad debt buyer) purchased the account and hired a collection agency to recover the money. While the debt was 14 years old by this point, the applicable statute of limitations under Illinois law was only 4 years. A collection letter sent to Mr. McMahon did not state when the debt was incurred and did not disclose that the statute of limitations had expired a decade ago. This same letter offered to “settle” the debt for 40 cents on the dollar.
When Mr. McMahon invoked his FDCPA right to verification of the debt, LVNV truthfully stated that it had purchased the debt in 2011. However, LVNV failed to mention that the debt itself was actually 14 years sold.
Delgado v. Capital Management Services, L.P.
In the second case, Delgado v. Capital Management Services, L.P., a collection agency sent a dunning letter to another Illinois resident regarding an 8-year-old debt. Like the McMahon case, the debt at issue in Delgado was subject to a 4-year statute of limitations, and the letter said nothing about when Ms. Delgado incurred the debt or the time-barred nature of the debt. However, the collection letter from Capital Management Services offered to “settle” the debt for 30 cents on the dollar.
The Seventh Circuit’s Decision
In its consolidated opinion, the Seventh Circuit held that “if the debt collector uses language in its dunning letter that would mislead an unsophisticated consumer into believing that the debt is legally enforceable, . . . the collector has violated the FDCPA.” The court specifically explained “it is plausible that an unsophisticated consumer would believe a letter that offers to ‘settle’ a debt implies that the debt is legally enforceable.”
A Cautionary Note
The McMahon/Delgado opinion did not hold that debt collectors are barred from asking debtors to pay debts that are unenforceable under the applicable statute of limitations. Rather, McMahon/Delgado merely forbids collection agencies from implying or stating that old debts are legally enforceable, if in reality, they are not.
The Final Word?
As the Seventh Circuit noted, its McMahon/Delgado decision conflicts with recent opinions from the Third and Eight Circuits. Those courts have allowed dunning letters like those sent to Mr. McMahon and Ms. Delgado, as long as the debt collector does not actually threaten or start litigation.
The U.S. Supreme Court may eventually be called upon to resolve this “circuit split.” For now, though, McMahon/Delgado is the law in Indiana, Illinois, and Wisconsin.