Creditors Rights Outline

Prof. Warner – Fall 2010
DEBT COLLECTION
I. The Basics –
A. Debtor: owes legally enforceable obligation to pay sum of money
B. Creditor: has right to enforce liability to pay sum of money
1. Unsecured creditor has no right or interest in specific property
2. Unsecured creditor must legally enforce right to be paid
3. If creditor uses self-help (i.e. takes property from debtor in satisfaction of debt), can be liable in tort for conversion (debtor can get compensatory damages, plus punitive damages to discourage other creditors)
C. Debt v. Lien:
1. Debt: personal claim against debtor (i.e. general unsecured creditor)
2. Lien: right in specific property (i.e. secured creditor)
D. Options for Creditors –
1. Creditor can sue debtor for amount of debt – but there are problems:
a) Creditor will incur high attorneys fees to sue (may only keep part of judgment recovered because have to pay attorney)
b) Debtor may not have assets – if creditor gets judgment, it might be uncollectible; or assets may disappear
c) Risk of losing law suit –may be real debt, but court can go other way
d) Delay – suing takes time, may not recover debt for a long time
II. Informal Debt Collection –
A. Creditor can contact debtor and hopes debtor pays at end of month – vast majority of debts are paid voluntarily
1. Send letter to persuade debtor (Dunning Letter)
2. Call debtor and “bother him” (i.e. will hurt his credit, threaten him)
3. Shame the debtor
B. Common Law Remedies against Creditor – debtors can sue creditors when creditors’ conduct is really unreasonable in attempts to collect on debts
1. Communications with Debtor –
a) Invasion of Privacy I: debtor has right to be left alone and free from unreasonable intrusion upon solitude
(1) Factors: degree of persistency and vicious quality
(2) Balance creditors interest in collecting debts v. interest of debtor
b) Infliction of Emotional Distress: extreme and outrageous conduct causing severe and emotional distress as result of creditor’s actions
(1) Some states also require physical manifestation of stress
(2) Must be really extreme and repeated (i.e. multiple calls per week, at night, etc.)
2. Communications with Third Parties –
a) Invasion of Privacy II: debtors have right to not have private information publicly disclosed
(1) Private information is disclosed
(2) Information must be made to public
(3) Persons information disclosed to must not have legitimate interest in information
(a) Credit Bureau = legitimate interest
(b) Church Congregation = no legitimate interest
(4) Some states require falsity
b) Defamation: to recover damages for false information
(1) Critical issue is falsity – most of time people do owe debts!
(2) Some states require some pecuniary loss
(3) Qualified Privilege: if person is acting in good faith, and they believe what they say is true even though its false, and making disclosure to someone with legitimate interest = no cause of action
c) Interference with Contractual Relations: must be unjustified
(1) Contact with Employer – must show employer fired debtor because of information disclosed
(2) Proof Problem: may not be able to show that employer fired employee because of information (it has to be direct cause!)
3. Effectiveness of Tort Remedies – there may be deterrent effect in imposing tort damages on creditors, but there’s no real standard of measure, so there’s little regulatory effect.
a) Unlikeliness of being sued plus unpredictability means there’s little deterrent effect in tort claims

FAIR CREDIT REPORTING ACT
I. Regulates credit reporting agencies
A. Credit Reports: compiled by credit bureaus – gather all information on people (debts, foreclosures, liens, etc.) and formulate reports
1. Valuable information for a lot of people (i.e. insurance companies, employers, Bar Examiners)
2. Can help you (get good deals) but can hurt you if there’s wrong information
B. Problems
1. These reports can have errors! Will not always be perfect and some negative information can be included that is not debtor’s own negative information
2. Qualified Privilege – information on these reports are for people who have legitimate interest in the information
3. Not public disclosure
II. Duty – Accuracy of Reports [§ 1681(e)]: Subsection (b): whenever consumer reporting agency prepares a consumer report, it shall follow reasonable procedures to insure maximum possible accuracy
A. Tension between “reasonable” and “maximum accuracy”
B. Focus is on procedures used and not what happened in specific case – i.e. the actual error doesn’t matter, just the method they used to make the error (more like negligence standard)
1. In order to contest agency procedures, must argue that its not reasonable
2. Difficult to challenge agency procedures (must weigh costs against benefits)
III. Duty – Disclosures to Consumers [§ 1681g]: every consumer reporting agency shall (upon request) clearly and accurately disclose to consumer his credit report
A. Consumers are allowed one free credit report per year, and can request to see his particular report to determine if there are errors
B. Agencies must have ability to change information and have duty to reverify information when there’s dispute by going back to source
1. If source of incorrect information does not respond, or says it’s wrong, must take it out of report
C. Consumer’s actions against incorrect information –
1. Credit Repairing Agencies can correct mistakes too – but do the same as creditor can do, but makes it worse because object to everything negative, even if true
2. Consumer has to report error to creditor first and inform them of its inaccuracy (i.e. its not true!) with enough information to allow them to correct mistake
a) If creditor does not correct, can sue for defamation! Now they know its not true and they fail to act
b) If creditor won’t say it doesn’t exist, consumer has right to put in 100 word statement as to what happened
(1) Problem: no one (aka no creditor) cares!
3. Creditors just use FICA scores – used to be bankruptcy index (how likely you’re to file bankruptcy). Scores are used to determine what’s changing, what’s dynamic
a) Score can be changed and tweaked
b) Consumers will probably not be told FICA score on credit report (its protected trade-secret!)
IV. Disputed Information [§ 1681i]: reinvestigation of errors – if consumer believes something is incorrect, must notify credit reporting agency. On notification, they’re required to back to source and check information within 30 days
A. If no answer from source within 30 days, information must come out
B. If affirmative answer of correct from source, information must stay in
1. Need affirmative answer or its out!
V. Limitations on Disclosures [§ 1681h]: subsection (e): consumers cannot sue on theories of defamation, invasion of privacy, etc., unless its false information furnished with malice or willful intent to injure the consumer
A. Implication: when challenging error, important to include statement and provide information, because if creditor is given proof and fails to correct, then it might become malice and they would have knowledge that it’s incorrect

FAIR DEBT COLLECTION PRACTICES ACT http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre27.pdf
I. Statute covers debt and debt collectors, i.e. business of debt- collecting (even if do n