Professor William Woodward
o Keep in mind when we are dealing with state debt collection practices, presence of bankruptcy always lurks
o Creditor first in line to levy on a property under state law may find his situation dramatically altered when the debtor enters into bankruptcy prior to the disposition of the property.
Ø Collection Without Courts
o Non-Judicial Collections and Restrictions
§ Big-picture—this comprises small portion of total debt collection.
· Empirical shows that very few bankruptcy filers had judicial action initiated against them
§ Leveraging – usually credible threats of harm to the other party.
· Leveraging is all about hitting the debtor where it hurts.
· Exert leverage over the so wants to pay, more likely to get paid without judicial enforcement.
· The debtor’s decision making
o Personal Priority
§ They will have debts
· Making either conscious or unconscious decisions to either:
o Pay one bill
o Not pay another
o Pay only a portion of one
§ Do they need future service
· Might want to pay a doctor to get future care
§ Can other party prosecute the debtor?
· The creditor’s decision making
o Is it worth it to collect judicially?
§ Small debt won’t be worthwhile when considering:
· Court fees
· Legal fees
§ Perception that litigation is fraught with unnecessary costs.
§ Other litigation dangers in consumer collection
· Judgment proof
· Deemed not to owe a debt
§ Might be better to seek voluntary payment – no risk of bankr sprung
o Determine how (at the lowest enforcement cost) make more likely that debtor will pay
§ Make it less costly to the debtor or more beneficial to them to make payment
o Direct method
§ Mortuary example: dumping the body on their steps
o Other methods
· Phone calls
§ Embarrassment (think about the type of creditor to determine effectiveness)
· Posting cancelled checks
· File with credit bureaus, effecting credit
· When the debtor has security, they have the ultimate leverage
o If business tools you have leverage over what they need to stay in business
§ Practice typically used in term loans made to businesses which require the pledging of all items associated with the business.
§ Note: you can get this at any time. Go for jugular with critical equip.
§ Collateral Control
· A perfected security interest will generally prevent the debtor from obtaining an additional loan on the same property.
§ Loss reduction
· You can foreclose on the security interest and recover loss from a default through the sale of the property
§ Ability to Collect
· Woodward said something about larceny if you just go and take it.
· But art 9 security interest give you a contractual right to repo, no BOP
· NOTE: Debtor’s strongest counter-leverage – esp unsecured is bankruptcy
§ Indirect Leverage in the Legal System
· State laws shift leverage
o Ex. CA law saying that if a Co. violates duty to pay employees under the act or engages in some other statutory misconduct then a TRO can be issued to shut down the co.. Pg-7
§ If employee knows about this, they can exact significant leverage to get paid.
· Credible threat to shut things down if not paid
o Cf. situation under FDCPA, where a lawyer tries improperly to collect on behalf of client
o Child support
§ Jail for nonpayment
§ Report to IRS as forgiveness of debt.
§ Credit Information Process
· Credit Score
o This can have an important effect on the collection process
§ typically inform creditors who to extend credit to and varies applicable rates
§ Debtors don’t want their score damaged
o FICO score (“Fair Isaac Company”) made this famous.
o Warning Letters
§ “Protect you credit rating”
o This can provide particularly powerful incentive for wealth concerned of reputation
· Deny future credit
o Stronger if nowhere else for debtor to go
o Can creditor influence other providers
· Fair Credit Reporting Act (15 USC §1681) – pg 10
§ Giving debtor access to credit report information
§ Prescribing features to ensure accuracy
§ If the consumer contests an item must conduct a free invest. to make sure accur.
§ Prompt changes
o Notification of adverse action based on the report
§ Must let you know why they are acting and the report that served as the basis
o Willful noncompliance can result in civil liability
o FTC enforces
· Frequent Complaints by Debtors
o Debts listed weren’t owed
o Amounts incorrect
o Payments registered not accurate
· Reporting agency can’t defend itself by saying creditor gave it bad info
o Both codefendants
· Credit Reports highly important now
o Used by employers, car insurance, life insurance, health insurance
· Still there is high degree of error in credit reports
o Empirical 79% contained error
o Restrictions on Non-Judicial Collections
§ Usury Laws
· Made certain high intr. rates or rates of return usurious, rendering them uncollectable or criminal
· Governed by state law
o Marquette National Bank of Minneapolis v. First Omaha (1978)
§ LOCATION LOCATION LOCATION
· Held that state law of customer’s location was irrelevant
· All that mattered was legal interest rate in bank’s home state
o Prompts race to bottom
§ Delaware and other deregulate interest
o National Bank – prb located in place that you’re ok
§ Fair Debt Collection Practices Act (FDCPA)
o Remedy abuses in the collection industry
o The term “debt collector” means any person . . . who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.
§ Also applies if they use another name
§ Does not apply if actual creditor is collecting
· Officer or employee of creditor collecting in the name of
§ Pretty much we don’t want third party debt collectors
· Theory – creditors not as prone to bad conduct cause more concerned with reputation so won’t act so badly because marke
§ Loss and damage, and
§ Failure to repay loan
o Making a false representation about any portion of the debt
§ Reason for holding
· Plain language. Earlier version had exemption for lawyers
· No real line between debt collection and litigation
§ Also held
· Can’t stop ordinary lawsuit communications
· Brown v. Card Service Center
§ Debt collector (card services was a debt collection firm) sent letter to debtor on behalf of creditor
· Unless she paid in 5 days
o “Could be” referred to lawyer
o “Could” result in “a legal suit being filed”
§ They didn’t do what they said they were going to do
§ Court said “could” was too conditional
§ Drew could v. would distinction
§ All comn’ctns w/debtors must be viewed from perspective of least soph. debtor
· Remedial statute so the court construed broadly
· This lowers std to whether the communication would deceive or mislead not a reasonable debtor but an unsophisticated one
§ FDCPA prohibits false representation involving lawsuits.
· letter potent’ly violated if firm had no intent to take threatened action.
§ Held:stmnts in letter could be deceptive or misleading if didn’t intend to sue
§ Can p’tiff prove similar claims were seldom litigated or seldom referred to attny
o What are Typical Business/Consumer Debts of a Debtor:
§ Ongoing expenses (this reflects a need to know about cash flow): Utilities and Rent
§ Tax liability
§ Salary to employees (payroll and benefits (vacation) owed)
§ Any pending judgments
§ Dividends/Accounts payable
§ Regular Loans
§ Potential liability – potential torts or future liabilities.
o Potential Assets (Consumer)
§ Accounts Receivable (Loaned money)
§ Tax return
§ Business assets (Inventory) Employee Fringe benefit owed
§ Unpaid Salary (not yet received)
§ Retirement Accounts (IRA/401k), Pensions; Bank Accounts
§ IP rights
§ Stocks and Bonds
§ Alimony/Child Support Owed (both)
o Lawyer Opinion Letters
§ Opinions are usually hedge pretty significantly because they don’t want to get nailed
§ Function of this in transactional work is to make transaction more solid for purchasing party (give some assurances)
· Described as an interesting and “perverse” activity
· Lipson asserted that these are worthless, lawyers spinning their wheels because they are so hedged.