Fearing that the legal playing field could be tilted against consumers, a group of federal and private consumer agencies have filed briefs in a U.S. Supreme Court case that threatens to shift the cost of a lawsuit to consumers in debt collection cases.
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Collectors have in the past absorbed court costs in "good faith" suits by consumers, even if the consumer loses. It's an exception, written into federal rules, to the usual "loser pays" rules that apply to most lawsuits. Without it, people would be discouraged from suing debt collectors, say the Federal Trade Commission, the Consumer Financial Protection Board and a group of private consumer advocacy groups in legal briefs filed this month.
In doing so, they say they're attempting to preserve a delicate legal balance between consumers, who sometimes fail to pay their debts, and debt collectors, who occasionally break the law by harassing or threatening consumers who are behind on their bills.
There has been a surge in the number of cases filed against debt collectors under the Fair Debt Collection Practices Act, the 1977 federal law that regulates the activities of third-party debt collectors.
The case before the court
The one that made it to the Supreme Court, though, could discourage such suits, the agencies say. The case, known as Marx v. General Revenue Corp., revolves around the experience of Olivea Marx, a Colorado woman who racked up student debt and failed to pay it, then was contacted by a debt collector. Marx, a single mother with two young children and a low-paying job, claimed the collector's vigor went beyond the limits of the law. It called her several times a day, she said, and illegally threatened to garnish half her wages and sent a collection-related fax to her employer. She sued.
The court disagreed, finding that the debt collector's contact with the woman's employer did not violate the law because it did not specifically mention her debt. The court ordered her to pay $4,543 in costs -- nearly all of which compensated the debt collector for hiring a court reporter and bringing in witnesses.
In a typical lawsuit, that wouldn't be unusual. Ordinarily, the prevailing party in American courts is entitled to recoup the costs of the case -- a venerable legal concept that discourages frivolous suits by making the loser pay, and one which General Revenue Corp. argued was only fair to apply to Marx.
A lawyer for General Revenue Corp. could not be reached. But in a statement, Mark Schiffman, vice president of public affairs for ACA International -- The Association of Credit and Collection Professionals, a trade group, says having the losing side pay in debt-collection cases "is a matter of fairness and consistency."
The association, he says, "supports the position that the law does not prevent a successful defendant in an FDCPA action from recovering costs, even if the action is not brought in bad faith and for the purposes of harassment."
Exception for debt collection cases
The case hinges on the court's interpretation of how the Fair Debt Collection Practices Act applies to the issue of litigation costs: Consumer groups say Congress crafted an exception for debt-collection cases. Industry groups say it didn't.
Debt collectors in the past have had to absorb the costs of cases filed under the Fair Debt Collection Practices Act (FDCPA) unless the debtor was found to have filed under bad faith or with harrassment in mind. Though the judge in Marx's case ruled her suit was not frivolous or in bad faith, it still ordered her to pay costs. In December, the 10th Circuit Court of Appeals upheld the ruling. In May, the Supreme Court agreed to hear the case. Arguments are scheduled for November, on the single narrow question of "whether a prevailing defendant in an FDCPA case may be awarded costs where the lawsuit was not 'brought in bad faith and for the purpose of harassment.'"
With the help of the Justice Department, the FTC and CFPB filed a brief in mid-August in support of the woman's position that she should not pay litigation costs. A group of private consumer agencies, including the AARP and National Consumer Law Center, filed a similar brief on the case. Representatives of General Revenue, the debt collector, have yet to file their arguments with the court.
"The need for effective enforcement of the act may be even more pressing today than it was in 1977 when the FDCPA was enacted. Debt loads have increased exponentially and technological advances have transformed the collections industry, exposing more consumers to abuses," the AARP/NCLC brief argues. The "limitation on awards to prevailing defendants avoids the painful irony of vulnerable debtors routinely being saddled with additional debt through the operation of a statute designed to protect them."
Chilling effect on suits?
Peter Barry, a Minneapolis lawyer who files suits on behalf of consumers against debt collectors, says debt collection companies would love to discourage legitimate lawsuits by raising the possibility that the plaintiff would have to pay attorney's fees or other costs if the suit is unsuccessful.
"The debt collection industry is very intent on shutting down Fair Debt Collection Practices cases," he says. "They'd very much like to have a weapon."
Suing debt collectors can already be intimidating, he says, especially for consumers who represent themselves.
Allen Harkleroad, a consumer advocate and author of "Stick It to Sue Happy Debt Collectors" and "Suing Abusive Debt Collectors," says the best advice for people pursued by debt collectors is to set up a credit freeze with the major credit reporting agencies, which will stop collectors from accessing your information and using it against you. (It would also inhibit your ability to receive new credit.)
He says he has filed about a dozen suits under the Fair Debt Collection Practices Act and the Georgia Business Practices Act, and that in all but two cases, the debt collectors offered him a settlement within weeks of his filings.
Consumers should not be intimidated, Harkleroad says, whether they are suing or being sued.
"Half the battle is just showing up in court," he says.