Laura Symes* The question of whether a law firm can act as a debt collector arises occasionally and gives rise to some interesting questions regarding the role of lawyers when it comes to acting not as lawyers, but as a debt collection agency.
A legal letter from a law firm seeking to recover a debt can lead to some confusion for debtors, whether it relates to consumer debts or any other such activity.
And debt collection is big business. U.S. debt collection agencies employ just under 130,000 people through about 4,900 agencies according to a report from Debt.org.
They reported in 2017 on a survey from accounting firm of Ernst and Young published a survey showing collection agencies earned $10.9 billion on the approximately $78.5 billion in overdue debts they collected. And with Covid and a high cost of living crisis the revenues will have increased substantially since then.
The federal Consumer Financial Protection Bureau says debt collection d that almost 35 per cent of American adults, about 77 million people, are at some point the subject of their collection efforts.
The Fair Debt Collection Practice Act (FDCPA)
The key legislation here is the Fair Debt Collection Practices Act, which limits what actions a debt collector can take when collecting a debt on behalf of a third party. It bans any abusive or fraudulent activity in the collection of any debts
Essentially the FDCPA limits how debt collectors act when they contact debtors. We all know of the various often nefarious practices that may be adopted by debt collectors in terms of how they contact debtors, the debt collection letter, the time of day contact is made, the nature of debt collector calls, abuse debt collection practices generally.
These violations, if proven, may mean the debt collector is liable for damages and attorney fees, which resulted in the 2021 Consumer Financial Protection Bureau ‘Debt Collection Rule’, which clarified the way in which debt collectors can communicate with debtors.
Congress passed the FDCPA in the 1970s to protect consumers and curb abusive or deceptive debt collection practices.
The statute is one that applies across a wide range of business activities but also creates a wide range of potential liability problems for those seeking to collect debts, as was reported in this 2019 article in JD Supra.
The articles noted that the FDCPA “has also created complex questions of law and statutory interpretation that circuit courts have split on. One recurring question is the definition of “debt collector,” for being a debt collector is a threshold requirement to being subject to the FDCPA’s requirements.”
The Law Firm Debt Collector
So where does this leave the law firm ‘debt collector’?
The key question as to whether a law firm is bound by the FDCPA is whether it collects debts – be they past-due debts, delinquent debt or any other debt, on a “regular basis”. Clearly this is an area that creates potential argument as to whether the debt collection law firms are in breach of any FDCPA requirement.
Mostly, any law firm seeking to work in the debt collection arena will want to keep their noses clean from both an FDCPA viewpoint and generally in terms of the local Bar Association requirements as to their practices.
Consumer debt collection activities are some that arouse high interest for obvious reasons.
However, it may be that law firms will actually be exempted from the requirements of the FDCPA according to reports, like this one from Bloomberg Law.
The ABA argues that any unscrupulous lawyers seeking to act as debt collectors are subject to ethics rules. However, as the Bloomberg article points out, the ABA’s objection to lawyers being caught by the provisions of the FDCPA will put borrowers in the hands of those who use unethical means to collect debts and will damage the image of lawyers, perpetuating the worst aspects of legal work and lawyers.
The article, written by two law lecturers from St Johns University Law School, said “When a law firm sued consumers for debts they did not owe, the Consumer Financial Protection Bureau needed the FDCPA to stop it. One of us teaches in a law school consumer clinic and has observed that ethical rules do not stop attorneys from deceiving consumers.
“The ABA’s ethical rules are not enough to protect victimized consumers because, as the Federal Trade Commission has observed, the debt collection litigation system is broken. Some courts are swamped with debt collection suits.
“Lawyers, whose actions carry the patina of legitimacy, routinely take advantage of consumers, few of whom can afford lawyers or know their rights, including when they have grounds to complain to attorney disciplinary boards—meaning that ethics investigations are never even triggered.”
The ABA Approach to Debt Collection
While the arguments in favor of dispensing with the need to exempt lawyers from the provisions of the FDCPA, the approach taken by the ABA has already been rejected by Congress.
Originally the FDCPA excluded lawyers from its provisions and in the United States attorney debt collectors actually outnumbered non-lawyer debt collectors with lawyers advertising their services with some marketing themselves as being exempt from the provisions of the FDCPA.
The concern therefore is that the exemption from the FDCPA requirements will not help the reputation of lawyers generally and that current ethical requirements are insufficient to protect vulnerable consumers.
The Wells Fargo Bank Cases
A case in 2021 demonstrated the difficulties faced by claimants seeking to prove a case against a law firm that, in the case, represented Wells Fargo Mortgage Inc to claim a mortgage debt.
The claimant sued for the anxiety created when a law firm forwarded a claim in respect of the debt, seeking protection from the Fair Debt Collections Practices Act.
The law firm letter claimed that legal action had commenced and that the foreclosure process had begun but that “foreclosure prevention alternatives” may still be available.
The debtor claimed that the letter from the debt collection attorneys raised his anxiety as it claimed his ability to avoid foreclosure was reduced, but the district court dismissed the FDCPA claim, which was made under Michigan state law. He appealed under federal law to the US Court of Appeals for the Sixth Circuit, who affirmed the district court decision.
And in another case involving Wells Fargo, Obduskey v. McCarthy & Holthus LLP, No. 17–1307 (2019), the United States Supreme Court unanimously ruled that law firms acting on behalf of secured parties to foreclose on security interests in nonjudicial proceedings are not “debt collectors.”
The Supreme Court decision meant that law firms and are exempt from liability under the Fair Debt Collection Practices Act (“FDCPA”). But the decision left some questions open, also. It was a limited action in terms of its application: it left open the larger question of FDCPA liability for law firms (and other entities) in judicial enforcement of security interests, which is an area where the law firm ‘debt collector’ needs to be careful.
The Law Firm Debt Collector
So law firms can and do act as debt collectors in addition to providing legal services.
However, there are some key differences between the law firm and the typical third party debt collection agency.
Apart from the overriding ethical requirements imposed upon law firms, they will typically require retainer agreements that may be somewhat different from that used by a credit bureau or other debt collection agencies.
The law firm debt collector will often charge a set fee – often between 25 – 33 per cent of the debt. Sometimes however they will charge a contingency fee which may include legal advice in matters such as debt collection lawsuits.
A debt collection agency will typically charge a fee, plus a commission of up to 50 per cent of the recovered debt for most debt collection cases. Keep in mind with the debt collection agency that the fee will often be higher if the debt has to be passed over to a law firm, where there will be legal fees, costs of any default judgment and other costs passed on by the third-party debt collector.
It is apparent therefore that using a law firm can sometimes be less expensive, as well as packing more punch (at least psychologically) than using a debt collector.
The Court Option
The principal difference between the debt collector versus the law firm debt collector is that the latter is not charged with just communicating with the debtor (often leading to the issues of deceptive practices, obscene language via the demand letters and the like), but will involve lawyers who can proceed to take court action should it be necessary.
The law firm can then take follow up action following a default judgment, for instance, such as placing liens upon property, serving court papers that they have prepared (which can carry more weight), garnishing wages and the like to enforce the judgment.
These are ‘debt collection services’ that require legal involvement and can ultimately be more helpful for the original creditor than simply writing a dispute letter or running through the standard procedures for the collection of a debt.
Choosing the Debt Collection Law Firm
The final decision as to whether to use a debt collection law firm or debt collection agency may come down to (a) the speed required to collect the debt, and (b) the knowledge of which agency or firm will best do the job required. It is, therefore, something to be determined on a case-by-case basis.
The amount of the debt, the fee arrangement to be charged, the financial position of both the creditor and the debtor, the speed and time period required to action the collection are all factors to be considered when determining the specific action to be taken – and who best to take it.
Laura Symes writes on legal marketing and law firm issues, including social media marketing, web marketing for lawyers, legal technology and related matters affecting law firms. She has previously written for LawFuel and other publications on law marketing issues and legal marketing strategies best suited to law firms.