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FOS Blog

08 Sep
2020

WHAT IS TIME-BARRED DEBT AND HOW DOES IT AFFECT MY BANK?

WHAT IS TIME-BARRED DEBT AND HOW DOES IT AFFECT MY BANK?

On February 21, the CFPB announced a proposal to amend Regulation F – Fair Debt Collection Practices Act (FDCPA) by requiring debt collectors to make certain disclosures when collecting time-barred debt.  The target audience of this rulemaking is third-party debt collectors, but it could also have an indirect impact on community banks if you use another party (ex: an attorney or debt collection service) to collect your debts.

So, what is time-barred debt?
A good explanation is provided in the CFPB’s Report regarding the testing of disclosure clauses and forms proposed to implement this new rule.  In the Introduction section, “Time-barred debt is debt for which the statute of limitations has expired.”  This means that you exhausted all the means available to you under state law and can do no more.  State law can vary – up to 3 years, six years, 15 years – depending on the type of debt.  After that, the consumer can raise “time barred debt” as their defense from further collection action.  Even though debt collectors may no longer apply collection strategies, the debt itself is still a matter of record.

Sometimes, time-barred debt can be “revived.”  If a consumer somehow acknowledges that they owe the debt or has a conscience and makes a partial payment, these are circumstances that open the door for the debt collector to sue the consumer.  Thus, it “revives” the debt.

By the time a debt reaches time-barred status, it may have passed through multiple debt collectors’ hands.  When it reaches final collection, there could be a misleading representation that the debt is still collectible and legally enforceable.  Hence, there is a need to explain that the debt collector is precluded from suing.

Under the CFPB’s proposed rule, certain disclosures will be required if a debt collector proceeds under these circumstances.  They conducted a study to develop understandability of the notice.  The disclosure first makes a clear statement of the identification of the debt collector and that they are trying to collect a debt.  It includes a summary of the debt, how it can be disputed, and what else the borrower can do.  It will clearly state that the debt collector cannot sue unless the borrower makes a payment or acknowledges the debt.  Finally, it includes a response tear-off for how the borrower wants to respond.  The NPRM (Notice of Proposed Rulemaking) includes illustrations on how the notice would be used.

For additional information contact the author at edehmey@fosaudit.com.

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