Court Rules Debt Buyer Violates Fair Debt Collection Practices Act by Seeking to Collect Post-Charge Off Interest

On August 7, 2013, the United States District Court for the Eastern District of Michigan ruled in favor of a class of consumers who were assessed post charge-off interest by a debt buyer on credit card debts prior to the time the debt was transferred to the third party.Interest rates. [1] This decision is likely to generate copycat lawsuits by aggrieved consumers who were asked by a debt buyer to pay interest where the original creditor charged-off the account and ceased collecting post-charge off interest.

The aggrieved consumers in the McDonald case asserted that the debt buyer defendant violated the Fair Debt Collection Practices Act’s (FDCPA) prohibition on false, deceptive and misleading representations in connection with the collection of the debts by adding post charge-off interest during the period of time before the debt was sold.  The consumers also contended that the assessment of post-charge off interest violated the FDCPA’s prohibition on collecting amounts not authorized by their agreement creating the debt or permitted by law. In support of their claim, the consumers presented evidence that the debt buyer’s purchase of the debt from the original creditor was premised on an unpaid balance as of the date of charge-off and that the balance of the debt transferred did not include post charge-off interest.

The Court ruled that the original creditor waived the right to collect post charge-off interest because the terms of the sale contract between the creditor and debt buyer declared that the transferred balance was the amount due as of the date of charge-off. Accordingly, the purchaser of the account could not retroactively add interest for the period before it owned the account.  The Court explained that a contrary ruling would create interest “out of thin air and provide a potential windfall” to the debt buyer.  Based on this rationale, the Court ruled that no right to assess post charge-off interest ever existed, therefore barring its assessment by the debt buyer.

This ruling provides guidance to debt buyers seeking to add interest on purchased debts.  This decision does not appear to explicitly conflict with an earlier Seventh Circuit Court of Appeals ruling [2] holding that the assignee of a debt was permitted to charge the same interest rate as assessed by the assignor. In Olvera, the Court rejected the consumer’s contention that the debt buyer was limited to the lower Illinois statutory rate because the original creditor was a licensed Illinois lender and therefore authorized to charge a higher rate under Illinois law.

Both the McDonald and Olvera decisions relied upon the accepted legal principle that the assignee of a claim “steps into the shoes” of the assignor and acquires all rights to the debt as had belonged to the seller/assignor.  In McDonald, this principle operated to bar an assignee from collecting post-charge interest where the original creditor waived the right to collect this interest.  On the other hand, the Court in Olvera was not faced with an objection as to the collection of post charge-off interest prior to sale and presumably the debt buyer added interest only from the date of the sale of the account and not the earlier charge-off date.

 


[1] McDonald v. Asset Acceptance, LLC, 2013 WL 4028947 (E.D.Mich. Aug. 7, 2013)

[2] Olvera v. Blitt & Gaines, P.C., 431 F.3d 285 (7th Cir. 2005).