Collecting Debts — Problems and Opportunities

By Douglas P. Cushing

Collecting money is often problematic, whether when times are tough or even when the economy is sound. Your methods must be effective, and they must comply with state and federal debt collection statutes.

Initially, you, as the lender, should focus on securing the debt, whether by deposits, a letter of credit if the transaction warrants, or a formal security interest. Your credit history with the customer, or the lack of a history, may dictate how much "free credit" you will extend. In the age of Internet information availability, much more data is available to determine whether a new customer is worth the risk of "open account" terms. Electronic payment methods being implemented today can provide secure transactions that avoid the uncertainty of "when will the check be mailed?" and "will it clear?"

Late payments may present a bizarre problem if the debtor should file for or be forced into bankruptcy. A trustee may recover (for the benefit of all creditors) payment of a debt that provides a better return to the creditor than would have been realized if the debtor had filed bankruptcy on the date of payment While there are defenses to such claims, it is far less expensive to have a secured claim or to receive contemporaneous payment than to litigate the payment you struggle to collect.

There are two statutory hurdles to collecting money owed to your business when the claim is based on a consumer transaction. Both Oregon and the federal government have adopted fair debt collection acts to control collection practices.

Oregon Unlawful Debt Collection Practices Act

Unlike the federal act, the Oregon law extends to both original creditors and debt collectors. It is limited to consumer transactions — that is, purchases customarily intended for personal, family, or household use. Is that a narrowly defined standard? Oregon's Court of Appeals once had to determine whether a hay baler was or was not a consumer item — it wasn't in one case, but it certainly could have been in another setting.

Oregon's statute, like the federal act, identifies a laundry list of prohibited practices, such as threats of violence or force, or of criminal arrest, as well as specific examples of permitted contact. The details are many and minute, so examine ORS 646.639 carefully. Consumer advocates have spent much time and effort on that statute.

What do you risk if you or your collection agency goes too far? Damages include actual damages (which are not limited to economic loss) as well as tort damages (for stress, anxiety, etc.), punitive damages, attorney fees, and class-action recovery. Be cautious; don't chase that $100 consumer debt too far.

Federal Fair Debt Collection Practices Act

The federal act is aimed at prohibiting unethical and abusive collection practices. Limited to consumer transactions, it applies only to the actions of third-party collectors. 15 USC 1692 et seq. sets out a long, detailed list of good and bad acts. It is also amplified by Federal Trade Commission rulings that add another gloss to the statutory language. That is particularly true as administrations change.

The Act does not directly apply to original creditors. "Directly" is the key because an original creditor may subject itself to vicarious liability — the liability of a principal for his agent's acts. A creditor may get too creative, perhaps by making demands that appear to be from a debt collection agency, and thereby fall within the statute. Creating an apparently independent name for processing consumer billings may invite unnecessary risk if that "third party presence" exposes an entity to more risk than an enhanced collections ratio.

The Act covers all communications with consumers from third parties, whether verbal, written, or electronic. Those communications will be judged by the standard of the least sophisticated debtor. In general, one cannot be harassing, abusive, or misleading. A letter referencing payment coming to "my desk" was deemed a violation when the party writing the letter didn't have a desk to which all payments were funneled. Notices, very critical under the federal act in terms of both content and timing, can be deemed insufficient if the demands "overshadow" the statutory disclosure information.

The statute of limitations under both statutes is one year. A creditor's delay beyond a year in commencing litigation would void liability under these statutes except for offset rights. Compliance is straightforward; to avoid risk entirely, be careful. If you are clearly and solely in the business-to-business game, you may never fear these rules, but technological advances allowing people to work from home keep blurring the lines. Talking with your lawyer before putting canned demand procedures in place is the key.

An attractive alternative that some creditors can seek is to demand reclamation rights. Under UCC §02-702, a seller may assert the remedy of reclaiming goods delivered if there is no security interest or statutory lien right. The remedy is narrowly defined in the UCC and limited by the Bankruptcy Code. One must act within ten days of delivery of merchandise, and the right to reclaim goods may be defeated by a good-faith purchaser for value. A secured creditor can also assert a prior right. A secured creditor's realization against other collateral may elevate a reclamation claim to payment status. Paying careful attention to the technical steps, including notice, time lines, etc, may seem expensive while you are precluded from recovery, but patience can be rewarding. As the court recognized in Pester Refining, 964 F2d 842 (8th CA 1992), a reclaiming creditor initially subordinated to the secured creditor became the first priority payee once the secured creditor was paid from other collateral. Priority under a bankruptcy plan or payment by a guarantor — the theory doesn't matter if your reclamation claim is now first! Collecting debts has some risks, and you must stay in compliance with debt collection rules. Work with your lawyer and be careful.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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