June 24, 2024

Why Do Debt Collection Agencies Get Sued?

The consequences of a lawsuit can be far-reaching for collection agencies, extending well beyond the immediate financial and legal repercussions.

A single legal misstep can set off a domino effect, triggering increased regulatory scrutiny, diminished client confidence, and a tarnished brand image. In times of heightened consumer protection and social media activism, the reputational damage from a lawsuit can linger long after the case is resolved.

For collection agencies, the stakes could not be higher — getting sued is not just a legal matter but an existential threat to the business itself. So, in this blog, we’ll cover the common reasons why debt collection agencies get sued and how you can prevent it from happening.

7 Top Reasons Why Debt Collection Agencies Get Sued

The main reason debt collectors get sued is failing to adhere to the Fair Debt Collection Practices Act (FDCPA) — the primary federal law governing the debt collection industry. The FDCPA sets strict guidelines on how debt collectors can communicate with consumers and what actions they can take to collect a debt. Violations of the FDCPA are a top reason consumers decide to take legal action against a debt collector.

1. Use of Harassing, Deceptive, or Misleading Language

One of the most common FDCPA violations is harassing or abusive behavior. The FDCPA prohibits debt collectors from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” This includes things like repeatedly calling a consumer, using profanity, or making threats of violence. Debt collectors must also avoid misrepresenting the legal status of a debt or the consequences of non-payment.

Unfortunately, some debt collectors even engage in more egregious behavior that violates the law. Threats of violence, impersonating law enforcement, or disclosing a debt to third parties are all illegal actions that can easily lead to lawsuits. Debt collectors must be acutely aware of the FDCPA’s requirements and ensure their staff is properly trained.

2. Unfair or Deceptive Practices

The Federal Trade Commission (FTC) prohibits unfair or deceptive practices in collecting consumer debts. This broad prohibition covers a wide range of potential violations, such as misrepresenting a debt’s amount or legal status, collecting on debts discharged in bankruptcy, or making false threats of legal action. Debt collectors must ensure their practices are fair, transparent, and truthful to avoid violating FTC’s regulations.

One common problem is not properly providing debt validation. According to the FDCPA, debt collectors must send consumers a written “validation notice” within five days of the initial contact or provide the information orally upon initial communication. This notice should include details of the debt, such as the amount owed and the creditor’s name. If the consumer disputes this debt in writing within 30 days, the collector must stop collection efforts until they can verify its validity.

3. Invasion of Privacy

Debt collectors must be careful not to invade consumers’ privacy in their collection efforts. This can include calling at unreasonable hours, contacting consumers at their workplace after being told not to, or discussing the debt with third parties like family members or coworkers. The FDCPA restricts communication to reasonable hours (generally 8 a.m. to 9 p.m.), prohibits calls to the consumer’s workplace if the collector knows the employer doesn’t allow such calls and requires collectors to cease contact if the consumer requests it in writing.

Also, debt collectors can’t call more than seven times in seven days or within a week after conversing over the phone. Invasions of privacy can lead to lawsuits under the FDCPA and state privacy laws.

4. Collecting Debt Past the Statute of Limitations

Another common issue is collecting on debts past the statute of limitations. Most states have a statute of limitations of a few years for consumer debts, after which the debt can no longer be legally enforced through the courts. Attempting to collect on time-barred debts violates the FDCPA and is a prime target for lawsuits.

5. Mishandling Bankruptcy Proceedings

When a consumer files for bankruptcy, the automatic stay provision of the bankruptcy code prohibits debt collectors from continuing to attempt to collect on the debt. If a collector continues to call, send letters, or take other actions to collect after being notified of the bankruptcy, they can be sued for violating the automatic stay. Debt collectors must have systems to quickly identify and cease collection efforts on accounts involved in bankruptcy proceedings.

6. Violating State Debt Collection Laws

In addition to the federal FDCPA, many states have debt collection laws that provide additional consumer protections. For example, some states limit the contact a collector can have with a consumer or provide longer statute limitations for debt collection lawsuits. Debt collectors must ensure they are compliant with all applicable state laws in the jurisdictions where they operate.

7. Violating the Telephone Consumer Protection Act (TCPA)

The TCPA sets strict guidelines for debt collectors using automated dialing systems or pre-recorded messages. Under the TCPA, debt collectors must obtain consent from consumers before using an autodialer or pre-recorded message to call their cell phone. Violating the TCPA can lead to significant fines and lawsuits.

Protecting Your Agency: Best Practices for Debt Collection Compliance

So, what can debt collectors do to protect themselves?

The key is a relentless focus on compliance.

Understanding national and local laws and regulations: First and foremost, debt collectors must thoroughly understand the FDCPA and all other relevant laws and regulations. This should be an ongoing effort as the legal landscape constantly evolves. Detailed training for all staff members, from call center representatives to senior management, is essential.

Create foolproof monitoring solutions: Debt collectors should also implement robust quality assurance measures to monitor employee behavior and identify any potential FDCPA violations. Regular call audits, script reviews, and customer feedback can help identify issues before they escalate into lawsuits.

Ensure the validity of the debtor information: When it comes to the underlying debt, debt collectors must be diligent about verifying the accuracy and validity of the information they receive from their clients. This includes obtaining thorough documentation of the debt, such as the original contract, billing histories, and proof of assignment. If there are any gaps or discrepancies, the debt collector should refrain from attempting to collect until they can resolve the issues.

Proper system to handle grievances and disputes: Debt collectors must have clear policies and procedures to handle consumer disputes and requests. When a consumer disputes a debt, the collector must cease collection efforts and validate the debt before resuming. And if a consumer requests that the collector stop contacting them, the collector must honor that request.

Debt collection agencies must navigate a complex web of federal and state regulations that govern their interactions with consumers. Any misstep can lead to costly lawsuits.

At Capital Recovery, we go above and beyond to stay informed about our legal obligations, implement robust compliance procedures, and treat debtors with respect and transparency. We follow all the laws and regulations and go above board to ensure the debtors aren’t left with a sour taste about your business at the end of the day.

To know more about how we work, contact us now.


Photo by Pavel Danilyuk