The FDCPA is a federal law that protects consumers from predatory debt collection activities.
- The FDCPA is a federal law that governs third-party debt collectors' interactions with debtors. It generally protects consumers only, not businesses or corporations.
- The FDCPA applies to most third-party debt collectors but not the company that is seeking debt repayment.
- The FDCPA mandates that third-party debt collectors do not lie, call the debtor outside of certain times and at certain locations, or threaten debtors.
- This article is for business debtors who want to know what their rights are during collections and business creditors who want to be aware of the law as they try to collect on past-due accounts.
As a creditor, hiring a collection agency can feel like a worrisome last resort, and as a debtor, dealing with collection agencies can be extremely stressful. In both cases, knowing the provisions of the federal Fair Debt Collection Practices Act (FDCPA) can inform and assuage you that the debt collection process is proceeding within legal and ethical boundaries. Learn all about this crucial debt collection law below.
What is the Fair Debt Collection Practices Act (FDCPA)?
The Fair Debt Collection Practices Act (FDCPA) regulates how debt collection agencies and other third-party debt collectors can interact with consumer debtors. The FDCPA's provisions include limits on when, where, and how often debt collectors can contact debtors and their friends and family.
FDCPA violations are grounds for lawsuits against debt collectors and creditors. This point is important: Although the FDCPA applies only to third parties rather than the actual creditor, both the creditor and the third party can be sued for FDCPA violations. Additionally, many states have their own laws, but often, these laws only govern non-business debts.
Tip: The FDCPA protects consumers from predatory debt collection activities, but courts have ruled that it does not apply to businesses or corporations.
How does the FDCPA work?
The FDCPA only applies to the actions of third parties involved in collecting a debt. If your company is waiting on funds from a non-paying client and you hire a collection agency, the FDCPA applies to the collection agency, not you. Additionally, the FDCPA covers almost all debt types that would matter to a small business, including credit card debt and certain mortgages.
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Who is subject to the FDCPA?
The FDCPA applies to the vast majority of debt collectors, which it defines as "any person who regularly collects, or attempts to collect, consumer debts for another person or institution." However, certain debt collectors are exempt. Excluded debt collectors relevant for business purposes include:
- Any creditors collecting debts owed directly to them rather than a third party
- Debts that a collector originated but sold while continuing to service them, such as student loans and mortgages
- Debts that were not in default at the start of the third-party collections process
- Debts secured for commercial credit transactions, such as invoice factoring
The first exemption codifies a company's ability, as the originator of the debt owed to it, to act outside the FDCPA's guidelines. However, since the remainder of the FDCPA regulates third-party debt collectors, a company using debt collection services should ensure that the agency complies with the law.
Did you know? The FDCPA applies to most third-party debt collectors but not the originator of a debt, which, for business purposes, may mean your company.
Tips for complying with the FDCPA
If your company is seeking debt repayment using a collection agency, you should discuss the FDCPA with the agency before you hire them and ensure that, in their interactions with your customers, they are abiding by the following rules.
1. Do not demand more money than is owed.
Third-party debt collectors cannot inflate the amount of money that the creditor is seeking from the debtor. Likewise, debt collectors cannot add interest or other fees to a debt; they can only discuss the amount of debt indicated in their legally mandated validation letters (more on this later). However, nothing in the FDCPA stops creditors themselves from reissuing overdue invoices with added late fees or interest.
2. Do not call the debtor outside of certain times.
A debt collection agency cannot call debtors before 8 a.m. or after 9 p.m. These times apply in the debtor's time zone, rather than the creditor's or that of the collection agency. However, if a debtor asks a collection agency to contact them outside of these times, then doing so is permissible.
3. Do not call the debtor's workplace if requested not to do so.
If a debtor requests that a third-party debt collector not place calls to the debtor's workplace, the FDCPA mandates that the third party must comply with this request. However, the FDCPA does not allow debtors to request that third parties not call their mobile or home phones. Creditors themselves face no such limits on their calls, and, notably, the FDCPA does not govern email or social media communications.
4. Do not contact the debtor directly if they hire a lawyer.
Under the FDCPA, collection agencies must contact debtors' lawyers rather than debtors themselves when they have hired legal representation. If a creditor learns that a debtor has hired a lawyer, the creditor should immediately alert their collection agency.
5. Do not contact the debtor's family and friends more than once.
You might have heard stories about collection agencies whose tactics border on harassment. Part of this reputation stems from the common debt collector tactic of contacting a debtor's friends and family. However, under the FDCPA, a third-party debt collector can only do so one time. Debt cannot be mentioned during the conversation – instead, the focus must be on locating the debtor.
6. Verify the debtor's debt.
The collections process can be quite stressful and exhausting for debtors. Collection agencies must send debtors a document called a validation notice. This notice describes and verifies the money that the debtor owes, and a debtor must receive it within five days of first hearing from a collection agency. This validation notice also educates the debtor on their alternatives for recourse if they feel the debt is unjust or incorrect.
7. Do not threaten debtors.
A collection agency cannot threaten to file lawsuits, nor actually do so. It also cannot garnish a debtor's wages, seize their property or threaten to do either. The FDCPA mandates that third-party agencies do not threaten debtors, including through the use of profanity or violence.
Additionally, only a judge can issue a ruling in a legal case involving debts owed, and only sheriffs and marshals can enforce them. The only thing collection agencies can do is regularly contact debtors and modify their credit reports to show their account is in collections.
8. Do not make misleading statements or send falsified documents.
The FDCPA unilaterally bans collection agencies from posing as lawyers, private investigators or court officials and making false claims both verbally and in writing.
No collection agency can say that a debt is criminal or send communications on legal or judicial letterhead. Instead, only debt collection lawyers whom a creditor hires can send notices on legal letterhead. And while the FDCPA technically does not apply to creditors, it is widely frowned upon for creditors to make false statements or pose as someone they are not.
Key takeaway: FDCPA compliance requires that third-party debt collectors remain truthful, contact debtors only at certain times and locations, and refrain from making threats or posing as enforcement authorities.
If a debt collector violates the FDCPA, debtors (or their family and friends, if contacted) can sue and potentially win a court case. Rulings in favor of a debtor may require the following payments from third-party debt collectors and possibly creditors as well:
- Damages for physical and emotional distress
- Lost or garnished wages
- Statutory damages of up to $1,000
- Attorneys' fees
A judge in such a case may issue injunctive rulings that forbid the third-party debt collector from calling or sending letters to the debtor. Such rulings can be avoided in the first place if third-party debt collectors comply with the FDCPA.
If you're a creditor, make sure your collection agency abides by the FDCPA. And if you're a debtor, you have recourse – while debts are scary, they're not the end of the world.