- The Fair Debt Collection Practices Act is the federal law that governs third-party debt collectors' interactions with debtors.
- The FDCPA applies to most third-party debt collectors but not the company seeking debt repayment.
- Under the FDCPA, third-party debt collectors are not allowed to lie, call the debtor outside certain times and locations, or threaten debtors.
- This article is for business debtors who want to know their rights during collections and business creditors who want to know their limits as they collect.
As a creditor, hiring a collection agency can feel like a worrisome last resort, and as a debtor, dealing with collection agencies can be highly stressful. In both cases, knowing the provisions of the federal Fair Debt Collection Practices Act (FDCPA) can reassure 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 FDCPA?
The FDCPA is the sole federal law that regulates how debt collection agencies and other third-party debt collectors can interact with 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 instead of the actual creditor, both the creditor and the third party can be sued for FDCPA violations.
Did you know? Many states have their own FDCPA debt collection laws, but these state versions often only govern nonbusiness debts.
How does the FDCPA work?
As mentioned above, the FDCPA applies only to the actions of any third parties involved in collecting a debt. This means that if your company is awaiting money from a nonpaying client and you hire a collection agency, the FDCPA applies to your agency but not to 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. These are some of the excluded debt collectors relevant for business purposes:
- Any creditors collecting debts owed directly to them rather than a third party
- Debts that a collector originated but sold while continuing to service, 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 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, you should discuss the FDCPA with prospective agencies before you hire them and make sure they abide by the following rules:
1. Do not demand more money than is owed.
Third-party debt collectors can't inflate the amount of money that the creditor is seeking from the debtor. Likewise, debt collectors can't 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 these later). However, nothing in the FDCPA stops the creditors themselves from reissuing overdue invoices with added late fees or interest.
2. Do not call the debtor outside certain times.
A debt collection agency heeding the FDCPA can't 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, it's permissible for a debtor to ask a collection agency to speak outside these times.
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 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 explicitly govern email or social media communications.
Did you know? Freelancers have unique challenges when it comes to being paid promptly. It's recommended that freelancers hire a collection agency if they've gone unpaid for more than 90 days and unpaid invoices are worth more than what they'd pay a collection agency.
4. Do not contact the debtor directly if they hire a lawyer.
A debtor who hires a debt collection attorney effectively places a substantial barrier between themselves and debt collection agencies. Under the FDCPA, collection agencies must contact debtors' lawyers rather than debtors themselves. If a creditor learns 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've probably heard 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 do this only once. 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. That's part of why collection agencies must send debtors something called a validation notice. This notice describes and verifies the money a debtor owes; a debtor must receive it within five days of first hearing from a collection agency. This validation notice must also educate the debtor on their routes for recourse if they feel the debt is unjust or incorrect.
7. Do not threaten debtors.
A collection agency isn't a law firm. It can't threaten lawsuits or actually file them. It's not a court or sheriff, so it cannot garnish a debtor's wages, seize their property or threaten these actions. The FDCPA mandates that third-party agencies not threaten debtors, including through the use of profanity or violence.
Additionally, only a judge can issue a ruling in a debt case, and only sheriffs and marshals can enforce them. Collection agencies can regularly contact debtors and modify their credit reports to show debts in collection.
8. Do not make misleading statements or send falsified documents.
It's not unheard of for collection agencies to pose as lawyers, private investigators, court officials or other potentially intimidating figures. However, the FDCPA unilaterally bans collection agencies from doing so. The FDCPA prohibits third-party debt collectors from making false claims both verbally and in writing.
No collection agency can say 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 directly to creditors, it is still widely frowned upon for creditors to make false statements or pose as someone they are not.
Key takeaway: FDCPA compliance requires third-party debt collectors to be truthful, call the debtor only at certain times or locations, and refrain from making threats.
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 themselves:
- Damages for physical and emotional distress
- Lost or garnished wages
- Statutory damages of up to $1,000
- Lawyers' 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 remain compliant with the FDCPA.
If you're a creditor, make sure your collection agency stays in line. And if you're a debtor, you have recourse; while debts are scary, they're not the end of the world.