The Third Circuit Court of Appeals has revived a lawsuit alleging violations of the Fair Debt Collection Practices Act by including language in a collections letter that indicated the forgiveness of a debt may be reported to the Internal Revenue Service.
A copy of the ruling in Schultz v. Midland Credit Management can be accessed by clicking here.
A District Court judge in New Jersey had dismissed the class action lawsuit, but a panel of judges from the Third Circuit deemed the letters to have violated the FDCPA.
The defendants received a total of six letters, each attempting to collect on a debt that was less than $600, the threshold for reporting a canceled debt to the IRS. Each letter included the following language: “We are not obligated to renew this offer. We will report forgiveness of debt as required by IRS regulations. Reporting is not required every time a debt is canceled or settled, and might not be required in your case.”
Four of the letters also included the following language: “[i]f you pay your full balance we will report your account as Paid in Full. If you pay less than your full balance, we will report your account as Paid in Full for less than the full balance.”
Because the debts were for less than $600, the plaintiffs accused the defendant of violating Section 1692e of the FDCPA, which prohibits using false, deceiving, or misleading information in attempting to collect on a debt.
Since the debts were for less than $600, which meant the defendant would not be able to report the cancellation to the IRS, including such language in a collection letter “presented a false and misleading view of the law,” the Third Circuit concluded.
“By including the reporting language on collection letters addressing debts of less than $600, we believe that the least sophisticated debtor might be persuaded into thinking that the discharge of any portion of their debt, regardless of amount discharged, may be reportable.”
The defendant tried to argue that someone would have to only read the first part of the passage and not the second part — “Reporting is not required every time a debt is canceled or settled, and might not be required in your case.” The Appeals Court disagreed.
“However, even with this qualifying statement, the least sophisticated debtor could be left with the impression that reporting could occur. Indeed, this is precisely what happened in the Schultzes’ case—there was no possibility of IRS reporting in light of the fact that the debt was less than $600, but use of the conditional “might” suggested that reporting was a possibility.”
Just because the language is true does not mean it also can’t be deceptive, the Appeals Court ruled.
“While we recognize that Midland, like many debt collection companies, uses form letters when contacting its debtors, we must reinforce that convenience does not excuse a potential violation of the FDCPA.”
