A District Court judge in Illinois has denied a motion to dismiss claims that a defendant violated the Fair Debt Collection Practices Act over how it handled a debt that was part of the plaintiffs’ bankruptcy proceedings.
The background: The case stems from a line of credit secured by a second mortgage that the plaintiffs took out to cover medical expenses. After experiencing financial hardship, they filed for Chapter 7 bankruptcy and listed the debt as part of the proceedings. While the bankruptcy case was pending, the servicing rights for the line of credit were transferred, and ownership of the loan changed hands.
- As part of the bankruptcy, one of the plaintiffs entered into a reaffirmation agreement that set a specific monthly payment amount. Despite that agreement, the defendant allegedly began sending statements demanding a significantly higher payment.
- When the plaintiff continued to pay the reaffirmed amount, the servicer allegedly treated those payments as partial payments, placed them into a separate account, and later declared the loan past due and in default.
- The plaintiffs also alleged that the defendant threatened foreclosure, warned of negative credit reporting, and failed to timely respond to a qualified written request disputing the payment amounts and allocation of payments.
The ruling: In a detailed opinion, Judge Sunil R. Harjani of the District Court for the Northern District of Illinois rejected the defendant’s argument that the case should be dismissed at the pleading stage. On the FDCPA claim, the judge found it plausible that the debt was treated as being in default when it was acquired, which is a key factor in determining whether a servicer can qualify as a debt collector under the statute.
- Judge Harjani also declined to dismiss the breach of contract claim, finding that the plaintiffs adequately alleged that the reaffirmation agreement modified the underlying obligations and that demanding higher payments could constitute a breach. At this stage, the court emphasized, it must accept the plaintiffs’ allegations as true, even if the defendant disputes their interpretation of the agreement.
- One notable passage addressed the scope of prohibited conduct, with the court rejecting a narrow view of what actions count under consumer protection statutes.
- While the court dismissed some claims brought by one plaintiff for lack of standing, the core FDCPA, contract, RESPA, and state law consumer fraud claims survived, allowing the case to proceed into discovery.
