Debt Collection: When Does A Law Firm Become A Collector?

Law firms and debt collection agencies share multiple similarities, but they also have some key differences. A law firm can assist in collecting a debt and may be referred to as a debt collector, but it is not the same as a debt collection agency. A debt collection agency cannot file a lawsuit against a debtor, whereas a law firm can. A law firm is only bound by the Fair Debt Collection Practices Act (FDCPA) if they can be said to be collecting debts on a regular basis. The definition of regular is a grey area, and there are no bright-line rules establishing when a law firm has regularly engaged in debt collection.

Law firms are more frightening than collection agencies

A law firm acting as a debt collector is a frightening prospect for many people. While debt collection agencies are not a welcome sight, they are commonplace and often lack the power to sue. Law firms, on the other hand, have the authority to sue and can use this to coerce debtors into paying. This makes them a lot more intimidating and can cause people to worry more about the consequences of non-payment.

The Fair Debt Collection Practices Act (FDCPA) governs the actions of third-party debt collectors, including collection agencies and law firms. However, the definition of "regular" debt collection by law firms is a grey area, and some lawyers may not consider themselves bound by the FDCPA. This is concerning as the FDCPA protects debtors from abusive and deceptive practices. The American Bar Association (ABA) is currently pushing for lawyers to be exempt from the FDCPA, which could make the situation worse for debtors.

Debt collection agencies often refer claims to law firms when a lawsuit is required, as they do not have the authority to file suits themselves. Law firms, therefore, have more power and can be more threatening. They can also use legal jargon to confuse debtors, and debtors may assume that an attorney has reviewed their case when this is not always the case. This can lead to people paying debts they do not owe, as they are intimidated by the prospect of legal action.

In addition, law firms can engage in collection activities in multiple jurisdictions, although their ability to enforce judgments may be limited to the jurisdictions in which their attorneys are licensed. This gives them a broader reach than debt collection agencies, which typically operate within a single state or city and are subject to local licensing requirements.

The involvement of a law firm in debt collection can be a cause for concern and may indicate that the creditor is taking a more aggressive approach. While the lawyer's efforts may not lead to a lawsuit, their involvement is a form of hardball that can be psychologically distressing for the debtor.

Law firms are bound by the FDCPA

Law firms are subject to the Fair Debt Collection Practices Act (FDCPA) when they are deemed to be acting as debt collectors. This is a federal law that governs the actions of third-party debt collectors when collecting consumer debt.

The FDCPA applies to debt collectors seeking to recover debts incurred for "personal, family, or household purposes". A "debt collector" is defined as any person or entity that uses "any instrumentality of interstate commerce or the mails in any business" whose "principal purpose is the collection of any debts" or who "regularly collects or attempts to collect, directly or indirectly, debts owed or due".

Courts have found that law firms qualify as "debt collectors" under the FDCPA when they are alleged to regularly perform debt collection activities for clients. There is no clear threshold for what constitutes "regularly" collecting debts, and each case is decided based on a balancing of multiple factors relating to the nature of the law firm's practice. However, it has been established that a law firm must collect debts as a matter of course for its clients or for some clients, or collect debts as a substantial, but not principal, part of its general practice to be considered a "debt collector" under the FDCPA.

Law firms acting as debt collectors must comply with the FDCPA's prohibitions against engaging in conduct that is harassing, oppressive, or abusive, using false, deceptive, or misleading representations, and employing unfair or unconscionable means to collect debts. They are also subject to the FDCPA's notice and disclosure requirements when contacting debtors and limitations on such contact.

It is important to note that the US Supreme Court has ruled that law firms acting on behalf of secured parties to foreclose on security interests in nonjudicial proceedings are not considered "debt collectors" and are exempt from liability under the FDCPA. This exclusion is specific to the context of nonjudicial foreclosures and does not extend to judicial enforcement of security interests.

Law firms must disclose they're acting as debt collectors

Law firms acting as debt collectors must abide by the same rules and restrictions as other creditors or collection agencies. This includes the Fair Debt Collection Practices Act (FDCPA), which prevents abusive, unfair, or deceptive practices when collecting debts.

The FDCPA defines a "debt collector" as:

> any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

The FDCPA applies to lawyers and law firms that are deemed to be "regularly" collecting debts. However, there is no clear definition of "regular", and each case is decided based on a balancing of multiple factors relating to the nature of the attorney or firm's practice. For example, in Bassett v. Credit Management Services, the FDCPA was found to apply to a lawyer who regularly, through litigation, tried to collect consumer debts. In another case, a law firm was deemed to be engaged in the business of collecting debts when it sent over 500 'dunning notices' in a year.

Law firms acting as debt collectors must disclose that they are doing so. For example, FCCPA 559.72(11) states:

> In collecting consumer debts, no person shall: communicate with a debtor under the guise of an attorney by using the stationary of an attorney or forms or instruments that only attorneys are authorized to prepare.

This rule exists because a letter from a law firm is more likely to frighten the consumer into paying the debt than a letter from a collection agency. Therefore, law firms must be clear that they are acting as debt collectors when sending collection letters to consumers.

Law firms can file suit, enforce a judgement, and use legal mechanisms

Law firms acting as debt collectors are subject to the same rules and restrictions as any other creditor or collection agency. They are also bound by the Fair Debt Collection Practices Act (FDCPA), which prohibits deceptive practices and outlines the notice and contact requirements when corresponding with debtors.

A law firm acting as a debt collector can file a lawsuit against a debtor. If a debtor refuses to pay, a collection agency will need to engage a third-party law firm to file a suit. Law firms, on the other hand, already have the authorization to bring suit on behalf of the creditor. This is a significant distinction between a collection agency and a law firm.

If a law firm obtains a judgment in favour of their client, they can enforce it. Enforcement mechanisms vary by country and are usually set forth in the civil procedure code. In the United States, the enforcement process is governed by state law, and the laws vary by state. Some states require the registration of the judgment, while others mandate the filing of a new civil lawsuit or the procurement of a writ of execution. For instance, in California, the sheriff's department enforces judgments, whereas, in Florida, the court clerk issues a writ of execution, directing the sheriff to seize property or funds.

Additionally, law firms can use legal mechanisms to collect debts, but their ability to do so is limited to the state jurisdiction where the attorneys are licensed. This is in contrast to collection agencies, which can send communications to debtors in multiple jurisdictions.

Law firms can send demand letters and call debtors

Law firms acting as debt collectors must abide by the same rules and restrictions as any other creditor or collection agency. This includes the Fair Debt Collection Practices Act (FDCPA), which prevents abusive, unfair, or deceptive practices when collecting debts. Law firms are only bound by the FDCPA if they collect debts on a "regular basis", which is a grey area. The FDCPA defines a "debt" as:

> "...any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment."

A law firm is often chosen as a debt collector because they can file suits and use legal mechanisms within their state jurisdiction. They also already have authorization from the creditor to bring suit, which sets them apart from collection agencies.

Frequently asked questions