• California’s Newest Legislation Restricts Debt Buyers and Debt Collection
  • July 19, 2013 | Authors: David N. Anthony; Virginia Bell Flynn; John C. Lynch; Alan D. Wingfield
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Virginia Beach Office ; Troutman Sanders LLP - Richmond Office
  • On July 11, 2013, California Governor Jerry Brown signed legislation backed by the state Attorney General that bars debt buyers from initiating litigation or collection efforts on charged-off consumer debt until they can verify the ownership and amount of debt.

    California Senate Bill 890, entitled “Fair Debt Buyers Practices Act” (FDBPA), was introduced in 2011. In short, the legislation prohibits debt buyers from obtaining legal judgments against consumers - or sending any written materials to consumers - unless they can document that they have matched the right person to the debt. For example, debt buyers, through a sworn declaration, will have to produce the name and address of the debtor in the original creditor’s records and then identify all subsequent owners of the debt, along with other details.

    Specifically, the bill requires that:

    • A debt buyer possess information that it is the sole owner of the specific debt at issue;
    • A debt buyer, when collecting a debt, include the debt balance, as specified, and the name and address of the creditor at the time the debt was charged off;
    • A debt buyer make certain documents available to the debtor, without charge, upon receipt of a request, within fifteen days;
    • A notice with specific information must be included with the debt buyer’s first written communication with the debtor;
    • All settlement agreements between a debt buyer and a debtor be documented in open court or otherwise in writing;
    • A debt buyer who receives a payment on a debt provide a receipt or statement containing certain information; and
    • A sworn declaration be included, which provides the name and address of the debtor in the original creditor’s records and includes all subsequent owners of the debt.

    Penalties also may be imposed between $100 and $1,000 per violation. Further, a court, under the FDBPA, may dismiss a debt buyer’s action with prejudice if the debt buyer fails to provide the information listed above, fails to appear or is not prepared on the date scheduled for trial.

    Finally, the FDBPA permits class actions to be brought, but limits the damages to an amount not to exceed $500,000, or one percent of the net worth of the debt buyer. Reasonable attorneys’ fees can also be awarded.

    Practical Implications

    While the FDBPA places more restrictions on debt buyers, ultimately, the requested information must come from the original creditor. These restrictions, therefore, place additional burdens on both sides of the debt collection market. Further, debt buyers and collectors should be aware of the significant interest of the California Attorney General’s office in this area of consumer practice, which could lead to investigations and litigation of noncompliant entities.