The Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt." In Schultz v. Midland Credit Management, Inc., the Third Circuit held that language debt collectors occasionally include in form dunning letters – a notice that the debt collector may be required to report certain discharges of debt to the IRS – can violate the FDCPA in certain circumstances. The Schultz case illustrates the risk debt collectors take when they utilize form collection letters without regard to the particularized facts of a debt.
In Shultz, the plaintiffs defaulted on several debts, each in amounts less than $600. The debt collector to which the creditor outsourced the debts sent several dunning letters to the plaintiffs offering to accept less than the amount plaintiffs owed to resolve the debt. Treasury Department regulations require debt collectors to report discharges of debts to the IRS under certain circumstances, but only where the debt discharged exceeds $600. Each letter that the debt collector sent to the plaintiffs stated: "We will report forgiveness of debt as required by IRS regulations. Reporting is not required every time a debt is cancelled or settled, and might not be required in your case."
The plaintiffs brought a putative class action against the debt collector alleging that, because their debts were less than $600 each, the debt collector's statement that it might be required to report any debt discharge to the IRS was false and misleading as to the plaintiffs' debts. The district court granted the debt collector's motion to dismiss, holding that the debt collector's statement that it might be required to report debt discharges to the IRS in some cases, was not misleading.
On appeal, the Third Circuit reversed the trial court and remanded the case for further proceedings. The Court first observed that a debt collector violates the FDCPA when it makes a "threat to take any action that cannot legally be taken or that is not intended to be taken." 15 U.S.C. § 1692e(5). The Court held that the language in the letters could lead a debtor to fear that "the discharge of any portion of their debt, regardless of amount discharged, may be reportable" to the IRS. Because the language "references an event that would never occur" with respect to the plaintiffs, the Court concluded that the language was misleading and that the plaintiffs had pled a viable claim for violation of the FDCPA.
The Court recognized that many debt collectors use form letters to contact debtors, but cautioned that "convenience does not excuse a potential violation of the FDCPA." In light of the Third Circuit's opinion, debt collectors should consider revising their form letters to specify that IRS regulations do not require them to report discharges of debts less than $600.
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