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The news on local home foreclosures continues to be grim. According to a report in yesterday’s Boston Globe, more than 1,500 notices of auction of foreclosed properties were filed by lenders. In May 2006, there were only 654.
Yesterday, the First Circuit Court of Appeals affirmed a lower court’s ruling that slashed a request for legal fees sought by counsel representing plaintiffs in a Fair Debt Collection Practices Act matter. The FDCPA allows attorney fees on successful claims, and the plaintiffs in this case were successful, but for a variety of reasons, attorneys fee award ended up being a little more than 10% of what was sought. The case should serve as a wake-up call for consumers, attorneys and Congress.
The plaintiffs, a married couple, sued Corporate Receivables, Inc. and one of its employees for abusive debt collection practices (the husband owed the debt). They took their case to a jury and presumably did so with the hopes of getting a significant award of actual damages.
The Trial
The husband testified that he had trouble concentrating at work, and had some sleepless nights. While the details of the wife’s testimony were not set out in the ruling, the Court of Appeals saw her testimony as “even less compelling” than the husband’s. There was no evidence that either plaintiff incurred out of pocket expenses, or suffered such extreme emotional distress that it was reasonable for them to expect they would receive a large damage award. Notwithstanding this testimony and the lack of evidence, a jury found in favor of the couple. The husband was awarded $1,000 in statutory damages, but the wife received nothing. The court then concluded that the defendants had violated c. 93 of the Massachusetts General Laws (the Commonwealth’s Consumer Protection Statute). The husband was awarded an additional $1,000 and the wife was awarded $25. While successful at trial, the plaintiffs’ success was limited.
Complicating the fact a bit more: the defendants made two offers of judgment. The first was for $2,500, and the second was for $3,900. Under the Federal Rules of Civil Procedure (no. 68), if an offer of judgment is rejected, and the award obtained is not more favorable than the offer of judgment, the rejecting party (i.e., the Plaintiff) may be responsible for the opposing parties costs incurred after the offer was made.
The court found that proceeding to trial on the claims, in light of the award ultimately obtained, was wasteful. It was “clear from the trial testimony that the possibility of …obtaining such a [large] recovery was minuscule.” Since $3,900 had been offered, and the plaintiffs were awarded a total of only $2,025, the request for over $20,000 in legal fees was found to be unjustified. The fee request was reduced to $2,500.
For consumers contemplating claims under the FDCPA, the message should be clear: you are not going to get rich from filing and pursuing a FDCPA claim. The FDCPA provides for statutory damages of $1,000 in the event of a violation. Actual damages are recoverable, but the value of actual damages is based on the loss actually incurred, and not merely the fact that the consumer has been wronged.
For attorneys contemplating claims under the FDCPA, the message should be also clear: while the FDCPA provides for attorneys fees for successful plaintiffs, a court is not going to award big damages absent a showing of actual losses. Lost concentration and difficult sleeping should not be viewed as being enough to justify taking a case through a federal jury trial.
For Congress, the message should also be a clear: the statutory damages amount of $1,000 may not be enough to deter collection companies from abusive debt collection practices. While I cannot credibly advocate that consumers should hit a jackpot if targeted by an abusive debt collector, the statutory damage amount cannot be so low that it could easily be viewed as a cost of doing business by a ruthless debt collector.
People explore all of their available options before filing bankruptcy. Bankruptcy is not for everyone struggling with debt. Some may benefit from credit counseling, while others may benefit from loans from family members. However, there is one option that I am pretty sure does not work for most people I meet: “debt settlement” companies. In many cases, I have represented people who unsuccessfully tried this option and only ended up losing their money and adding to their stress. A conversation I had today with a prospective client reminded me that these "debt settlement" companies are still lurking out there, and people struggling with debt need to think about these issues before signing on the dotted line.
Settlement is voluntary. No credit card company has to settle. There is no legal requirement to do so. While it might make sense for them to collect 40% of the debt the fact is, they do not have to. They can still continue to collect and still sue. Generally, someone using the services of a reputable non-profit credit counselor will not be subject to collection calls or law suits, and people filing bankruptcy are protected by the automatic stay.
The Credit Report. When a debt is settled, it is as reported as such. Settled is not “paid in full as agreed.” Reported settlements lowers the credit score.
Taxes. Most of these “debt settlement” companies will not tell you this (although it might be buried in the fine print). You are responsible for the taxes on the amount of the debt that has been forgiven. For real. Here’s an example: if you have a $9,000 credit card debt, and you settle it for $5,000, the remaining $4,000 may be considered taxable income. The creditor should and sometimes will issue an IRS Form 1099C. However, what I have seen more often than not is that a 1099C is filed with the IRS, but not received by the consumer. The income is not declared. A few years later, they receive a letter from the IRS informing them that they underreported their income and they now owe the government money in addition to penalties and interest.
The debt/income ratio. No one wants to file bankruptcy, but look at your debt. If you can afford a monthly payment to a debt settlement company, you may be able to afford a payment towards a Chapter 13 plan. While your creditors may not get paid 100%, you get the protections of the automatic stay, the certainty that there is no tax liability on the unpaid/discharged debt, and credit card companies do not have the option of “opting out” of a bankruptcy filing and suing you unless they get permission from the bankruptcy court (which unless certain exceptions apply, they are not going to get). I know it's bankruptcy, and I know it's something that you do not want to do, but if your credit report is already bad and/or is going to be made worse...
Look at the fees. I have seen different fee structures, but the most common I have seen is an application fee, the first month or two of payments are fees and do not go towards the payment of debt, and then there is a monthly fee after that. After the first month or two, the consumer realizes the program is not working. They are still getting collection calls and in some cases, getting sued in court.
While there may be situations where “debt settlement” might work, I have never seen it with the people I meet. By the time they come to me, they have made a few months of payments, and are getting sued or have already been sured and now hauled into court for a wage garnishment hearing. By hiring the debt settlement company, they were trying to do what they thought was the “right thing to do” and at the same time avoid bankruptcy. You can imagine then how frustrated they were to end up in bankruptcy anyway.
If you’re contemplating “debt settlement”, don’t be swayed by the hype these “debt settlement” companies offer. Look at the fine print, think about these issues, consider all of your options, and choose the best, most cost effective, and safest way to tackle the debt.
At a press conference from her office, Massachusetts Attorney General Martha Coakley announced newly imposed regulations barring foreclosure “rescue” schemes. The new rules – which are effective today – bank for-profit lenders from taking ownership to help struggling homeowners avoid foreclosure.
The new rules do not apply to nonprofit housing agencies, or from family members taking ownership. The new rules also will not prevent lenders from offering assistance, such as by relaxing repayment terms.
From the Boston Herald:
Coakley, whose office has been battling companies that offer complex transactions claiming to lessen the financial pressure of mortgages, said the regulations are effective today and valid for 90 days.The regulations could become permanent after public hearings are held.
Coakley’s office vowed to review and possibly implement other reforms to deal with the foreclosure “crisis” gripping the state.
“These ‘rescuers’ take a bad situation - foreclosure - and make it worse by liquidating any remaining equity in the homes,” Coakley said in a statement.
From Boston.com:
Coakley's action comes at a time when the state Legislature is still weighing whether to pass a law to deal with the subprime lending and the state's foreclosure crisis. Subprime mortgages are targeted to homeowners with poor credit, but the low initial payments that make them attractive increase two years into the loan when the interest rate increases.Coakley said she would seek comments from the public over the next 28 days for proposals to make it illegal for lenders to inflate a borrower's income on their mortgage application, to make mortgages that borrowers clearly cannot pay; and to provide credit when it is not in the interest of the homebuyer or an existing homeowner who is refinancing a property.
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