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«Model Statute of Limitations Reform Act December 2015 By April Kuehnhoff and Margot Saunders National Consumer Law Center® © Copyright 2015, ...»

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Model Statute of Limitations

Reform Act

December 2015

By April Kuehnhoff and Margot Saunders

National Consumer Law Center®

© Copyright 2015, National Consumer Law Center, Inc. All rights reserved.


April Kuehnhoff is a staff attorney at the National Consumer Law Center whose focus

includes fair debt collection. Before joining NCLC, Kuehnhoff was a Skirnick Public

Interest Fellow at the Cambridge and Somerville Legal Services office of Greater Boston Legal Services, clerked for the Honorable Justice Gary Katzmann at the Massachusetts Appeals Court, and worked as an associate at Shapiro Haber & Urmy LLP.

Margot Saunders is of counsel to the National Consumer Law Center, after serving as managing attorney of NCLC’s Washington office from 1991 to 2005. Margot has testified before Congress on dozens of occasions regarding a wide range of consumer law matters, including predatory lending, payments law, electronic commerce, debt collection and other financial credit issues. She is a co-author of NCLC’s Consumer Banking and Payments Law and a contributor to numerous other manuals. Margot regularly serves as an expert witness in consumer credit cases, providing opinions on predatory lending, electronic benefits, servicing, debt collection, and credit math issues.


The authors would like to thank Carolyn Carter, Robert Hobbs, and Chi Chi Wu of the National Consumer Law Center for their invaluable review and comments. Thanks to Jan Kruse of NCLC for communications support, Cleef Milien for formatting this paper, and former intern Mark Thomson for his research.


Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has used its expertise in consumer law and energy policy to work for consumer justice and economic security for low- income and other disadvantaged people, including older adults, in the United States. NCLC’s expertise includes policy analysis and advocacy; consumer law and energy publications;

litigation; expert witness services, and training and advice for advocates. NCLC works with nonprofit and legal services organizations, private attorneys, policymakers, and federal and state government and courts across the nation to stop exploitive practices, help financially stressed families build and retain wealth, and advance economic fairness.

www.nclc.org Table of Contents INTRODUCTION


A. Debt Buyers: The New Debt Collection Paradigm

B. Reforming Statutes of Limitation

States Have Multiple Causes of Action with Different Statutes of Limitation........... 6 1.

In Most States, Collections Can Legally Continue Beyond the Statute of Limitations 7 2.

Consumers May Inadvertently Restart the Statute of Limitations


C. Reforming Statutes of Limitations on Judgments

D. Reforming Statutes of Limitations Will Bring Benefits to Creditors and the Market in General


Section 1. Title and Scope

Section 2. Definitions

Section 3. Limitations on Actions for Consumer Debts

Section 4. Limitations on Actions upon Judgments or Decrees

Section 5. Prohibition of Waiver of Rights

Statute of Limitations Reform Act 1


Statutes of limitations are laws that limit the length of time available for bringing a lawsuit in court. They are designed to protect “defendants and the courts from having to deal with cases in which the search for truth may be seriously impaired by the loss of evidence, whether by death or disappearance of witnesses, fading memories, disappearance of documents, or otherwise.”1 Too often, however, these laws fail to help consumers because they are not easily understood by non-lawyers. Statutes of limitations generally only protect consumers if consumers know about the availability of this defense and assert it affirmatively. The determination of which limitations period applies to a particular action is often complicated, even for lawyers and judges. The common rule that a partial payment, or even simply an admission, can extend the limitations period is seldom known by consumers. As the Federal Trade Commission (FTC) noted, “most consumers do not know or understand their legal rights with respect to the collection of time-barred debts.”2 This model legislation3 provides sample language to reform statutes of limitations in

order to more effectively protect consumers. Specifically, this Act:

 Creates a single 3 year statute of limitations4 for all consumer debts being collected in the state and decreases the length of statute of limitations in many states (Section 3(a));

 Establishes the rule that the debt is extinguished, prohibiting further collection activities after the 3 year statute of limitations has run, and provides a private right of action for violations (Section 3(b));

 Prohibits renewal or extension of the statute of limitations period because of partial payments or acknowledgments of the debt (Section 3(c)); and United States v. Kubrick, 444 U.S. 111, 117 (1979) (citation omitted).

1 Fed. Trade Comm’n, Repairing a Broken System: Protecting Consumers in Debt Collection Litigation 2 and Arbitration, at 26 (July 2010).

3 This act contains portions of NCLC’s Model Family Financial Protection Act (MFFPA), available at:

http://www.nclc.org/images/pdf/debt_collection/model_family_financial_protection_act.pdf, and can be adopted either as a stand-alone act or together with other parts of the MFFPA.

4 Sixteen states already provide a three-year statute of limitations for either written contracts, oral contracts, or both, so this model law’s choice of a three-year period is not an unusual departure from existing practice. National Consumer Law Center, Collection Actions, § (3d ed. 2014).

–  –  –

An entire industry has emerged that feeds on defaulted consumer debts. “Debt buyers” purchase consumer debts that have been written off by the original lender.6 Despite paying a deeply discounted rate for these debts – just four cents on the dollar on average7 – debt buyers aggressively seek to collect the full amount of the debt, as well as adding interest, penalty fees, and attorney’s fees.

The debt buying industry has enjoyed remarkable growth. In 1993, the face value of defaulted consumer debt purchased by debt buyers was less than $10 billion.8 By 2005, that number had increased to nearly $130 billion.9 Although sales of consumer debt decreased during the Great Recession, the amount of debt sold increased again in 2011.10 Debt buyers purchase accounts in bulk, typically obtaining only an electronic spreadsheet with minimal information about the debts.11 Most of the time, they do not receive the credit application, the account agreement, monthly statements, payment records, or any customer service records that would reflect customer disputes.12 In addition to providing little information about the debt, many debt sellers will not even guarantee that they own the accounts they are selling or that the amounts listed as owed by account holders are correct.13 Some states permit collection on judgments for 20 years or more. National Consumer Law Center, 5 Collection Actions, § 12.15 (3d ed. 2014).

6 Fed. Trade Comm’n, The Structure and Practices of the Debt Buying Industry (Jan. 2013), available at:


7 Fed. Trade Comm’n, The Structure and Practices of the Debt Buying Industry, at ii (Jan. 2013).

8 Robert M. Hunt, Fed. Reserve Bank of Philadelphia, Understanding the Model: The Life Cycle of a Debt, at 19 (June 6, 2013), available at: https://www.ftc.gov/sites/default/files/documents/public_events/lifedebt-data-integrity-debt-collection/understandingthemodel.pdf.

9 Id.

10 Id.

11 Fed. Trade Comm’n, The Structure and Practices of the Debt Buying Industry, at 20, 29 (Jan. 2013).

12 Id. at T-9.

13 Dalié Jiménez, Dirty Debts Sold Dirt Cheap, 52 Harv. J. on Legis. 41, 7 (2015).

Statute of Limitations Reform Act 3 Debts are often resold again and again between debt buyers, with each owner potentially attempting to collect on the accounts.14 Over the course of multiple sales and collection attempts, the debts continue to age while the documentation related to the debts is lost, corrupted, or becomes more difficult to access. Moreover, original creditors typically do not have an obligation to produce documentation of the debt to secondary buyers, who must instead make requests for documentation to the first debt buyer and rely on the previous debt buyer to relay these requests to the original creditor.15 As a result of this lack of documentation, debt buyers frequently pursue flawed claims.

The FTC has concluded that “the information received by debt collectors is often inadequate and results in attempts to collect from the wrong consumer or to collect the wrong amount.”16 Some claims that have been settled or paid in full are reentered into collection. Other claims target the wrong person or victims of identity theft.17 Still others are beyond the statute of limitations, were discharged by the consumer in bankruptcy, or were disputed with the original creditor years before due to fraud, nonperformance, or another problem. A report by several New York City nonprofit and legal services organizations found that 35% of debt buyer lawsuits were clearly meritless.18 Consumers are particularly vulnerable to these flawed claims because they are almost never represented by an attorney. A Maryland study found that consumers were represented by an attorney in only 2% of collection lawsuits.19 Another study found that attorneys represented consumers in only 2% of the 195,000 collection cases filed in New York in 2011.20 Before a number of pro bono programs were instituted, an earlier study had found the percentage was well under 1%.21 It is thus not surprising that this system works for debt buyers. Estimates are as high as Jake Halpern, Bad Paper: Chasing Debt from Wall Street to the Underworld (2014).

14 Fed. Trade Comm’n, The Structure and Practices of the Debt Buying Industry, at iii-iv (Jan. 2013).

15 16 Fed. Trade Comm’n, Collecting Consumer Debts: The Challenges of Change, A Workshop Report, at 24 (Feb. 2009).

17 Kathy M. Kristof, “When debt collectors go after the wrong person,” Los Angeles Times (Dec. 19, 2010), available at http://articles.latimes.com/2010/dec/19/business/la-fi-perfin-20101219.

18 New Economy Project, Debt Deception at 2.

19 Peter Holland, Junk Justice: A Statistical Analysis of 4400 Lawsuits Filed by Debt Buyers, 26 Loy.

Consumer L. Rev. 179 (2014).

20 New Economy Project, The Debt Collection Racket in New York (June 2013).

21 Urban Justice, Debt Weight, the Consumer Credit Crisis in New York City and Its Impact on the Working Poor (Oct. 2007).

Statute of Limitations Reform Act 4 90% of collection lawsuits result in default judgments,22 and very few of these are ever set aside. One study found only about 2% of the default judgments in New York City were later set aside.23 And of course many of the cases not resulting in default judgments resulted in settlements very favorable to the collector. As a result, collectors in New York City in one year obtained an estimated $800 million in judgments based on almost $1 billion in claims.24 The fact that cases are almost never contested also means the debt buyers do not have to worry about adequate legal pleadings. A New York City study also found that in 99% of the cases in which default judgments were entered, the materials underlying those applications constituted inadmissible hearsay and did not meet New York’s standards for the entry of a default judgment.25 In 85% of the cases, the supporting evidence was an affidavit from the debt buyer’s own employee, and in another 12% it was from an employee of an unidentified entity.26 Another study concluded that, among the sample of cases reviewed, no application by a debt buyer for a default judgment complied with New York law.27

B. Reforming Statutes of Limitation

Statutes of limitations provide important protections enabling consumers to defend against old legal claims brought years after their debts were charged-off and records were lost. However, the complexity of statutes of limitations makes it difficult for consumers to use or understand them. Moreover, the fact that, in most states, debt collection can continue after the statute of limitations expires and the statute of limitations can be restarted due to partial payment means that statutes of limitations do not provide finality from claims on old debts.

McCollough v. Johnson, Rodenburg & Lauinger, L.L.C., 637 F.3d 939 (9th Cir. 2011) (Montana collection 22 attorney estimated that 90% of collection lawsuits result in a default); Fed. Trade Comm’n, Repairing a Broken System 7 (July 2010) (most panelists from around the country at FTC hearings indicated that the 90% figure was about right; also citing a number of studies); The Legal Aid Soc’y, Debt Deception 6 (May 2010) (study of New York City collection lawsuits found that 94.3% of cases in sample resulted in a default judgment or a settlement); Dignity Faces a Steamroller: Small-Claims Proceedings Ignore Rights, Tilt to Collectors, Boston Globe, July 31, 2006 (study of collection actions in Massachusetts found an 80% default rate).

23 Urban Justice, Debt Weight, the Consumer Credit Crisis in New York City and Its Impact on the Working Poor (Oct. 2007).

24 Id.

25 Id.

26 Id.

27 New Economy Project, The Debt Collection Racket in New York (June 2013).

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