Fifth Circuit Weighs in on Time Barred Debt

The Fifth Circuit has joined the growing split in circuits concerning the collection of time barred debt. In Daugherty v. Convergent Outsourcing, Inc., 2016 U.S. App. LEXIS 16531 (5th Cir. Tex. Sept. 8, 2016), the Fifth Circuit joined the Sixth and Seventh Circuit in holding that “a collection letter that is silent as to litigation, but which offers to “settle” a time-barred debt without acknowledging that such a debt is judicially enforceable, can be sufficiently deceptive or misleading to violate the FDCPA.” Daugherty at * 7.  

In Daugherty, the collection letter provided that 

This notice is being sent to you by a collection agency. The records of LVNV Funding LLC show that your account has a past due balance of $32,405.91.

Our client has advised us that they are willing to settle your account for 10% of your total balance due to settle your past balance. The full settlement must be received in our office by an agreed upon date. If you are interested in taking advantage of this offer, call our office within 60 days of this letter. Your settlement amount would be $3,240.59 to clear this account in full.

Even if you are unable to take advantage of this offer, please contact our office to see what terms can be worked out on your account. We are not required to make this offer to you in the future.

Daugherty v. Convergent Outsourcing, Inc., 2016 U.S. App. LEXIS 16531, *3 (5th Cir. Tex. Sept. 8, 2016). The letter offered three payment opportunities: “(1) a "Lump Sum Settlement Offer of 10%" requiring a single payment of $3,240.59; (2) a "Settlement Offer of 25% & Pay Over 3 Months" requiring three payments of $2,700.49; or (3) "Spread Your Payments Over 12 Months" requiring monthly payments of $2,700.49 over the course of a year.” Id. at *3-4.


In siding with the Sixth and Seventh Circuits, the Fifth Circuit adopted the rationale of the Seventh Circuit- specifically, that the plain language of the FDCPA prohibits not only threatening to take actions that a debt collection cannot take, but also using false, deceptive or misleading representations concerning the character or legal status of the debt. The court therefore concluded that “a collection letter seeking payment on a time-barred debt (without disclosing its unenforceability) but offering a “settlement” and inviting partial payment (without disclosing the possible pitfalls) could constitute a violation of the FDCPA.” Daugherty at *13. The Fifth Circuit reversed the district court’s dismissal of the action and remanded the matter for further proceedings.

For those keeping score.  The Third and Eighth Circuits have held that "[i]n the absence of a threat of litigation or actual litigation, no violation of the FDCPA has occurred when a debt collector attempts to collect on a potentially time-barred debt that is otherwise valid." Huertas v. Galaxy Asset Mgmt, 641 F.3d 28, 33 (3d Cir. 2011) (quoting Freyermuth, v. Credit Bureau Services, Inc., 248 F.3d 767, 771 (8th Cir. 2001). Additionally, the CFPB is considering a proposal that would require debt collectors to provide a disclosure that advises the consumer that the debt is time barred and the debt collector cannot sue to recover it.