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August 5, 2013 / Nic Underhill

California Enacts Fair Debt Buyers Practice Act

Tens of thousands of Californians are contacted annually by debt buyers they have never done business with, for debts that may be old or in amounts that don’t match the consumer’s memory or records.   Many times the debt is owed by someone else or the result of identity theft.  The Consumers Union’s 2011 report issued by the East Bay Community Law Center detailed how debt buyers are filing an increasing number of lawsuits against consumers even though they often do not have sufficient proof to support their claims.  Debt buyers purchase large portfolios of consumer debt from the original creditor or secondary debt buyers for pennies on the dollar. The buyers hope to make a profit by collecting a small percentage of those accounts and then resell the portfolio to another debt buyer who then restarts efforts to collect.  Some debt buyers have nothing more than a robo-signed affidavit to support their claims in court.

SB233, the Fair Debt Buyers Practice Act, was created to help regulate these practices.  In the bill the Legislature cites that the collection of debt had become a significant focus of public concern due to the adequacy of documentation required to be maintained by the industry in support of its collection activities and litigation; California law did not specifically prescribe the specific nature of documentation that debt buyer must maintain and produce in a legal action on the debt; documentation used to support the collection of a debt must be sufficient to prove that the individual who is being asked to pay the debt is in fact the individual associated with the original contract or agreement, and that the amount of indebtedness is accurate; it was important to create documentation and process standards for the collection of consumer debt that all interested parties can easily understand; and setting specific documentation and process standards will protect consumers, provide needed clarity to courts, and establish clearer criteria for debt buyers and the collection industry.

In order to address these issues, the Act establishes many new rules related to the purchase and collection of consumer debts.  First, a debt buyer is prohibited from making any written statements to a debtor in an attempt to collect a consumer debt unless the debt buyer can verify the amount of the debt balance at charge off, the date of default or last payment, the name and address of the charge-off creditor at the time of charge off, and the name and last known address of the debtor as they appeared in the charge-off creditor’s records prior to the sale of the debt.  Second, a debt buyer is prohibited from making any written statement to a debtor in an attempt to collect a consumer debt unless the debt buyer has access to a copy of a contract or other document evidencing the debtor’s agreement to the debt. If there is no signed contract, the debt buyer must obtain evidence that the debt was incurred by the debtor.  Third, a debt buyer must provide a written notice with its initial written communication to the debtor that, among other things, informs the debtor of his or her right to request certain records from the debt buyer and those records shall be provided free of charge within fifteen days of the debtor’s request. Fourth, a debt buyer is prohibited from bringing suit, initiating another proceeding, or taking any other action to collect a consumer debt if the applicable statute of limitations on the cause of action to enforce the debt has expired.  Finally, the Act establishes requirements for default judgments, such as a requirement that a debt buyer submit business records to confirm a debt before seeking a default judgment against a debtor. The new rules will apply to debt buyers with respect to all consumer debt sold or resold on or after January 1, 2014.

After being unanimously passed by both the California Senate and General Assembly, SB233 was signed into law by California Governor Jerry Brown on July 11, 2013.

If you or someone you know has being similarly taken advantage of or has been the victim of any other unfair business practices, please contact Khorrami Boucher Sumner Sanguinetti, LLP for a private consultation.

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