The Fair Debt Collection Practices Act
By Richard Paul Ormond
Many landlords and management companies are losing thousands of dollars due to their failure to establish a sound debt collection policy.
It is not uncommon for a landlord to find himself or herself in a dispute over a bill with a former tenant. This is especially common when the landlord claims that the damage to the property rented exceeds the amount of the tenant’s security deposit or when a lease is terminated prematurely by a tenant, triggering a cancellation fee in the lease agreement.
In 1977, Congress passed a law known as the Fair Debt Collection Practices Act (the “Act”) to protect consumers from overzealous bill collectors. Serious debate exists as to whether the Act does too much or too little to protect consumers from questionable collection practices.
The Act does have its limitations by applying only to “Consumer Debt.” Consumer Debt is any debt that was acquired by an individual in order to acquire a personal, family or household benefit. Consumer Debt, by definition, thus includes disputed residential leases. The Act specifically does not cover debts that are for business purposes, such as commercial leases.
Interestingly, a number of recent court decisions across the United States, have reaffirmed that neither a landlord nor a management agent can be defined as a “Debt Collector” under the Act. This does not, however, grant the landlord free license to collect an outstanding or disputed debt. There are many pitfalls in which a landlord or managing agent may find himself personally liable under the Act.
The most common errors that landlords and managing agents make when faced with an uncollected debt is that they fail to have an established procedure as to how to pursue the debtor and simultaneously remain within the limitations established by the Act. Most property owners that face problems in collecting a debt lack the proper office procedure for handling a collection, lack information about the debtor, including the debtor’s whereabouts and credit history, and, finally, procrastination in pursuing debtor, and thus missing the deadlines prescribed by the law to collect the debt.
The Act specifically enumerates that it applies only to “Debt Collectors.” Debt Collectors are defined by Congress as any person or business that regularly utilizes telephone or U.S. mail to attempt to collect a consumer debt owed to a person other than the Debt Collector.
This specific definition of a Debt Collector being a third party that collects debts of another, actually creates some interesting problems for landlords and managers. Landlords must know that the Act is not limited only to collection agents. but can also apply to business owners and property owners and can open them up to liability and harsh penalties.
When collecting a debt, a landlord or manager must make clear that they are acting as an officer or agent of the entity to whom the rent is paid, rather than personally as an individual or third party. This person attempting to collect a debt must emphasize that they are acting on behalf of the entity that owns the property. No confusion should exist in the mind of the debtor as to whom the debt is owed. This is especially important for partnerships and corporations that lease out residential property.
For example, if a general partner in a partnership that owns the property from which the dispute has arisen, attempts to collect rent without specifying that he or she is acting on behalf of the partnership, he or she may open himself or herself up to personal liability under the Act for failing to specify that the debt is being collected on behalf of the partnership.
This is of the utmost importance for smaller partnerships or corporations that lease property where, in the eyes of the tenant, it can be easily misconstrued that the person they pay rent to is the owner of the property, when in actuality, that person is a member or agent of a business entity that owns the property.
Additionally, there are a number of actions a Debt Collector cannot take. These include, but are not limited to the following:
Make repeating or harassing phone calls;
Use profane or physically threatening language.
Advertise the debt (tell anyone that the tenant owes money);
Make false Statements;
Send unsealed envelopes or post cards;
Threaten prosecution or jail;
Falsely represent themselves as attorneys or agents of the government;
Threaten to seize property (unless it is legal to do so and it is the intended action of the collecting party); and,
Threaten to seize wages (unless it is legal to do so and it is the intended action of the collection party).
When passing the Act, Congress created some interesting requirements to be followed when collecting a Consumer Debt. A Debt Collector cannot, under any circumstances, threaten any action that is illegal or which the collector does not intend to carry out.
For example, a Debt Collector, cannot threaten to garnish wages from the debtor if the Debt Collector does not intend to carry out the garnishment. This also pertains to the threatening of legal action.
In addition to excluding Debt Collectors from certain practices, the Act specifies actions that are within the law. These include, but are not limited to:
Calling or visiting on a daily basis between 8 am. and 9 p.m.
Garnishing wages in specific circumstances;
Calling family members, employers and neighbors in order to locate the debtor;
Taking legal action to collect the debt; and,
Requesting a post-dated check for up to 5 days.
Congress, when implementing the Act, included severe penalties for Debt Collectors that violate the Act. These include statutory damages of up to $1000.00, attorney fees and costs, courts costs, and actual damages suffered by the debtor as a result of the violation of the Act (actual damages could include punitive damages If a debtor informs the Debt Collector in writing that the debtor refuses to pay or wants the Debt Collector to stop contacting the debtor, the Debt Collector must cease all communication with the debtor.
Furthermore, under the Act, if a debtor disputes the debt, the Debt Collector must, within thirty days, send an accounting and evidence of the debt to the debtor. Also, under California state law, a landlord must provide a tenant, within fifteen days of vacating the leased property, an accounting of the security deposit and any fees charged.
There are a number of simple procedures a landlord or managing agent can take to ensure that they will not violate the Act. If these procedures are not followed, a property owner may lose thousands of dollars, and the collection of outstanding debts would become almost impossible.
Landlords and managers should seriously consider adopting the following procedures:
Know what collection practices are illegal;
Use a credit application form;
Use a credit agreement;
Clarify to whom the debt is owed and who is collecting the debt;
Create a policy to avoid bad checks; and,
Prepare a comprehensive policy and procedure available to all tenants describing payment of rent and debt collection procedures.
The creation of a pre-printed statement available to all new tenants before any dispute can arise, helps inform all of the parties about their rights and remedies under the law. The most common error made by tenants and landlords alike is the failure to know what rights exist for both parties under the law. This statement, that sets forth the landlord’s policies helps clarify the responsibilities of both the tenant and the landlord, and may help avoid a situation in which collection actions need to be taken.
Landlords and managing agents must be aware of the limitations established by the Fair Debt Collections Practices Act and each should develop a comprehensive and clear policy as to how to avoid having a dispute between a tenant and how to proceed if a dispute leads to a debt that must be collected.
In order to properly establish guidelines for landlord-tenant relations, including debt collection, a landlord or managing agent should consult an attorney. Attorneys that handle real estate law and landlord-tenant issues can provide excellent advice on how to prepare a policy and how to enforce it properly.
Richard P. Ormond is an associate in the West Los Angeles Law Firm of Fainsbert Mase & Snyder, LLP. If you have any questions concerning this article or any other related matter, Mr. Ormond may be contacted at (310) 473-6400 by fax at (310) 473-8702 or by e-mail at firstname.lastname@example.org