Be careful what you do with and how you communicate about a settled debt. A federal court has determined that a sale or further collection of a settled debt by a different collection agency can be construed as the supplying of false information regarding the debt – by the settling collector.
In McGill v. Diversified Consultants, Inc., the parties entered into a settlement agreement under which the defendant debt collector agreed to purchase the debt, permanently forgive the debt and not seek to collect, sell or transfer the debt in the future. The plaintiff debtor alleged that the settling collection agency subsequently falsely communicated to the creditor and another collection agency that the debt was still owed after plaintiff was allegedly pursued by a second collection agency for the same debt. The plaintiff alleged the settling debt collector violated the FDCPA by communicating false credit information to the creditor and the subsequent collector.
The settling debt collector filed a motion to dismiss, arguing the alleged misrepresentation was not “in connection with the collection of a debt” and that an act may only be in connection with the collection of a debt under the FDCPA if the collector was itself directly trying to collect a debt from the plaintiff. Because defendant was not trying to collect the debt from the debtor, defendant argued that the FDCPA should not apply.
The court disagreed, and denied the motion to dismiss. Relying on § 1692e(8) of the FDCPA, the court concluded that there is no requirement that the “collection” needs to be by the defendant “debt collector,” but can be through another collection agency. Plaintiff had therefore stated a plausible claim against the settling debt collector for failing to communicate the settled debt as disputed.
The concern with the court’s decision is that it creates possible FDCPA liability for a predecessor agency if there is a mistake when an account is recalled, such as failing to advise the creditor that the consumer disputed the debt or made a cease and desist request.
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