Banking and Finance Law Daily Statement that debt forgiveness might be reported to IRS violates the FDCPA
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Tuesday, September 25, 2018

Statement that debt forgiveness might be reported to IRS violates the FDCPA

By Nicole D. Prysby, J.D.

A statement in a debt collection letter that forgiveness of the debt might be reported to the Internal Revenue Service constitutes a violation of the Fair Debt Collection Practices Act where the debt at issue was less than $600, held the U.S. Court of Appeals for the Third Circuit. Because IRS regulations clearly state that only discharges of debts of $600 or more "must" be filed with the IRS, by including that language on letters to consumers with debts less than $600, the least sophisticated debtor might be persuaded into thinking that the discharge of any portion of their debt, regardless of amount discharged, may be reportable. The use of the word "might" did not keep the language from being misleading, because for consumers with debts of less than $600, there are no circumstances under which reporting would ever occur (Schultz v. Midland Credit Management, Inc., Sept. 24, 2018, Vanaskie, T.).

Background. A debt collection company sent multiple letters to the consumers attempting to collect four different outstanding debts. None of the debts exceeded $600. Each letter offered to settle the debt for less than the full amount owed and included this statement "We will report forgiveness of debt as required by IRS regulations. Reporting is not required every time a debt is canceled or settled, and might not be required in your case." Because the Department of the Treasury only requires an entity or organization to report a discharge of indebtedness of $600 or more to the IRS, and because each of the debts linked to the consumers was less than $600, the consumers claimed that the inclusion of the foregoing language was "false, deceptive and misleading" in violation of the FDCPA. They filed a putative class action, which was dismissed by the district court. The district court concluded that the consumers failed to plausibly allege a violation of the FDCPA because the language set forth in the dunning letters was not "deceptive" or "otherwise violative of the FDCPA." The consumers appealed.

Debt collector presented misleading view of the law. The Third Circuit held that the language in the letter was misleading under the FDCPA, which prohibits the threat to take any action that cannot legally be taken or is not intended to be taken. The court agreed with the consumers’ argument that by including the language, "[w]e will report forgiveness of debt as required by IRS regulations," the debt collector presented a false or misleading view of the law—one designed to scare or intimidate the consumers into paying the outstanding debts listed on the debt collection letters, even though the debt collector knew that any discharge of the debt would not result in a report to the IRS as the regulations clearly state that only discharges of debts of $600 or more "must" be filed with the IRS. By including that language on letters to consumers with debts less than $600, the least sophisticated debtor might be persuaded into thinking that the discharge of any portion of their debt, regardless of amount discharged, may be reportable. The debt collector argued that the use of the word "might" kept the language from being misleading, because it should signal to the least sophisticated debtor that only under certain circumstances will reporting occur. The court rejected that argument because for consumers with debts of less than $600, there are no circumstances under which reporting would ever occur.

The case is No. 17-2244.

Attorneys: Cary L. Flitter (Flitter Milz, PC) for Robert A. Schultz, Jr. and Donna Schultz. Han Sheng Beh (Hinshaw & Culbertson LLP) for Midland Credit Management, Inc.

Companies: Midland Credit Management, Inc.

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