Consumer Debt Management

Q: some information about Consumer Debt

A: For the first time in nearly a decade, the year began with a gloomy economic forecast, including threats of recession, layoffs, and stock-market volatility. Meanwhile, consumer debt continues to increase and annual personal bankruptcies are expected to remain at well over one million. With economic uncertainty on the horizon, community associations could face a rise in the number of homeowners who fall behind on their assessments. Now is the time to implement collection procedures that comply with your governing documents as well as state and federal law and that treat your residents in a fair and equitable manner. RULES OF THE GAME In addition to provisions in your governing documents and state laws regarding liens, foreclosure, and suits, collection of association assessments is also affected by the federal Fair Debt Collection Practices Act (FDCPA). This law requires that debt collectors who regularly collect consumer debt be ?"fair?" in dealing with debtors. Among the act?'s specific mandates: * Written and oral communications must inform a homeowner that the communication is an attempt to collect a debt and that any information obtained will be used for that purpose. * A first notice must inform homeowners that they have 30 days to dispute the debt and request verification of the debt. * Collection action must stop if the homeowner disputes the debt or requests verification in writing within the 30-day notice period. The FDCPA also prohibits certain actions, such as: * Collecting any amount greater than the debt (including interest, late fees, and cost of collection) unless permitted by the agreement creating the debt - usually your governing documents - or by state law. * Depositing a check post-dated by more than five days unless written notice of intent to deposit is provided to the homeowner between 3 and 10 days prior to deposit. This helps your owners avoid surprises or bounced checks. * Threatening or implementing non-judicial action to take or disable property if there?'s no present right to possession of the property - or there?'s no present intention to take the property. * Communicating with a homeowner regarding a debt by postcard. This is to ensure privacy. The consequences of attempting to collect assessments in violation of the FDCPA can be substantial. Violations of this law are subject to damages of $1,000 for each instance. And a debtor may recover attorney?'s fees for the cost of enforcing the FDCPA. DEBT OR NOT? Although the FDCPA was first enacted in 1977, there remains some uncertainty as to whether it applies to collection of community association assessments. Several federal and state trial courts ruled in the mid-1990?'s that assessments were not ?"consumer debt?" covered by the FDCPA. These court rulings were based on the view that the law applied only to debt created by an ?"extension of credit?". However, more recent court rulings have hewed toward the view that assessments are indeed consumer debt subject to the FDCPA. This opinion was set down by a federal appeals court for the first time in Newman v Boehm, Perlstein & Bright, a 1997 decision in which the U.S. Court of Appeals for the Seventh Circuit concluded that extension of credit was not required for association assessments to qualify as consumer debt. The Newman decision is directly applicable only to community associations located in the Seventh Circuit, which encompasses the states of Illinois, Indiana, and Wisconsin. A Florida appeals court, also in 1997, disregarded the Newman decision and ruled that condominium assessments aren?'t consumer debt. Calling the issue of whether the FDCPA applies to collection of condominium assessments a ?"difficult one?", the court commented ?"The federal courts are groping for a principled, logical, and consistent interpretation of a statute that is poorly drafted and whose true scope appears hopelessly lost in its circular definitional scheme?". In the past three years, however, the federal appeals court for the Tenth Circuit - which includes the states of Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming - along with federal trial courts in Maryland, California, Arizona, and Louisiana have, like Newman, specifically ruled that association assessments are consumer debt subject to the requirements of the FDCPA. Plus, several other federal appeals courts, in cases not involving association assessments, have ruled that there doesn?'t have to be an extension of credit for a consumer debt to be covered by the FDCPA. This issue is sure to be subject to further interpretation and analysis. But, in light of the clear trend of recent court rulings, it?'s nearly settled that the FDCPA does in fact apply to the collection of association assessments. COLLECTOR EDITIONS What does this mean for associations, their managers, and their attorneys? The FDCPA applies only to the actions of a ?"debt collector?" as defined by the act. Generally, this means a person who is engaged in the collection of another?'s debts. Boards. Therefore, the FDCPA doesn?'t apply to any action taken directly by an association through its board of directors or officers. Where residents have challenged a homeowner association or condominium in this area, courts generally have ruled that the association isn?'t subject to the FDCPA because it?'s not a debt collector as defined by the act. However, a New Jersey court ruled in 1999 that a condominium association recorded a lien in violation of the act. And, in 1998, a federal trial court in Maryland ruled that although a homeowner association wasn?'t subject to the FDCPA, it might be liable for breach of good faith and fair dealing if it knew, or should have known, that its attorney?'s collection practices violated the FDCPA. Attorneys. For association attorneys, it?'s clear that where the attorney is ?"regularly?" engaged in the collection of assessments or other consumer debt, the FDCPA does apply. Thus, unless the collection of assessments is done only on an occasional basis and is a very small part of the attorney?'s law practice, the act is binding. Managers. What is somewhat less clear is the applicability of the act to community association managers. The 1999 decision of a federal trial court in Minnesota, in Alexander v Omega Management, concluded that the FDCPA didn?'t apply to the actions of a management company to collect homeowner association assessments where the management company was responsible for collecting assessments before they became overdue. In this case, because the management company spent almost all of its time managing and maintaining the property and devoted less than 3 percent of its operations to collecting past-due assessments, the court ruled that the company wasn?'t a debt collector as defined by the FDCPA. However, there?'s no certainty that other courts would similarly conclude that a management company isn?'t a debt collector on the basis that collecting delinquent assessments is a small portion of the management responsibility. So long as a manager regularly engages in the collection of unpaid accounts, the percentage of time relative to other management tasks may not be relevant. This is especially true where management is engaged only for financial-management services and where assessment collection makes up a substantially greater proportion of the services provided It?'s also unclear whether managers would be exempt from complying with the FDCPA where a delinquent account is inherited from a prior management company or a self-managed association. Without clear guidance from the courts, managers could be liable for not abiding by FDCPA procedures - especially in cases in which they don?'t have responsibility for collecting an account prior to the debt becoming past due. With so much still uncertain, the only sure bet seems to be that the applicability of the FDCPA to community association assessments will continue to evolve through litigation alleging violations of the act. Clarification may also arrive in the form of legislative amendments, administrative rulings, and regulations issued by the Federal Trade Commission. Meanwhile, with near-unanimous agreement among the courts that community association assessments are consumer debt covered by the FDCPA, and faced with the possibility of a $1,000 fine for each violation, association attorneys and managers would do well to carefully follow FDCPA procedures and requirements when collecting assessments. It?'s good business sense - and, not coincidentally, the fair way to treat your residents. .

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