Updated: Aug 29, 2019
Lawyers, especially in consumer debt cases, hear it all the time: “Why do I need a lawyer? Can’t I do this myself? I already owe so much money, I really can’t afford to pay a lawyer AND pay my debts!”
In some cases, I agree with potential clients who take this view. There is certainly nothing stopping a consumer debtor from calling up a creditor or their attorneys and requesting to settle a debt. Many times this will provide a degree of much-needed relief for the consumer. What many consumers do not realize, however, is that the willingness of a creditor or debt buyer to settle a delinquent account is inversely proportional to the validity of the claim against the debtor. In other words, if the creditor is quick to settle, a smart debtor should always question if the debt is valid to begin with.
This has been a hot-button issue in New York, especially in light of the spate of credit card defaults in the recently depressed economic climate. New York generally has a six-year statute of limitations for credit card default, which means that a creditor or debt buyer has six years from the date of the debtor’s last payment to bring an action seeking a judgment against the debtor. However, most credit card companies and debt buyers are neither incorporated nor headquartered in New York so, under New York law, the economic harm suffered by out-of-state creditors occurs outside of New York, and such creditors cannot take advantage of the long New York statute of limitations period if a shorter limitations period applies in the state where the creditor is located.
Take, for instance, the now-infamous case Portfolio Recovery Associates, LLC v. King, which was decided by the New York Court of Appeals on April 29, 2010. In that case, Portfolio Recovery Associates, LLC bought a delinquent Discover Bank credit card account. Discover Bank is a Delaware corporation headquartered in Delaware, and even includes a clause in its credit card agreements specifying that Delaware law applies to any disputes regarding its credit card accounts. The consumer who defaulted on the Discover account in question lived in New York, and had last made a payment on the account in December 1998. Portfolio Recovery sued the consumer in New York state court in April 2005, and claimed that under New York law the lawsuit was not time-barred. The New York Court of Appeals, the highest state court in New York, ruled that, even if the credit card agreement specified that Delaware law would govern in any disputes, the question of which statute of limitations should apply is governed by New York CPLR 202, which requires both out-of-state creditors and debt buyers to comply with the statute of limitations where they are located, and where they suffered their economic loss. Therefore, Portfolio Recovery needed to bring its lawsuit against the debtor within the Delaware limitations period, which is only three years. To the dismay of creditors everywhere, the United States District Court, Eastern District of New York, applying New York law, later held that the King case did not make new law, but merely clarified existing law, therefore King was effectively retroactive, and default judgments already in existence could be vacated.
Needless to say, these cases rocked the foundation of the credit card industry. Lawsuits on delinquent credit accounts are generally handled by a small number of firms that specialize in debt collection actions, and these firms bring tens of thousands of lawsuits against New York consumers each year. Many of these lawsuits are filed by these firms knowing that the limitations period has run, but these firms know that most consumers are strapped for cash, and probably won’t be represented by counsel. A large number of these consumers, whether out of fear, denial, or basic neglect, never even answer the complaint against them, and never appear in court. The creditors then seek default judgments against these consumers, and because the consumers either never show up or, not being attorneys themselves, do not know that the statute of limitations has expired, never assert a statute of limitations defense. These creditors are now enforcing default judgments obtained even after the statute of limitations has expired, against consumers who don’t know that the judgment against them isn’t even valid. These consumers are having their wages garnished and their assets seized, and are entering into settlement agreements for debts that can’t properly be enforced against them.
I had a client call me in a panic last week because her bank account was being frozen. Besides a small amount of money from her wages, her entire account consists of FEMA assistance she received following Superstorm Sandy. First of all, FEMA money is generally exempt from levy. Second of all, she never even knew that there were judgments against her until she needed to move after Sandy and potential landlords turned her down for apartments due to her credit. When I looked into the situation further, it was clear that, not only had the creditor not served her with summonses and complaints, meaning that the court lacked jurisdiction to enter judgments against her in the first place, but the judgments were also time-barred. She last made a payment in 2005, and the lawsuits were not brought until 2009. The credit card company in question is incorporated in Delaware, located in Virginia, and both Delaware and Virginia have three-year statutes of limitations. Opposing counsel has called offering to settle for a relatively small percentage of the total debt because, as he says, my client is a Sandy victim and his client is, of course, sympathetic to her situation. However, when I calmly suggested that I could not advise my client to settle when the default judgments against her were improper, the gloves came off.
The situation has been so dire in New York City that, in June of 2010, the Civil Court of the City of New York acknowledged that these debt-collection firms had sought, and been granted, numerous time-barred default judgments against consumers. In response, the Civil Courts in all five boroughs now require debt collectors seeking default judgments to submit a sworn affidavit setting forth: (1) where the claim accrued; (2) the statute of limitations period for the state in which the claim accrued; and (3) the debt collector’s reasonable belief that the applicable statute of limitations has not expired.
It is important for New York consumers facing debt collection lawsuits to be well informed, and to present the best possible defenses to creditors’ claims. Plaintiffs in these actions routinely file lawsuits when the statute of limitations has expired, and frequently these firms (or their chosen process servers) do not serve defendants with summonses and complaints as required by New York law. So many consumers would be relieved to learn that a competent attorney can, in a relatively short amount of time, at minimal cost to the consumer, get such a complaint dismissed or, if there is already a default judgment against the consumer, get such judgment vacated.
UPDATE: I had asked the law firm representing the credit card company suing my client to fax me copies of the summonses, complaints, judgments, and proof of service of all of those things. Strangely, my fax machine remained idle all day. This morning, the law firm called me, and the same attorney who swore up and down that I would lose, that I didn’t understand the law, wanted to discontinue the actions voluntarily, by stipulation, with prejudice, and to have the judgments vacated, releasing my client from any further obligation on these debts.
When I called my client, she rightfully asked “What’s in it for them?” She was suspicious, as it all seemed too good to be true. What’s in it for them, though, is not paying an attorney to go to court to argue for default judgments obtained without proper service, and after the statute of limitations had already run. Also, it reduces the likelihood that their firm’s reputation, and that of their client, will take any further hit because of these improper judgments. It allows them to save face, while still conceding that they don’t have a legal leg to stand on. Either way, victory for my client, and for consumers everywhere who not only fight back, but do so with the best possible legal strategies!
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