[GA, at vote, for] - Unscrupulous Debt Collection Practices

Unscrupulous Debt Collection Practices
Category: Regulation | Area of Effect: Consumer Protection
Proposed by: Simone Republic | Onsite Topic​

The World Assembly (WA),

Noting the WA’s desire to protect the rights of borrowers, such as via GARs 476, 515, and 623;

Anxious that legitimate enforcement of overdue debts is not overshadowed by obnoxious behaviour by debt collectors;

The WA hereby enacts as follows:

1. Definitions.
   • "Associate" means an immediate member of the family of, or anyone who resides in the same address as, the debtor, guarantor or guardian (defined below).
   • "Creditor" means who owns the debt due from a debtor (defined below), such as a bank.
   • "Debtor" means anyone owing debts to a creditor and who is under the jurisdiction of a WA state.
2. Debt collector.
   • A debt collector ("collector") means any entity who endeavours to enforce overdue debts on behalf of a creditor. This includes relevant employees, contractors or agents ("personnel") of that entity engaging in such endeavours.
   • This definition excludes anyone acting as an attorney for a debtor or a law enforcement officer.
   • This resolution covers all debt collectors enforcing debts legally recognised as valid by a WA state, regardless of whether the creditor is from a WA state.
3. Authorisation.
   • Anyone who wants to conduct business as a collector must be duly authorised by a WA state (or by its sub-national authorities).
   • A WA state shall promulgate standards for competence, professionalism and skills for a collector.
   • A collector must maintain professional indemnity insurance deemed adequate by a WA state.
   • This clause (3) covers the entity acting as a collector, including sole proprietorships as well as any personnel as defined in clause (2)(a).
   • A collector needs to be separately authorised to work in each WA state (or in each sub-national division) and to comply separately with the provisions of this clause (3).
   • Each WA state shall maintain a database of authorised collectors for verification. The said database shall be publicly available through convenient means.
4. Behaviour. Collectors are banned from using the following means to enforce overdue debts, subject to standards set by each WA state and due process of law:
   • take vastly disproportionate action against a debtor relative to the debts outstanding;
   • harass or threaten the debtor or associates of a debtor, with demands for payment through such means which are likely to subject the said individuals to deep anxiety, distress, or humiliation;
   • misrepresent themselves to be authorised in some government or WA capacity to claim or enforce payment;
   • attempt to enforce debts that are known to the collector to be (i) not (or no longer) legally valid, or (ii) not yet overdue.
5. Associates. For the purpose of debt collection, a collector may not contact:
   • Anyone that agreed to act merely as a referee for the debtor.
   • Anyone that is an associate of the debtor except to try to establish contact with the debtor.
   • Anyone who is merely acquainted with the debtor, such as neighbours.
   • An employer of the debtor (or any other known income source of the debtor) unless (i) the other parties can act as a garnishee according to local laws, and (ii) the debt collector has obtained all legal permission for garnishment.
6. Recovery.
   • A collector may not enforce a debt if the creditor's own expected recovery is less than the estimated cost of enforcement.
   • A collector may not attempt to enforce debts against anyone after such debts are discharged, such as via bankruptcy.
7. Guarantors.
   • A collector may only attempt to recover debts from a guarantor of a debt only if it has exhausted all available means of collecting the debt from the debtor, unless the guarantor has explicitly consented to acting as a primary obligor and not merely as a surety.
   • The protections under clauses (4) and (5) also applies to a guarantor or their associates.
8. Legal competence.
   • If a debtor is deemed legally incompetent after drawing down the loan as a result of ill health, accidents or other misfortune, no enforcement of debts may take place until a legal guardian is appointed, and the finances of the debtor has been organised pursuant to local laws.
   • The protections under clauses (4) and (5) also applies to a legal guardian or their associates.
9. Jurisdiction.
   • Clauses (4) to (9) also apply to creditors who enforce overdue debts themselves.
   • Each WA state is responsible for interpretation and enforcement of this resolution, including any penalties enforced.
   • This resolution does not govern anything owed directly to the WA, WA organs, or a WA state.

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Zyvetskistaahn:

I have a couple of thoughts around clause 6.a.

The first relates to low-value civil debt. There may be member states which have systems for small claims which are quite restrictive in allowing costs recovery, which could mean the value of debt is exceeded by unrecovered costs in contested cases. For Claimants with large volumes of low-value cases who rely on most of them being uncontested to be a profitable endeavour, the clause would seem to create a difficulty, in that they would be obliged to discontinue contested cases (at least sacrificing the costs already incurred and potentially becoming exposed to costs liability). Such a circumstance could well then lead to Defendants raising unmeritorious defences in the knowledge that merely raising a defence increases costs so as to bar recovery. Perhaps the answer to this is “tough, those sorts of Claimants should not recover” but I do wonder if the clause as drawn would then disfavour the ill-informed debtor or the honest debtor who concede the cases against them as against a debtor who deliberately obstructs proper efforts to recover.

The second relates to bankruptcy. Bankruptcy proceedings may be brought by a single creditor on behalf of wider class of creditors and bankruptcy costs can be relatively high (again particularly with an obstructive debtor). Does the clause have the effect that there are some debtors who cannot be bankrupted because each individual creditor’s recovery would not exceed the bankruptcy costs even if the recovery for creditors as a class would?

EDIT: “6.1” to “6.a”.

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Simone:

OK, the clause is worded like this.

"A collector may not enforce a debt if the creditor's own expected recovery is less than the estimated cost of enforcement."

The key word is "own expected recovery".

If systems for small claims are very restrictive in allowing cost recovery, (notwithstanding whether it is a binding arbitration like Judge Jerry or Judge Judy, or in a tribunal of some kind or administrative tribunal of some kind), the creditor should be aware (or should seek professional legal advice) in determining whether its own expected recovery exceeds this. A rational creditor needs to calculate two things:

1. The expected cost of the process
2. The probability of winning the case
3. The expected recovery if they win the case.

These variables have a lot of moving parts that a competent attorney should be aware.

In bankruptcy court, again this would depend on the status of the creditor. If the creditor is a secured creditor with seniority, then of course enforcement makes sense. If it's a junior subordinated creditor and the senior is not expected to recover the full amount, no rational junior creditor would enforce - since the expected recovery is zero.

Obviously a court can consolidate multiple claimants into a single case to reduce legal costs. That's on the premise of RNT.

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Zyvetskistaahn:

I think you have missed what I am driving at. This is an example (and I admit not an especially sympathetic one in terms of the example creditor):

A creditor, let us say a parking company entitled to enforce a small civil debt of £100, issues a claim, let us say in a Unified Kingdom that would require a £35 fee for that claim to be issued but which fee would be recoverable as costs. Suppose also that nation allows for default judgment if the claim goes unanswered for 14 days by the debtor, which further entitles the creditor to £72 in costs fixed by provisions in the nation’s rules on civil procedure. The creditor’s recovery is £207. It has had to meet the court fee and a very small amount of time for a lawyer perhaps one or two units of time at a low rate, probably an amount that the fixed costs would mostly meet. Presumably, the creditor could bring that claim.

Now, let us suppose instead of not responding the debtor defends the claim, they enter a pro forma defence they have found online which raises a number of matters, some of relevance but mostly points that are bad in law and most likely the creditor would succeed in the claim. This requires the matter to be determined at a hearing. For the hearing to take place, the creditor must further pay a £27 hearing fee which is recoverable as costs. If the creditor succeeds they are entitled to £50 in costs fixed by provisions in the nation’s rules on civil procedure. The creditor’s recovery is £212. It has had to meet the court fees of £62. It will need to pay for slightly more of its lawyer’s time to prepare the case and it will need to instruct someone to attend the hearing for it, probably an amount in excess of £200, and the prospects of recovery of these amounts being permitted above the costs fixed under the nation’s rules on civil procedure is very low. Presumably, in this case the creditor cannot continue the claim it has brought and must now discontinue (losing the fee and costs already expended) as its far most likely outcome (even if successful) is that it will be £50 or more out of pocket, despite a lack of merit in the defence raised.

This would appear to favour debtors are savvy enough to dispute a debt (whether meritoriously or not) and disfavour who lack awareness that simply disputing the debt would effectively relieve them of it or debtors who, despite that knowledge, accept the debt and do not dispute it. It would also, thereby, appear to encourage the raising of disputes (regardless of merit) so as to raise costs for the creditor and so to bar recovery.

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Make a court claim for money

How to take legal action if someone owes you money (small claims court), how much it costs, what happens next. Includes information from withdrawn guidance EX303, EX304, EX306, EX321, EX325 and EX350.

www.gov.uk

the prospects of recovery of these amounts being permitted above the costs fixed under the nation’s rules on civil procedure is very low

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Zyvetskistaahn:

I am aware as to the structure of court fees and costs in England and Wales, that is why my example so closely mirrors that structure.

It is not a case of a lender per se but the company in the example would entitled to judgment for a sum in debt. I say advisedly that claims of the sort in the example are regularly brought and lawyers instructed by Claimants to bring them. It is bulk work, most cases will be undefended or conceded. My question is about those which are defended (even on grounds that are without merit). Under the costs regime in my example, the likelihood is that defended claims will not see a large enough recovery to meet the full costs incurred in proceeding. For some of those, the company may wish to abandon the claims, if likely to be particularly costly. The company, however, may wish for wider commercial reasons to pursue such claims, as discontinuing any claim that is defended could then incentivise more defendants to contest claims, affecting the bulk work where the company profits.

Leaving aside, however, the desire of the company to serve its commercial interest, I have yet to see an answer as to why the regime ought by prohibiting the proceedings from continuing (as it appears to me to do) to favour a debtor who, though genuinely owing a debt and able to pay it, is recalcitrant and drives up costs over a debtor of more limited means who honestly (or even mistakenly) concedes liability. Similarly, I don’t see an answer as to why the regime ought to encourage defendants to raise their opponents’ costs so as to statutorily bar the claims against them.

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Simone:

I think it depends a lot on how costs are awarded if it reaches trial or has appeals, etc. I think there's no reason not to expect a full recovery of costs if the case goes to court(s) of first instance, for example.

I also think there's a commercial reason for a recalcitrant creditor not to attempt this maneuver - the damage to credit scoring is likely substantial. At least a creditor who has reasonable access to credit and plans for future access to credit.

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Zyvetskistaahn:

Continuing with the example of England and Wales, costs recovery in small claims in England and Wales is restricted to the applicable issue and hearing fees and a sum fixed by the Civil Procedure Rules for commencement of a claim (leaving aside disbursements for witness expenses and the like), for a claim of £100 these would total £112. An award of further costs in excess of this is available only where the Court finds a Defendant to have been unreasonable in their conduct, which is a high bar to meet and not satisfied merely by running a defence that fails (indeed, a Litigant in Person running a defence that is without merit will have a reasonable chance of escaping additional costs). The award of additional costs is at the Court's discretion and to be reasonable and proportionate; the expectation in most cases in England and Wales (whether small claims or those allocated to higher tracks) is not of full costs recovery (though the issue about which I am concerned is less likely to arise with higher value claims as the costs can be met out of the judgment sum).

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a Defendant to have been unreasonable in their conduct, which is a high bar to meet and not satisfied merely by running a defence that fails (indeed, a Litigant in Person running a defence that is without merit will have a reasonable chance of escaping additional costs)

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