In McMahon v. LVNV Funding, LLC, ---F.3d---, No 12-3504, No. 13-2030, 2014 U.S. App. LEXIS 4592 (7th Cir. March 11, 2014), the Seventh Circuit ruled that collection letters on time-barred debts could mislead unsophisticated consumers to believe that the debts are enforceable in court in violation of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (“FDCPA”), even though the letters did not contain any threats of litigation and especially if the letters offer to settle the debts at a discount.  Id. at 32. 

The Seventh Circuit acknowledged that its ruling conflicted with rulings from the Third and Eighth Circuits (Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 33 (3d Cir. 2011); Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767, 771 (8th Cir. 2001)) but reasoned that, based on the Federal Trade Commission’s “research and expertise” as portrayed in REPAIRING A BROKEN SYSTEM: PROTECTING CONSUMERS IN DEBT COLLECTION LITIGATION AND ARBITRATION 26-27 (2010), an unsophisticated consumer would likely be deceived because “most consumers do not understand their legal rights with respect to time-barred debts.” McMahon at *25-29.

The ruling consolidated two lawsuits by consumers against debt collectors under the FDCPA where the debt collectors had sent collection letters to the consumers offering to settle their accounts for a fraction of the total amount owed.  Id. at *3-9.  The collection letters were unremarkable except for what the Seventh Circuit deemed were omissions about the age of the debts and the statute of limitations.  Id.  The Seventh Circuit held that because the letters did not state the age of the debts, when the debts were incurred, or that the applicable statute of limitations had expired, the unsophisticated consumer would not know that “he had an iron-clad defense under the statute of limitations.”  Id. at *27.

The letters did not threaten litigation or make any affirmative statement to suggest the possibility of a collection lawsuit. The debt collectors argued that if a debtor receives a collection letter on a debt for which the statute of limitations had passed and jumps to the conclusion that he may be sued if he does not pay, the inference is not attributable to the letter.  Id. at * 28.

The Seventh Circuit reasoned that “a settlement offer on a time-barred debt implies that the creditor could successfully sue on the debt.”  Id. at *30 (emphasis added).  The Seventh Circuit explained that if an unsophisticated consumer googled the word “settlement” she “would learn that the term “offer to settle” is “used in a civil lawsuit to describe a communication from one party to the other suggesting a settlement--an agreement to end the lawsuit before a judgment is rendered.”” Id.  Based on that, the Seventh Circuit concluded that an unsophisticated consumer who read the collection letters at issue could “believe either that the settlement offer is their chance to avoid court proceedings where they would be defenseless, or if they believe that the debt is legally enforceable at all, they have been misled, and the debt collector has violated the FDCPA.”  Id.

In other words, the Seventh Circuit believes that a settlement offer on time-barred debt, even without a threat of litigation, suggests by omission that a collection lawsuit is not only possible but likely to be successful, and, going a step further, that if a debtor thinks “the debt is legally enforceable at all,” despite the collection letter’s lack of any affirmative suggestion of a lawsuit, the letter violates the FDCPA as a misrepresentation of the legal status of the debt.  Id. at *30.

This creates a new duty for debt collectors in the Seventh Circuit that is not stated anywhere in the FDCPA and that contradicts other Circuits’ rulings.  To comply with the holding in McMahon, debt collectors sending collection letters on debts on which the statute of limitations has passed must now, at a minimum, affirmatively provide “general language” stating the “possibility” that the debt is time-barred.  Id. at 31.  TheMcMahon ruling also illustrates the difficulties debt collectors face when a court uses the FDCPA to establish new requirements for debt collection that are not in the FDCPA and are based only on the shifting perceptions of what government officials think a hypothetical unsophisticated consumer may think.