For convenience, when collecting a debt, lenders may be tempted to simply add a percentage of the outstanding balance as the collection costs, rather than determining the actual costs of collection. The Eleventh Circuit, in the recent case of Bradley v. Franklin Collection Service, Inc., determined that, even in situations where the debtor has agreed to pay all costs of collection, this practice violates the Fair Debt Collection Practices Act (“FDCPA”).

As you are probably aware, the FDCPA is intended to prevent unfair and abusive practices in connection with the collection of a debt. Under the FDCPA, only amounts expressly provided for in the agreement can be collected.  Bradley involved two similar debtors that incurred debts with healthcare providers. The debtors each agreed to pay “all costs of collection.” The healthcare providers referred the collection of the debts to a third party, and in doing so, added a set percentage of the principal balance to the total of the debt for collection costs. The debtors objected to that the percentage was not the actual cost of collection. The Eleventh Circuit agreed with the debtors and held that the agreement to pay “all costs of collection,” is limited to actual costs incurred by the creditor.  

The Eleventh Circuit serves as a good reminder to banks of a few important points under the FDCPA. First, if your bank uses “all costs of collection” or similar language in its agreements, remember that only actual costs of collection can be charged to the debtor. Similarly, if your bank intends to use a collection agency to collect debts, be certain that your standard practice does not involve adding collection costs prior to transfer of the debt to the collection agency. If your bank has previously employed this practice when transferring debts, you may want to consider modifying your contract with the collection agency.