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Can a debt collector report that a partially-paid debt was paid in full?

February 6, 2015 Leave a comment

The Central District of California just decided a case which presents an interesting question (to me, anyway):  can a debt collector, in an effort to convince people to pay something toward an unpaid debt, offer to cut the following deal:  pay me x% of the debt, and I will consider the debt to be paid in full, and I will tell the credit bureaus that it was paid in full.

The question is interesting because, in my experience, this sort of thing happens all the time.  Debt collectors routinely settle debts for partial payment:  if A owes B $1000, but A doesn’t have that much money, B’s debt collector may let A settle the debt for $500, or $750, or some other figure that A can afford to pay.

The catch is that if A pays $500 to settle a $1000 debt, then technically, the debt was not paid in full.  This raises the question of whether the debt collector must tell the credit bureaus that the debt was not paid in full.  After all, the FCRA prohibits debt collectors (and everyone else) from providing the credit bureaus with inaccurate information.  15 USCS § 1681s-2(a)(1)(A).

So the question is this:  if a debt collector agrees to settle a $1000 debt for $500, is the debt paid in full (because the debt collector agreed to consider it paid), or not (because the debt was settled for something less than the total)?

In Kielty v. Midland Credit Mgmt., No. 3:14-cv-00541, 2015 U.S. Dist. LEXIS 9918 (C.D. Cal. Jan. 28, 2015), the district court found that a debt collector may report a partially-paid debt as “paid in full,” in an effort to get consumers to pay something toward unpaid debts.  In Kielty, a debt collector sent letters and brochures which told consumers that if they contacted the debt collector and agreed to make a sufficiently-partial payment on an unpaid debt, the debt collector would cut a deal, consider the debt paid in full, and tell the bureaus that it was paid in full.  

The plaintiffs in Kielty argued that the debt collector’s offer to do this violated the FDCPA and the FCRA, because reporting that a partially-paid debt was paid in full would be an inaccurate statement and thus a violation of both statutes.  The court disagreed:  the court did not find any legal authority which “bars [a debt collector] from reporting debts it settled with consumers as ‘Paid in Full,'” so the court held that “the Complaint fails to make a plausible allegation that [the debt collector’s] representations that Plaintiffs’ accounts will be considered “Paid in Full” and reported as such to the three major credit reporting agencies violates the FDCPA.”  2015 U.S. Dist. LEXIS 9918, at **16-18.

This decision supports the current industry practice of cutting deals with debtors to settle unpaid debts for partial payment.  This practice of reporting a partially-paid debt as “paid in full” improves a consumer’s credit history and gives consumers an additional reason to make a partial payment toward a debt.  As such, the decision benefits consumers (who now have a permissible way to work on cleaning up their credit reports by cutting deals) and debt collectors (who can make deals that obtain some money on an unpaid debt, which is presumably better for them than no money).

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