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One of the more interesting developments in consumer finance law that we have witnessed over the years is the growing responsibility of creditors to protect debtors. While creditors are not fiduciaries of debtors, the law has developed in such a way as to recognize a special relationship that requires some duties by the party more able to protect its interests—the creditor. No better example of this concept is the consequence of a creditor pursuing a time-barred debt.  Let me explain.

When collection of a debt is prevented by an applicable statute-of-limitations, that debt is considered “time barred.” Historically, this has meant that a debtor could plead the statute-of-limitations in any action by the creditor, and successfully defeat the creditor’s claim.  However, the debt itself is still very much an obligation of the debtor to the creditor. It is just one that cannot be collected through the judicial process in a court of law. (Interestingly, a creditor may still file a proof of claim in a consumer’s bankruptcy case with respect to a time-barred debt.)

Most significantly for my purposes, pleading an applicable statute-of-limitations has always been an affirmative defense available to the debtor.  And, if a debtor did not plead such defense, then it could be waived.

But, some recent developments in consumer finance law seem to have changed this precedent.  

First, in the new Debt Collection Rule promulgated by the CFPB under the Fair Debt Collection Practices Act (effective later this year), there is an absolute prohibition against debt collectors from bringing or threatening to bring a legal action to collect a time-barred debt. And, there is strict liability for those collectors who violate this prohibition. So, even though this Rule is limited in application to “debt collectors” as defined under the Act, the rationale for the restriction would seem to be equally applicable to creditors collecting their own debt.

Second, under the Dodd-Frank Act, the CFPB is empowered to regulate “unfair, deceptive or abusive acts or practices.” When one parses through the definition under the law of each of these words, it seems apparent that pursuit of a time-barred debt falls under the definition of “unfair” and “abusive” even if not “deceptive.” Therefore, any CFPB prohibition against UDAAPs would seem to include pursuit of a time-barred debt.

I have referred to the reliance of the CFPB in the regulatory formation process as relying on the Fair Debt Collections Act rather than on the Dodd-Frank Act (see here). Still, we should be mindful of pursuing time-barred debt. There are just too many other federal and state laws that may be vehicles to carry the prohibition on time-barred debt collection.