Reuters is reporting that the US 2nd Court of Appeals has reversed a lower court's decision in a lawsuit titled Madden vs. Midland Funding, where the junk debt buyer was claiming protection under the National Banking Act. The appeals court correctly showed that Midland Funding is not a bank and is not acting on behalf of a bank in attempting to collect a debt that in all likelihood no longer exists.
The case involves a complicated transfer of debt from an originating bank to a second bank, which then "sold" the debt to Midland Funding. In fact, the second bank charged off the debt, meaning that it told the US government it was no longer treating that debt as an asset ("account receivable") but rather as a business expense, an expense the bank would deduct from its taxable revenue.
Banks deduct charged off debts from their income all the time and when they do that, any accountant will tell you, the debts cease to exist. That is, the debts no longer exist according to the rules of accounting. You cannot have an asset that is an expense and to the lender the debt is an asset until it is charged off. At that point, the debt no longer exists.
Unfortunately for consumers US law does not recognize all of the rules of accounting. The laws allow companies to buy lists of names of former debtors from banks and attempt to collect those debts. If you were to just make up an invoice and start collecting on it against a company or your neighbor you could be charged for fraud. But if you buy the name of someone whose debt was charged off you can make up an invoice and start collecting on it, even though no debt exists as far as the rules of accounting are concerned.
Is that insane or what? But that is how US law works, at least for now.
The courts are very much aware of how complicated junk debt buying is. I have read many articles where courts question the validity of these debts, but judges must make their decisions on the basis of the facts presented to them in court, not on the basis of what they read outside of court. And so when a junk debt buyer files a collection lawsuit if the consumer fails to respond to the lawsuit the judge can only issue a summary judgment on the basis of the facts presented to the court: that someone "owes a debt" and there is no apparent dispute in the matter.
This process is patently and inherently unfair to consumers, many of whom have never been properly served with summonses by the junk debt companies. Where possible states' Attorney Generals seek to invalidate such collection lawsuits and they have won a few victories, such as when the State of Maryland forced Resurgent Capital (aka LVNV Funding LLC) to cease attempting to collect debts against its citizens in 2012.
Unfortunately these victories have been slow to come. Junk debt buyers have been bilking consumers out of billions of dollars for over 20 years. Consumers have to take action by refusing to play the junk debt buyers' games. You have the right to dispute any debt and to demand proof that the debt is valid. Junk debt buyers usually have no documentation proving that they are entitled to collect money from you, and many judges despise these almost-crooks.
If you receive a collection notice for a charged-off debt from a junk debt buyer (or, more likely, from their collection agency or attorney), send a polite but firm letter insisting that they prove the debt is real within 30 days. Also tell them they do not have permission to contact you again, except to verify the debt. If they do contact you after you send the letter you can sue them for violating the Fair Debt Collection Practices Act.
Notify your state Attorney General's office of the attempt to collect a junk debt against you, and provide documentation on what you have done.
If you are approached by a process server accept the summons. Then find an attorney who is experienced in representing consumers against this kind of harassing litigation. Most attorneys will just work with you to get the case dismissed. A few may have enough clients to want to seek class action status (but this is a complicated and time-consuming process with no real guarantee of success).
Do not EVER enter into any extended payment plan with these companies. They do not have the legal right to collect money from you in the first place (unless they can verify the debt with proper documentation showing how it was obtained).
Do NOT pay these companies any money at all, as making a payment legally resets the clock on the age of the claimed debt. Any unpaid debt is supposed to come off your credit record after seven years. Junk debt buyers will do everything they can to extend the life of the charged off debt on your credit record and you have very little protection under consumer law, especially if you make even one partial payment.
Lawyers who advocate for the junk debt industry do not like Madden vs. Midland Funding and some of them may work against it. Don't be alarmed if you do research on this case and find Websites where legal writers challenge the court's logic. Appellate courts often know the law better than commenters on legal blogs. And, besides, the matter may come up again in another case that provides further clarification.
Meanwhile, pay your legitimate debts as best you can. At the very least make minimum payments, or "minimum+$10" payments, so that you remain current in your accounts. This way you avoid extra penalty fees and interest until you can work out a plan to pay off your debts completely.
