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Post date: May 8 2014

A.G. Schneiderman Announces Settlements With Two Major Consumer Debt Buyers For Unlawful Debt Collection Actions

For Years, Portfolio Recovery Associates And Sherman Financial Group Obtained Judgments Against New York Consumers Based Upon Untimely Claims

Schneiderman: Debt Collectors Must Abide By Same Rules As The Rest Of Us

NEW YORK – Attorney General Eric T. Schneiderman today announced that his office has secured settlements with two major debt collectors, Portfolio Recovery Associates, LLC, and Sherman Financial Group, LLC, for repeatedly bringing improper debt collection actions against New York consumers.   For years, the two companies had sued New York consumers and obtained uncontested default judgments against the individuals who failed to respond to these lawsuits, even though the underlying claims were untimely under New York law.  The settlements require Portfolio Recovery Associates and Sherman Financial Group to vacate the improper judgments with the court and cease any further collection activities on the judgments, make key enhancements to their debt collection practices, and pay civil penalties and costs to the state in the amounts of $300,000 and $175,000, respectively.  All told, nearly three thousand improper judgments, totaling approximately $16 million, that had been entered against New York consumers will be vacated under the settlement agreements.

“Debt collectors must follow the same rules the rest of us do when bringing lawsuits—in this case, suing for debts that were not enforceable in the first place,” said Attorney General Schneiderman. “When these kinds of practices occur on such a large scale, hard-working New Yorkers feel the pain, to the massive tune of $16 million across nearly 3,000 people. In this case and others, my office will continue to pursue debt collectors and lenders who improperly take advantage of New Yorkers in tough times.”

Portfolio Recovery Associates and Sherman Financial Group are both debt buyers that purchase unpaid consumer debt (largely credit card debt) from the original creditors of the debt, or from other debt buyers, at deeply discounted prices, and then attempt to collect on the debt. Portfolio Recovery Associates and Sherman Financial Group are two of the most active debt collection plaintiffs in New York State, with each company filing thousands of debt collection actions in the state in any given year.

It is unlawful for a debt collector to bring suit against a consumer when the claims are outside of the applicable statute of limitations, the time frame established for the enforcement of legal rights.  Under New York’s longstanding “borrowing statute,” in order for an action to be timely filed in this state, it must be commenced not only within New York’s own statute of limitations, but also within the statute of limitations of the state where the cause of action accrued (if other than New York). In debt collection actions, a cause of action accrues where the original creditor of the debt resides. For example, while New York’s statute of limitations to collect on a debt is generally six years, if the original creditor on the debt was located in Delaware, which has a three-year statute of limitations, the shorter statute of limitations would govern the action.

The Attorney General’s investigation found that for many years, despite the clear requirements of New York’s borrowing statute, the debt buying industry failed to ensure that their claims were timely under the statutes of limitations where the causes of action accrued, which are often shorter than New York’s statute of limitations. Because most consumers fail to respond when they are sued by a debt collector, this practice resulted in the debt buyers repeatedly obtaining default judgments in their favor against consumers based on claims that were beyond the legal time limit for their enforcement. 

In April 2010, the New York Court of Appeals, the state’s highest court, in a case involving Portfolio Recovery Associates, reaffirmed that all New York litigants, including the debt buying industry, must strictly comply with the requirements of New York’s borrowing statute.  Since that time, it appears that both Portfolio Recovery Associates and Sherman Financial Group have sought to comply with the requirement that the companies file only new debt collection actions that are timely under both New York’s statute of limitations and the statute of limitations of the state where the causes of action accrued.  Both companies, however, continued to collect on the faulty judgments that they had obtained prior to the Court of Appeals’ decision. According to the Attorney General’s analysis, Portfolio Recovery Associates obtained more than 2,000 improper judgments since 2008, while Sherman Financial Group obtained more than 400 hundred improper judgments. 

Under the settlements announced today, Portfolio Recovery Associates and Sherman Financial Group will seek to vacate these improper judgments with the courts and will immediately cease any further collection efforts on the judgments. Based on information provided by the companies, the combined outstanding balance on the judgments being vacated is more than $16 million. In addition, the two companies have agreed to several important enhancements to their current practices in New York to help safeguard consumers against any further potentially deceptive or confusing debt collection practices relating to old debts, including:

  • Disclosing in any written or oral communication with a consumer about a debt that is outside the statute of limitations that the company will not sue to collect on the debt.
  • Disclosing in any written or oral communication with a consumer about a debt that is outside the date for reporting the debt provided for by the federal Fair Credit Reporting Act that, because of the age of the debt, the company will not report the debt to any credit reporting agency.
  • Alleging certain information relevant to the statute of limitations in any debt collection complaint filed by the company, such as the name of the original creditor of the debt, the complete chain of title of the debt, and the date of the consumer’s last payment on the debt.
  • Submitting an affidavit with any application for a default judgment specific to the statute of limitations that, among other things, attests that after reasonable inquiry, the company or its counsel has reason to believe that the applicable statute of limitations has not expired.

In addition, Portfolio Recovery Associates and Sherman Financial Group will pay $300,000 and $175,000, respectively, to the state as civil penalties and costs.

These settlements are a part of the Attorney General’s continuing efforts to combat unlawful and abusive debt collection activity. As discussed here, just last week, New York’s Chief Judge Jonathan Lippman proposed a new comprehensive set of court reforms that incorporate many of the prior recommendations by Attorney General Schneiderman’s office for improvements to the legal process that governs the tens of thousands of debt collection lawsuits brought every year in New York State.

The case was handled by Assistant Attorney General Brian N. Lasky, Special Assistant Attorney General Stephen Mindell and Bureau Chief Jane M. Azia, all in the Consumer Frauds Bureau, and Executive Deputy Attorney General of Economic Justice Karla G. Sanchez.