Really!! Court Rules “Obligation” In A Settlement Letter Is A Threat That A Consumer May Be Sued

Since the 7th Circuit released their 2014 McMahon decision, using the word “settle” or “settlement” in any settlement offer letter has exposed collection agencies to being sued. Finding an FDCPA violation, the McMahon Court ruled that the consumer could reasonably assume that “settle” was a legal term and consumers would fear being sued for the debt.

Worse, if the letter related to a debt past the statute of limitations period, there was the double liability risk and threats because the letter would be saying – at least according to the 7^th Circuit – that with “settle” not only might the consumer be sued, but a lawsuit could never actually be filed on an out of stat debt.

Now comes Waggett v. MRS BPO, where the plaintiff received a letter seeking to recover an unpaid debt that was outside the statute of limitations. The letter included several settlement options and started by saying: “We recognize that a possible hardship or pitfall may have prevented you from satisfying your obligation. We are presenting three options to resolve your balance.” (Emphasis added.)

When deciding the defendant’s motion to dismiss, the court focused its FDCPA analysis on whether the letter implied that the consumer could be sued on a time-barred debt by looking at one word — “obligation.”

Using 6 different dictionary definitions, the judge denied the debt collector’s motion and ruled that the word “obligation,” even if not used in conjunction with the word “settlement,” meant a duty that could be compelled by law. As a result, the court found “it is more than plausible, and even likely, that the least sophisticated debtor would understand that their ‘obligation’ is a duty to pay that a creditor could enforce in court through the commencement of litigation. . . .”

Using “obligation,” the letter was plausibly alleged to have been a threat to bring a collection lawsuit that was time-barred.

In shortest summary, the use of the word “obligation” when discussing an out-of-statute debt could mislead a consumer into believing that the debt was legally enforceable in court.

Concluding that the term “obligation” was more similar to “settlement” as “obligation” too had litigious connotations, the court suggested more innocuous language such as “satisfy” or “close your account.”

The result – provided there is no legal threat of a lawsuit, we know that the FDCPA permits the collection of time-barred debt and allows settlement offers. We know that courts specifically favor the concept of settling accounts so that there is value in a debt collector making settlement offers. But for at least one NJ federal judge here is the new rule – you may offer debt settlements, but you may not call it a settlement offer. And now, add the word obligation to the terms we cannot use.

Looking for help with your settlement letters? We are here to help!