The Third Circuit recently ruled that a statement in debt collection letters indicating that forgiveness of the consumer’s debt may be reported to the IRS could constitute a violation of the Fair Debt Collection Practices Act (FDCPA) because the debts in question were too small to be reported under IRS reporting requirements.
At issue in this case were the debt collection letters (also known as “dunning letters”) sent to the putative class action plaintiffs attempting to collect outstanding debts, none of which exceeded $600, for less than the full amount owed. In relevant part, the letters contained the following language: “[w]e are not obligated to renew this offer. We will report forgiveness of debt as required by IRS regulations. Reporting is not required every time a debt is canceled or settled, and might not be required in your case.”
Since each of the plaintiffs’ debts was less than $600 and only discharges of indebtedness of $600 or more are required to be reported to the IRS, the plaintiffs claimed that the inclusion of the above IRS language was “false, deceptive and misleading” in violation of the FDCPA, because the reporting requirement is entirely inapplicable to their debts and the FDCPA broadly prohibits the use of any false, deceptive, or misleading representation in connection with the collection of any debt. The district court had dismissed the lawsuit on the grounds that the debt collector’s letters did not violate the FDCPA because the letters did not include “any false or deceptive statements designed to enhance its ability to collect the outstanding debt.”
On appeal, the Third Circuit agreed with the plaintiffs’ argument that the debt collector “presented a false or misleading view of the law – one designed to scare or intimidate the [plaintiffs] into paying the outstanding debts listed on the debt collection letters even though [the debt collector] knew that any discharge of the [plaintiffs’] debt would not result in a report to the IRS.” According to the Third Circuit, when evaluating a debt collector’s communications under the FDCPA, courts must apply the “least sophisticated debtor” standard, which asks whether the hypothetical least sophisticated debtor likely would have been misled by a communication.
To this end, the Third Circuit concluded that by including the IRS reporting language on the collection letters addressing debts of less than $600, the least sophisticated debtor may believe that such reporting could occur, regardless of the letter’s qualifying statement that reporting is not always required when a debt is cancelled or settled. “While we recognize that [the debt collector], like many debt collection companies, uses form letters when contacting its debtors, we must reinforce that convenience does not excuse a potential violation of the FDCPA,” the court said.
Based upon its holding, the Third Circuit reversed the district court’s order and found that the plaintiffs had “pled sufficient factual allegations that state a plausible claim upon which a court may grant relief under the FDCPA.” The Third Circuit remanded the case back to the district court for further proceedings.
The full opinion is accessible here.