There are a number of substantive defenses that may exist in a collection lawsuit. Some of these are described in this chapter. Many of these issues are highly technical, and we suggest that you retain a lawyer familiar with consumer credit and debt issues to review your case and present any arguments that apply.
Bogus Charges on Credit Card Accounts
There have been a number of consent judgments and orders against major credit card issuers that involve unauthorized charges for credit insurance and similar products. The card issuers include Capital One, American Express, and Discover Bank (http://files.consumerfinance.gov/f/201207_cfpb_consent_order_0001.pdf; http://www.occ.gov/static/enforcement-actions/ea2012-212.pdf; http://files.consumerfinance.gov/f/2012-CFPB-0002-American-Express-Centurion-Consent-Order.pdf; http://www.fdic.gov/news/news/press/2012/pr12108a.pdf).
Other issuers, such as Chase and General Electric/Synchrony/CareCredit, have been involved in litigation that casts serious doubt on the accuracy of their records and the validity of the accounts (Consumer Financial Protection Bureau (CFPB) consent orders 2013-CFPB-0007 (Chase) and 2015-CFPB-0013 (Chase); Office of the Comptroller of the Currency consent orders AA-EC-13-76 (Chase) and AA-EC-2014-64 (Chase); CFPB consent order 2013-CFPB-0009 (CareCredit)). If a credit card account involved one of these issuers, and especially if the facts of your case resemble the conduct at issue in the prior cases, it may be very hard for the issuer, or anyone claiming to have acquired the debt from the issuer, to prove anything.
Capacity of Parties to Credit Card Accounts
Generally, “authorized users” of a credit card are not personally liable; only the cardholder is. If two names appear on a monthly credit card statement and it is disputed who is a signatory and who is the authorized user, the bank or debt buyer cannot prevail without proving who is a signatory. This issue often arises after death, divorce, or bankruptcy of one of the two. Banks often have poor records and cannot prove this, and often they do not transfer such records that they do have to debt buyers. It appears that many banks keep applications or images of applications for not more than seven years after the account is opened (not after the account is closed).
All states limit the time within which a lawsuit may be filed by private parties on various types of debts. (Sometimes there are no time limitations on debts owed to governmental entities.)
Statute of limitations periods vary from one to fifteen years. Common variations are the type of debt and the extent to which the debt has been reduced to writing. For example, most states have a four-year statute of limitations in the Uniform Commercial Code for debts arising out of the sale or lease of goods (automobiles, fuel oil, natural gas). Often, there are special statutes of limitation for dishonored checks and penalties under bad-check statutes. The statutes generally run from the later of breach or last payment, although the effect of payments varies between states.
In addition, some states will look to the limitations provisions in other states to determine whether a debt is time-barred. For example, New York looks to the state in which the creditor is located (Portfolio Recovery Associates, LLC v. King, 14 N.Y.3d 410, 901 N.Y.S.2d 575, 927 N.E.2d 1059 (2010)). Some states will apply the law of another state if there is a choice of law provision in a contract, which is common with credit card agreements. Other states have “borrowing” statutes so that if a consumer defaults on a debt while residing in state A and later moves to state B with a longer statute of limitations, a court in state B may apply the shorter limitations provision of state A.
NOTE
Do not assume that if a lawyer files a lawsuit that he or she has the right to do so. Debt buyers and collection attorneys often ignore statutes of limitations, hoping that the consumer will default and a judgment will be entered even though the consumer has a complete defense to the claim.
Filing suit on a time-barred debt not only gives rise to a defense but is a violation of the Fair Debt Collection Practices Act (FDCPA) (Phillips v. Asset Acceptance, LLC, 736 F.3d 1076, 1079 (7th Cir. 2013)). Threatening to file suit on a time-barred debt is also an FDCPA violation. An increasing number of courts hold that a debt collector seeking to collect a time-barred debt who implies that the debt is legally enforceable—such as by offering a settlement—must disclose that the debt is time-barred (McMahon v. LVNV Funding, LLC, 744 F.3d 1010 (7th Cir. 2014)). Some states have passed statutes or issued regulations requiring debt collectors to make this disclosure whenever attempting to collect time-barred debts.
Promises to Answer for the Debt of Another
Virtually all states have one or more “statutes of frauds.” These laws require a signed writing before a person can be held liable for certain types of debts. One type of debt commonly covered by statutes of frauds is a promise to answer for the debt of another.
There are differences between states as to exactly what debts are covered and whether the debt has to already exist when the promise to pay it is made. This issue commonly arises when persons are added to credit card accounts and with claims by nursing homes against relatives of patients.
Liability of Parents and Spouses
Under American common law (judge-made law), a parent is liable for the “necessaries” of an unemancipated minor child, and a husband is liable for the “necessaries” of a wife. Various states have modified the liability of spouses by statute or case law. In community property states, debts may be the responsibility of both spouses. Some non-community-property states have abolished spousal liability for necessaries. Others have made the obligation applicable to both husband and wife, or limited liability for “necessaries” to cases where the noncontracting spouse has a materially greater ability to pay. In addition, the doctrine of necessaries has been codified or expanded by statute in some states (e.g., Illinois Family Expense Act, 750 ILCS 65/15).
A further complication is introduced by the federal Equal Credit Opportunity Act (ECOA), which arguably precludes the use of all such statutes and rules of law to impose personal liability on a noncontracting spouse where a creditor obtains the obligation of only one spouse on a contract involving the extension of credit (deferral of payment). The ECOA and implementing Regulation B entitles each spouse to contract to purchase goods or services on their own, without the agreement or participation of the other (15 U.S.C. §1691d; 12 C.F.R. §1002.7). It expressly preempts (overrides) state laws that provide lesser rights (12 C.F.R. §1002.11).
The ECOA is presently administered by the CFPB. Previously, when it was administered by the Federal Reserve Board, that agency issued a statement that “in States that have laws prohibiting separate extensions of credit for married persons, this section of the regulation will not only preempt such laws but also any other provision of State laws which would hold one spouse responsible for the debts contracted by the other, for example, a family expense statute” (emphasis added) (40 Fed. Reg. 49298, at 49304 (Oct. 22, 1975)).
If a spouse or parent is liable for a debt based on one of these rules, the liability is generally for the reasonable value of goods or services. Liability may or may not extend to contractual undertakings to pay attorney’s fees, collection costs, late fees, interest, and similar items.
Attempts to collect debts from the family members of a deceased consumer who have no legal liability are a widespread problem. The Federal Trade Commission (FTC) published a statement on such attempts, “Statement of Policy Regarding Communications in Connection with the Collection of Decedents’ Debts” (76 Fed. Reg. 44915 (Wed., July 27, 2011)). People assume that someone has to pay the debt; this is not the case.
Liability of Children for Parent’s Debts
Generally, in the United States a child has no responsibility for the debts of a parent. However, a few states have "filial responsibility statutes," meaning that adult children are required to pay at least some of the unpaid medical bills of a parent when the estate can’t. In 2012, such statutes existed in Alaska, California, Connecticut, Delaware, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, and Puerto Rico.
These laws vary widely in terms of what debts are covered and who can enforce them (some are limited to medical assistance provided by state or local government). There are substantial issues as to the validity of such statutes under the ECOA and otherwise.
Attempts to collect from family members are particularly common in the case of nursing home debts. Often, a family member will sign a contract with a nursing home as an agent of the resident. Notwithstanding contract claims by nursing homes, such a signature generally does not impose any personal obligation on the family member. The principal is the only party to a contract signed by an agent who discloses both that he or she is signing as agent and who the principal is. The statute of frauds (see previous discussion) may also prevent the imposition of liability on an agent who clearly signs as such.
In addition, nursing homes that accept Medicare or Medicaid payments for any patient are precluded from requiring a guaranty from anyone other than the resident by federal law as a condition of admission or continued stay at a nursing home (42 U.S.C. §1396r(c)(5)(A)(ii)). The prohibition is not limited to the specific patients for whom Medicare or Medicaid payments are received. The exact meaning of the prohibition is unclear—does it merely prohibit refusing to keep the resident in the nursing home, or does it prohibit trying to hold the relative liable? The prohibition should also extend to the use of the “necessaries” doctrine and family expense statutes to impose liability amounting to a guaranty.
Collection suits for healthcare debts are difficult to prove. Absent an express agreement to perform a particular service for a specific price, as is occasionally done for elective procedures (e.g., cosmetic surgery), the patient is liable for the reasonable cost of medically necessary services (e.g., Dreyer Medical Clinic v. Corral, 227 Ill.App. 3d 221, 591 N.E.2d 111 (2d Dist. 1992)). This is generally not something the patient can know, and it is not easy to prove if contested.
NOTE
Most hospital bills contain both billing errors and items that are priced far beyond their cost. Proving that all items in a hospital bill were both reasonable and medically necessary is not easy.
At the outset, beware of attempts to charge for items for which the hospital has contractually agreed not to charge. Many insurance policies and plans require the provider to accept whatever the insurer pays for a given procedure. The Medicaid and Medicare statutes have parallel restrictions. Check the “explanation of benefits” from the insurer for the required contractual write-off, and compare the medical bill to see if you are being improperly “balance billed” for amounts the provider is required to write off.
Some providers will decline to process charges through an insurance plan if they believe that they can get more through other means. This is common where the patient has been injured as the result of an accident; the hospital thinks it can get more by placing a lien on the patient’s tort recovery. Many contracts between hospitals and insurers forbid this practice by requiring the hospital to submit a claim for any patient who presents an insurance card. If you believe this has happened, complain to the insurer. In many cases, the insurer is advancing money to the hospital based on expected revenues. If the hospital removes from the pipeline cases where it thinks it can obtain more from a lien, it is cheating the insurer as well as violating the patient’s rights.
Usually, patients are initially sent a summarized version of the hospital bill. However, an itemized bill is likely to reveal some obvious errors. For example, compare the dates noted on the bill with the dates you actually received treatment. Look for absurd data-entry errors such as numbers with zeros added on (e.g., ten X-rays) or duplicate listings. Do you remember receiving the services listed?
Obtain a copy of your medical chart and pharmacy ledger (which shows all drugs administered). Compare it to the itemized hospital bill. This may reveal whether you are being charged for goods or services that were not furnished. Look for mistakes such as procedures billed for but not in the medical record, items billed for more times than listed in the medical record, procedures or medications ordered but canceled, and operating room time that is billed for longer than the surgery lasted.
Compare the charges to the hospital’s standard charges. These are usually in a document called a “chargemaster.”
Look for items improperly billed due to the hospital’s negligence. We had a case where a surgical implement was incorrectly left in the patient, requiring surgery for its removal, and the hospital sued the patient for the cost of the corrective surgery! If the results of a test are misplaced and the procedure is redone, the hospital may bill the patient. Complications that result from negligence, such as staph infections, should not be the patient’s responsibility. Longer hospital stays resulting from scheduling problems should not be the patient’s responsibility.
If the bill is large, there are professional bill reviewers who look for errors in bills. For example, a procedure may be given a code (“DRG code”) that reflects a more serious condition than what the medical chart states. Other DRG codes are supposed to include a “bundle” of charges, some of which may also be billed separately. Inquire about possible alternative codes that could have been assigned and the cost implications. Also inquire whether the hospital has ever been charged with miscoding or inappropriate coding by any governmental agency or insurance company.
Finally, the reasonableness of a hospital’s rates is often subject to challenge. Uninsured persons generally are charged more to make up for lower rates of reimbursement offered by the government or private insurance providers.
To a growing extent, medical debts are being sold to debt buyers. It should be evident from the previous discussion that it is highly unlikely that a debt buyer who does not have access to hospital/provider witnesses can ever prove a medical debt.
Some consumer advocates have suggested that patients pay a small portion of the bill as a sign of good faith while trying to negotiate payments with a hospital. We strongly recommend that you do not do anything of the sort, as such a payment may be treated as an admission of the validity of the entire debt. If it is an older debt, making a payment may extend the statute of limitations.
WARNING
If you do not agree you owe a debt in full, in the amount claimed, do not make partial payments. Dispute the debt. Otherwise, you will make damaging admissions and will extend the time within which you may be sued.
Generally, a consumer should not make a payment on a disputed debt without a satisfactory written agreement completely resolving the matter upon the completion of specified payments. If you agree to pay a sum and make monthly payments, the agreement should address whether the debt is bearing interest. A proper settlement agreement will state that the consumer will make x payments of $y each and that upon completion of those payments, all liability on the part of the consumer is released. You should also attempt to address credit reporting in the agreement.
The federal Patient Protection and Affordable Care Act (Obamacare) and Treasury regulations issued in final form on December 29, 2014, limit nonprofit hospitals from engaging in “extraordinary collection actions” (26 C.F.R. §1.501(r) et seq.). Hospitals cannot file lawsuits against patients or put liens on their houses before determining whether they are eligible for financial assistance. “Extraordinary collection actions” also include selling debts to debt buyers, reporting adverse information about the individual to consumer credit reporting agencies or credit bureaus, requiring a payment before providing medically necessary care, and any legal or judicial process.
Some states have similar restrictions. In addition, some states regulate the amount that uninsured patients can be charged and require that payment plans be offered on hospital bills (this is an unusual requirement—with the exception of medical debts and mortgages, in most cases a creditor is not obligated to offer a payment plan).
TIP
It is often a good idea to request a jury trial in a hospital collection case. It is hard to find a juror who has not had a negative experience with healthcare costs.
Under the Uniform Commercial Code (UCC), in effect in virtually all states, a creditor or assignee attempting to collect on a deficiency after repossession of a car or other collateral has to prove that proper notice was given and that there was a “commercially reasonable” disposition of the collateral. Major auto creditors can sometimes prove that they complied with these requirements. Smaller creditors often don’t comply, and debt buyers that claim to acquire this type of debt generally can’t prove that the original creditor complied.
Additional requirements are often imposed by state installment sales and consumer protection laws. These requirements include bars on deficiencies, requirements of pre-repossession notice, requirements that cosigners be allowed to take over the debt before any collection action is taken, requirements that consumers be allowed to reinstate contracts if they have paid over a certain percentage of the debt, and others.
In addition to constituting a defense to liability, noncompliance with the UCC or other requirements often gives rise to a claim for substantial statutory damages against the creditor or assignee. For example, the UCC provision applicable to consumer cases provides for statutory damages equal to the finance charge (whether or not paid) plus 10 percent of the amount financed or cash price.
Defects in the goods (e.g., lemon cars) may often be asserted against the finance company. An FTC regulation subjects the holder or assignee of a note or retail installment contract to claims or defenses that a consumer has against the seller of the goods or services financed if the seller was involved in the origination of the financing obligation or the referral of the consumer to the finance company.
Finally, in many states there is a separate UCC statute of limitations for claims for nonpayment for the sale or lease of goods (four years). It may be extended by payment or, in some cases, promises to pay.
A consumer faced with such a case should consult a local attorney familiar with these matters. They are not something that a layperson should attempt to raise on his or her own.
Earlier, we pointed out that, with certain exceptions, the fact that goods and services purchased with a credit card are defective may be asserted as a defense against the credit card issuer. This is just one aspect of a general principle that one who purchases a debt takes subject to claims against the creditor prior to assignment. "The rule is that the assignee of a contract takes it subject to the defenses which existed against the assignor at the time of the assignment" (Allis-Chalmers Credit Corp. v. McCormick, 30 Ill.App.3d 423, 424, 331 N.E.2d 832 (4th Dist. 1975); accord, Montgomery Ward & Co. v. Wetzel, 98 Ill.App.3d 243, 423 N.E.2d 1170, 1175 (1st Dist. 1981) ("the assignee thus takes the assignor’s interest subject to all legal and equitable defenses existing at the time of assignment")). For example, in a collection action based on a contract for the purchase of a car, the defendant can assert that the car was defective.
Summary
There are numerous defenses to various types of debt-collection actions. The issues are complicated, and we strongly advise hiring a lawyer to review and defend any debt-collection lawsuit.