Nature of Debt Under FDCPA Determined When Debt Arises

[David A. Szwak]

Nature of debt under FDCPA determined when debt arises, not when collection begins
Law Reporter, Nov 2000
Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, and Clark, LL.C., 214 F.3d 872 (7th Cir. 2000).

The Seventh Circuit Court of Appeals held that the nature of a debt under the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. 1692 et seq., is determined at the time the debt arises, not when collection begins.

Here, Miller bought a house and took out a mortgage. He lived in the house for three years, then rented it to strangers. He received a dunning letter from one of the law firms engaged in debt collection on behalf of the mortgagee. Miller sued the law firms under the FDCPA, alleging defendants violated the act by failing to state the amount of the debt in the dunning letter. Defendants argued that the letter is outside the scope of the FDCPA-which governs the collection of consumer debts-because plaintiffs renting of the property to strangers transformed the loan into a business debt. A trial court granted defendants summary judgment.

Reversing, the Seventh Circuit noted that the language of the FDCPA favors plaintiffs interpretation that the relevant time for determining the nature of a debt is when the debt first arises, not when collection attempts begin. The act defines a debt, in part, as any obligation of a consumer to pay money arising out of a transaction in which the money or property that is the subject of the transaction is primarily for personal use. The transaction to which the statute refers, the court explained, is the one out of which the obligation to repay arises, not the obligation itself. In this case, that transaction was the purchase of a house for personal use.

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The court rejected defendants' argument that plaintiff's interpretation creates a loophole so that if an individual buys a house to use as an office and later converts it to personal use a debt collector would not have to give that buyer the statutory warnings under the FDCPA. The court observed that this outcome makes perfect sense because the act regulates the debt collection tactics employed against personal borrowers on the theory that they are likely to be unsophisticated about debt collection. Businesspeople do not need warnings, the court noted. Consequently, a businessperson who converts a business purchase to personal use does not by virtue of that conversion lose his or her commercial sophistication and acquire a need for protection under the FDCPA, the court explained.

Accordingly, the court remanded.