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A Puzzle

posted by Stephen Lubben

Working my way through the local paper today, I stumbled across a story on consumer credit. Against my usual inclinations, I read on. It tells the story of how banks routinely sell old debts, that is, debts past the statute of limitations, for about 0.2 cents per dollar. For my co-bloggers, this is probably old news.

But the question that occurs to me, is why do we allow such sales? Just as we don't allow markets to sell expired milk, no matter what the discount, it would seem that allowing sales of debts that can only be enforced by trick is unlikely to be socially useful or something that our banking regulators should condone.

Comments

Some also off-shore stale debt to Indonesia or whatnot.

General rule in civil cases is that failure to plead statute of limitations as an affirmative defense is a waiver of the defense, no?

"All God's creatures got a place in the choir/
Some sing low and some sing higher..."

;-)

It's a statute of limitation, not a statute of repose, so the court has jurisdiction to hear the case, and the defendant must affirmatively plead the statute. Even if the defendant does so, the plaintiff can still argue that the court should ignore the statute for equitable reasons. That doesn't work very often, but it does every now and then.

Your proposal would require a major overhaul of the system. You'll find there are not many statutes of repose out there, and the bulk of those on the books are a long way from consumer protection statutes, having been passed at the behest of insurance companies.

A statute of limitations is no defense to a setoff or recoupment, IIRC. (Although there are also legal restrictions on purchasing debt for the purpose of getting a setoff.)

Steve Lubben is thinking like a consumer lawyer here, not a commercial lawyer.

I would add that there is nothing unscrupulous about attempting to collect on a debt that is legitimately owed, even if the statute of limitations has run and enforcement will be difficult. After all, it is still a debt.

Mr. Lubben, can you please explain the social harm or ethical problem that would arise if a collection company simply called to ask for the funds to be repaid, and the debtor repaid them in full or in part (whether or not s/he knew that a statute of limitations defense was available)? I would not describe this as a trick. Of course repayment is unlikely in such cases.

It's a statute of limitation!

Not unlike the foreclosure "game", a "rule book" was written, in this instance, by which both creditor and debtor are supposed to play. The decision has to be made as to whether or not the "game" is going to be played by those rules. If it's not, then the whole book needs to go out the window. However, if the rules ARE going to be imposed then they need to be imposed and enforced upon BOTH sides with equal force and effect. Otherwise, there is no point in even acknowledging the rule book.

Steve, thanks for posting on what I consider a very important issue. The commenters are on to something here.There are rules, and so far, statute of limitations is an affirmative defense that must be plead, but that does not mean states can't require collectors to disclose that the debt is time-barred in every correspondence with a consumer. New Mexico just did this, and a psychologist and I wrote about the details. The article is here. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1657040.

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