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Debt Collection, Debtor Default, and Reposessions

Consumer Law Tutorial for Judges in New Mexico

When a debtor defaults on a financial obligation, both creditor and debtor have certain rights and obligations in the collection process. These rights and obligations are enumerated in various state and federal laws, including the federal Fair Debt Collection Practices Act, the Unfair Practices Act, the UCC, and the Collection Agency Regulatory Act, among others.

A. Debt Collection under the Fair Debt Collection Practices Act

When a creditor is unable to collect a consumer debt, it may refer the debt to a person, agency or attorney for collection. The person, agency or attorney whose job it is to collect the debt is called the “debt collector” for purposes of the Federal Fair Debt Collection Practices Act. 15 U.S.C. §§1692 through -1692(o). See also Heinz v. Jenkins, 514 U.S. 291, 115 S. Ct. 1489, 131 L. Ed.2d 395 (1995). The Fair Debt Collection Practices Act applies to debt collectors only–not to the original creditor. This Act regulates debt collection in order to ensure that debt collectors do not engage in abusive practices.

The Fair Debt Collection Practices Act applies only to consumer debt, that is, debt incurred in obtaining money, property, insurance, or services primarily for personal, family, or household purposes. The Fair Debt Collection Practices Act does not apply to debts that have been reduced to a legal judgment. 15 U.S.C. §1692a(5).

1. Prohibited Practices

a. Contact with Third Persons
In general, a debt collector is allowed only limited contact with third persons, such as the friends and employers of the debtor. A debt collector may contact a third person only to find out the address or phone number of the debtor. When the debt collector contacts the third person, he or she is not allowed to tell that third person that a debt is owed. The debt collector is not supposed to communicate with that third person more than once, unless requested to do so by that third person. Also, if an attorney represents the debtor, then the debt collector is not allowed to contact any third party other than the attorney. 15 U.S.C. §1692b.

Contact with the Debtor The debt collector may not contact the debtor at an unusual time or place that is known or should be known to be inconvenient to the debtor. 15 U.S.C. 1692c(a)(1). The debt collector may not contact the debtor at his or her place of employment if there is reason to know that the employer prohibits such contact. 15 U.S.C. §1692c(a)(3).

If an attorney represents the debtor, the debt collector must communicate with the debtor through that attorney. 15 U.S.C. §1692c(a)(2).

If the debtor notifies the debt collector in writing that he or she refuses to pay the debt or that the debtor wishes the debt collector to stop contacting him or her, then the debt collector must stop contacting the debtor, except:
(i) to advise the debtor that the debt collector’s efforts are being terminated;
(ii) to notify the debtor that the debt collector may try to obtain a specific remedy against the debtor, or;
(iii) to notify the debtor that the debt collector intends to obtain a specific remedy against the debtor. 15 U.S.C. §1692c(c). The debt collector may not engage in any conduct that would harass, oppress or abuse the debtor in connection with the collection of the debt. 15 U.S.C. §1692d. For example, the debt collector may not: use or threaten to use violence or other criminal means to harm the physical person, reputation, or property of any person; use obscene or profane language; or cause a telephone to ring repeatedly or engage any person in telephone conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number.

c. False or Misleading Representations The debt collector may not use any false, deceptive, or misleading representation or means to collect a debt. 15 U.S.C. §1692e. Among other things, a debt collector may not:
(i) falsely represent or imply that the debt collector is vouched for, bonded by, or affiliated with the federal or state government;
(ii) falsely represent * the character, amount, or legal status of any debt; or * any services rendered or compensation that may be lawfully received by any debt collector for the collection of a debt;
(iii) falsely represent or imply that any individual is an attorney or that any communication is from an attorney;
(iv) represent or imply that nonpayment of any debt will result in arrest or imprisonment or the seizure, garnishment, attachment, or sale of any property or wages of any person unless such action is lawful and the debt collector or creditor intends to take such action;
(v) threaten to take any action that cannot legally be taken or that is not intended to be taken;
(vi) falsely represent or imply that a sale, referral, or other transfer of any interest in a debt shall cause the consumer to— * lose any claim or defense to payment of the debt; or *become subject to any practice prohibited by this Act;
(vii) falsely represent or imply that the consumer committed any crime or other conduct in order to disgrace the consumer;
(viii) communicate or threaten to communicate to any person false credit information, including the failure to communicate that a disputed debt is disputed;
(ix) use or distribute any written communication that simulates a document authorized, issued, or approved by any court, official, or agency of the United States or any State, or that creates a false impression as to its source, authorization, or approval;
(x) use any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer;
(xi) fail to disclose in the initial written or oral communication with the consumer that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose;
(xii) falsely represent or imply that accounts have been turned over to innocent purchasers for value;
(xiii) falsely represent or imply that documents are legal process;
(xiv) use a false business, company, or organization name;
(xv) falsely represent or imply that documents are not legal process forms or do not require action by the consumer; or
(xvi) falsely represent or imply that a debt collector operates or is employed by a consumer reporting agency.

2. Remedies (15 U.S.C. §1692k)
If a debt collector fails to comply with the Fair Debt Collection Practices Act, then the debt collector is liable to the debtor in an amount equal to the sum of:

a. any actual damage sustained by the debtor as a result of such failure;
b. such additional damages as the court may allow, but not exceeding $1,000; and,
c. in a case where the debtor’s action against the creditor for such failure succeeds, the costs of the action, together with reasonable attorney’s fees.

In determining the amount of the debt collector’s liabilities, the court should consider, among other factors, the frequency and persistence of noncompliance by the debt collector and, the nature of such noncompliance and the extent to which such noncompliance was intentional. However, if the debt collector’s violation of the Act was not intentional, but instead the result of a bona fide error (notwithstanding the maintenance of procedures reasonably adapted to avoid such an error), then the debt collector cannot be held liable for the violation.

If the court finds the debtor brought the claim in bad faith or to harass the debt collector, then it may award attorney fees and costs to the defendant.

B. Assignment of Debt to Collection Agencies for Suit

According to New Mexico Rules 1-017(D) and 2-107(D), collection agencies may file suit in their own names against delinquent debtors as long as the account upon which they sue has been assigned to them by the original creditor.

C. Debtor Default and Repossession (§§55-9-601 through -628)

With certain types of transactions, called secured transactions, a creditor may take possession of a debtor’s property when the debtor defaults on his or her loan or credit agreement. When a creditor takes possession of the debtor’s property it is called “repossession,” even if the creditor never possessed the property before.

Secured transactions are credit transactions in which the debtor gives the creditor an interest in some property so that the creditor’s investment is secure. See generally §§55-9-102(a)(72); 55-9-103. Typically, one party (the debtor) buys something on credit from another party (the creditor or secured party). In order to ensure payment, the creditor takes a “security interest” in some item or items of property (the collateral) of the debtor. If the debtor fails to fulfill his or her obligations under the credit agreement (defaults), then the secured party is allowed to take the collateral in order to satisfy the obligation. NMSA §55-9-609(1).

1. The Secured Party’s Rights After Default
After the debtor defaults, the secured party may take possession of the collateral, dispose of the collateral, and seek a deficiency judgment against the debtor if necessary to cover the remaining debt. §§55-9-609, -610, -615(d)(2).

Taking Possession and Disposing of the Collateral
The secured party may take possession of the collateral by removing it from the debtor’s premises or may render the collateral unusable and dispose of it from the debtor’s premises. §55-9-609(a). The secured party may take possession of the collateral, or render it unusable, with judicial process or without judicial process if the secured party proceeds without breaching the peace. §55-9-609(b).

Once the secured party has taken control of the collateral, the secured party may sell, lease, license or otherwise dispose of the collateral, provided that the disposition is “commercially reasonable.” §§55-9-610(b); -627(b). Disposition of the property must be commercially reasonable because a debtor may be ordered to pay any deficiency resulting from the difference between the amount owed by the debtor and the amount obtained through sale (or other disposition) of the collateral. However, the “fact that a greater amount could have been obtained by” disposing of the collateral differently or at a different time does not “preclude the secured party from establishing that the” disposition was commercially reasonable. §55-9-627(a).

A disposition of collateral is commercially reasonable if it is made in the usual manner in any recognized market, at the price current in any recognized market at the time of the disposition, or is otherwise in conformity with reasonable commercial practices among those who deal in the type of collateral at issue. §55-9-627(b).

Even when the disposition of collateral is not commercially reasonable, the secured party does not forfeit the entire deficiency. Rather, the secured party may recover the claimed deficiency less any loss occasioned by its failure to sell in a commercially reasonable manner. First Nat'l Bank v. Jiron, 106 N.M. 261, 741 P.2d 1382 (1987); Clark Leasing Corp. v. White Sands Forest Prods., Inc., 87 N.M. 451, 535 P.2d 1077 (1975).

2. Debtor’s Rights After Default
After the buyer defaults, the secured party must give notice to the debtor of any plan to dispose of the collateral. §§55-9-611; -612. In a consumer goods transaction, the notice must contain the following information:

a. A description of the debtor and the secured party;
b. A description of the collateral;
c. A description of the manner in which the secured party will dispose of the collateral;
d. A statement that the debtor is entitled to an accounting of the unpaid indebtedness and the cost of any accounting;
e. A statement of the time and place of the sale, if the sale is open to the public;
f. A description of any liability for amounts the debtor may still owe after the disposition of the collateral;
g. The telephone number the debtor may contact in order to find out the amount that must be paid to the secured party to redeem the collateral; and
h. A telephone number or mailing address the debtor may use to obtain further information concerning the disposition of collateral and the amount owed to the secured party. §55-9-614.

The debtor has the right to redeem the collateral at any point before the secured party sells the collateral. §55-9-623(a)(c). In order to redeem the collateral, the debtor must pay all of his or her obligations for which the collateral was secured, unless the creditor agrees otherwise, as well as the reasonable expenses and attorney fees paid by the secured party in repossessing and attempting to dispose of the collateral. §55-9-623(b).

If the secured party sells the collateral and receives an amount that is in excess of the amount that the debtor owed plus costs of repossession and sale, then the debtor may receive the extra money. §55-9-615(d)(1).

3. Remedies for the Secured Party’s Noncompliance
If a secured party does not comply with these requirements, he or she will be liable for the debtor’s damages. The overall purpose of awarding damages is to put a debtor in the same position he or she would have occupied had no violation occurred and to ensure that every noncompliance with these requirements results in some liability, regardless of the injury that may have resulted.

The debtor may recover his or her actual damages, including any damages resulting from the debtor’s inability to obtain alternative financing or from the debtor’s increased costs of alternative financing. If the collateral is consumer goods, the UCC sets a minimum amount of damages: either an amount not less than the credit service charge plus ten percent of the principal amount of the obligation or the time-price differential plus ten percent of the cash price. (The time price differential is the amount a debtor pays for the privilege of buying goods or services on installments over time. §56-1-1(J). The time price differential does not include the amount, if any, charged for insurance premiums, delinquency charges, attorneys' fees, court costs or official fees. Similarly, the Motor Vehicle Sales Financing Act defines the time price differential as the total of the principal balance and the amount of the finance charge. §58-19-7(B)(9).)

If the debtor’s deficiency is eliminated by sale of the collateral and the debtor is entitled to a surplus, the debtor’s damages include the loss of any surplus. But, the debtor is not entitled to recover any damages resulting from the debtor’s inability to obtain alternative financing or from the debtor’s increased costs of alternative financing.

A debtor may be entitled to additional statutory damages if the secured party violates certain specific provisions of the UCC. §55-9-625(e). Finally, Section 55-9-625(g) limits the extent to which a secured party may claim a security interest when that party, without reasonable cause, fails to respond to a request regarding a list of collateral or a request for a statement of account.