A law professor who specializes in consumer financial protection and who spent a year working on a fellowship with the Bureau of Consumer Financial Protection has written a paper that argues in favor of automatically discharging debts seven years after a default or seven years after a judgment has been entered.
The article, written by Dalie Jimenez from the University of California, Irvine School of Law, was published in the Houston Law Review.
Even when repaid in full, some debts may return, like zombies rising from the grave. The debtor’s death does not kill her debts; they survive and may haunt the debtor’s family members for months or years after. At first blush, the expiration of the statute of limitations may seem to spell the end for a debt. However, in most circumstances these statutes are not meant to be debtkillers; they merely lessen the debt owner’s remedies. In practice, they may have no effect unless the debtor explicitly asserts her rights. The only way to ensure a debt truly dies is through a bankruptcy discharge. Obtaining a discharge is akin to achieving permanent remission. Like with cancer, however, remission comes at a cost.
Jimenez argues in favor of a law that would automatically discharge debts after a certain period of time. A bankruptcy discharge, other than paying the debt in full, represents the only “true death” to a debt, Jimenez says. Her proposed law would have five key components:
- Owners of unsecured consumer debts would have seven years in which to collect those debts, with the clock beginning to run 180-days after the consumer’s behavior that gave rise to the cause of action. Payments made during this period do not restart the collection clock.
- Judgments based on consumer debts would have a separate, non-renewable, seven-year clock. In other words, the initial seven-year extinguishment period can be extended if a court renders a judgment in a lawsuit filed before. The automatic discharge federal law I am proposing would not only automatically extinguish the
legal remedy of collecting through the courts, but also any right of repayment. - When the applicable seven-year period expires, the debtor’s obligation to the creditor and the creditor’s concomitant right to collect cease to exist. Similar to the bankruptcy discharge, a judgment obtained on an extinguished debt is void and can be collaterally attacked in a different proceeding.
- Attempting to collect on an extinguished debt would be an unfair practice giving rise to a private right of action against the collector, with statutory financial penalty, attorney’s fees, and actual costs (including disgorgement of any payments made by the consumer) obtainable from the collector. Regulators such as the Consumer Financial Protection Bureau and states’ attorneys general could also enforce the statute.
- The two extinguishment periods would preempt contrary state law and could not be waived by the consumer.
The proposed law would drastically reduce the number of lawsuits filed against collectors by consumers, Jimenez argues, and would hasten consolidation in the industry, which should be viewed as a positive, because it is the smaller collectors that are “more likely to violate the law for lack of knowledge or ability to train their employees.”
Industry consolidation should also increase efficiency of collections, and allow collectors and debt buyers to use their increased market power to create more complex and accurate analytical models of whether a debtor is likely to repay. This should in turn decrease the cost of collections, which may trickle up to a decrease in the cost of credit, all else being equal.
