Appeals Court Upholds Lower Court’s Dismissal of FDCPA Suit Over Tax Language in Letter

The Court of Appeals for the Seventh Circuit has upheld a lower court’s dismissal of a lawsuit against a collection law firm for including language in a collection letter regarding the potential tax consequences of settling a debt for less than the full amount owed.

The case was a consolidation of two similar cases — Dunbar v. Kohn Law Firm, and Smith v. Weltman Weinberg & Reis. A copy of the Appeals Court ruling can be accessed by clicking here.

Both plaintiffs received collection letters from the defendants with an offer to settle the amounts owed for less than the total balance. Both letters included the language, “This settlement may have tax consequences.” Both plaintiffs were insolvent when they received the letters and subsequently filed a lawsuit, alleging the defendants violated the Fair Debt Collection Practices Act by providing misleading information since neither plaintiff would have any tax consequences of settling the debt, given their insolvency.

A magistrate judge and a District Court judge both dismissed the claims against the defendants. The plaintiffs subsequently appealed to the Seventh Circuit.

Even an unsophisticated consumer would be able to understand the difference between something that “may” have consequences and something that “will” have consequences, the Appeals Court ruled. As well, an insolvent individual may become solvent at any given moment.

The letters are invitations to settle the debt and are clearly meant to encourage the debtor to take advantage of the discount offered. A rational debtor knows that income taxes are calculated as a percentage of income, and he would likewise understand that even if the discount counts as taxable income, the benefit would still outweigh the cost. That makes it all the more implausible that the tax-consequences warning would dupe a debtor into paying the full debt amount.