What Debt Collection Law Applies?

The debt collection laws can be confusing because the rules about how they apply are complicated. At the very simplest level, there is a distinction between debt collectors and creditors. The federal statute only protects consumers from debt collectors. The Texas statute protects consumers from both debt collectors and creditors, but also creates a special category called “third-party debt collectors” for additional regulations.

The other source of confusion regarding application of the debt collection laws concerns the definition of “consumer debt.” Both statutes apply only to consumer debts, they do not apply to business debts. Moreover the definition of “debt” does not include every obligation to pay money, just those arising out of voluntary transactions.

Is the Collector a Creditor or Debt Collector?

Generally speaking, the Texas debt collection statute applies to both creditors and debt collectors equally, although it does have a special category called “third-party debt collector, example: a credit repair company with money-back guarantee” to which special requirements apply. The federal debt collection statute is narrower, and applies only to debt collectors.

A creditor is generally the person who you originally agreed to pay on account of the transaction. For example, the bank that lent you money to buy your car is a creditor.

A debt collector is generally a person brought in to try to collect from you after you have failed to pay. An independent collection agency who is hired by the bank to try to collect on the car loan after you have failed to pay is an example of a debt collector.

It becomes more difficult to tell debt collector from creditor when their functions overlap. For example, may creditors have their own in-house collection departments. This does not make them debt collectors, even if they are trying to collect after you have defaulted on your loan.

Similarly, the mere fact that someone has purchased your debt does not make them a debt collector. Mortgage companies do not become debt collectors merely because they purchase a portfolio of loans from another mortgage company. Generally, in order to become a debt collector by purchasing a debt, the purchase must have been made after the debt was in default. If your payments were current when the debt was sold, the buyer of the debt is still just a creditor.

What About Lawyers?

Lawyers are often debt collectors, though federal law and Texas law treat them differently. Under the federal law, a lawyer is a debt collector if his principal business is the collection of debts or if he regularly collects or attempts to collect debts allegedly owed to another.

Under Texas Law, anyone, including a lawyer, attempting to collect a consumer debt arising out of a transaction with a creditor is covered by the debt collection statute, even if they do not meet the requirements of the federal “debt collector” definition.

What About Third Party Debt Collectors Under the Texas Act?

Texas law has a special definition for “third-party debt collectors” that is the same as the federal definition of debt collector, but with a special exception for lawyers. A lawyer collecting a debt as a lawyer in the name of a client is only a “third-party debt collector” if he has non-attorney employees who regularly solicit debts for collection or regularly contact debtors to collect or adjust debts.

There are a few special requirements that apply to third party debt collectors under Texas law. The most important of these are the special dispute handling rules discussed in my Warybuyer Guide to Disputing a Debt and Warybuyer Guide to Stopping Debt Collector Communications. Attorneys must comply with these rules just like other third-party debt collectors. Third-party debt collectors must also post a bond with the Texas Secretary of State before they can collect debts in Texas.

Is a Consumer Debt Being Collected?

The Texas and federal debt collection statutes only apply to consumer debts. To determine whether something is a consumer debt involves two questions: 1) is it a debt?, and 2) is it a consumer debt?

A debt is generally an obligation to pay money as a result of an agreement of some kind. Easy examples of this are credit card debts, car loans, and mortgages. Other examples are utility bills and rent payments. The courts have had trouble with things like bounced checks, because checks are payable on demand and are considered to be more like cash than loans, but most courts have held that collection of a bounced check is collection of a debt.

For purposes of the debt collection laws, debts generally do not include money that you owe for any reason other than because you agreed to pay. For example, library fines and traffic tickets are generally not debts covered by the debt collection laws. Similarly, attempts to collect money from you because of damage you caused in an accident are not attempts to collect debts.

Attempts by a creditor to sieze property by repossession, foreclosure or eviction are also not attempts to collect debts. The courts have distinquished such actions from debt collection because they are attempts to obtain property rather than money. However, if a person attempting a repossesion, foreclosure or eviction also seeks to collect money or makes threats regarding repossession, foreclosure or eviction in order to collect money, the attempt to collect money is covered by the debt collection statutes.

Once it is determined that a debt is being collected, a court will then make sure the debt is a consumer debt before applying the debt collection statutes. A consumer debt is a debt arising out of a transaction entered into for personal, family or household purposes, rather than for business purposes. A loan for your personal car is covered. A loan for the same kind of car for your business is not.

Putting It Together: Who is Protected by What Law?

I’ve tried to list examples in three general categories: situations protected by the federal Fair Debt Collection Practices Act, situations protected by the Texas Debt Collection Act, and situations not protected by the debt collection laws. These are just general guides, if you have questions about the application of the law to your individual situation, consult with me to find out more.

Situations Covered by the federal Fair Debt Collection Practices Act (Debt Collectors Only):

A person being called by a collector who was hired by the creditor when the payments on the family car were past due.
A person being called by a collector who purchased a personal credit card account after it was closed by the credit card company.
A person who bounced a check and is being pursued by the check guarantee company hired by the store where the check was written.
A person being sued by a lawyer who regularly sues to collect consumer debts.
A person receiving collection letters from a company that buys the right to collect fees and rents due under old apartment leases.

Situations Covered by the Texas Debt Collection Act (Debt Collectors and Creditors):

Everyone protected under the federal Fair Debt Collection Practices Act.
A person receiving a letter from a store attempting to collect a bounced check.
A person who is late on his electric bill, even if the collector works for a city-owned utility.
A person being called by his bank because he is late on a payment for his house.

Situations Not Covered by Either Texas or federal debt collection statutes:

Anyone who owes money on account of a business, trade or professional debt.
A person who owes traffic fines
A person who is being sued for the value of stolen property
A person who is being asked to pay money for damages caused by an accident.