Texas debt collector loses case, gets hit with a massive fee request

Phoenix Recovery Group, also known as Tolteca Enterprises, Inc., lost a class action lawsuit in  December of 2019. A district judge in ruled that Phoenix’s debt collection letters to consumers violated the Fair Debt Collection Practices Act (“FDCPA”) by omitting language required by law and by being misleading as to the amount of the debt.

            The judge ruled only as to liability and the parties continued to litigate as to the amount Phoenix would have to pay. Under the FDCPA, Phoenix would owe statutory damages, plus the a reasonable attorney fee and costs. In an FDCPA class action, the maximum statutory damages were 1% of the net worth of Phoenix. In February of 2021, the parties stipulated 1% of Phoenix’s net worth was $3,600. Two months later, the parties agreed Phoenix would pay statutory damages of $3,600 to the class and $1,000 to the lead plaintiff. The parties were unable to agree to the amount of attorney fees Phoenix would pay.

            The judge ordered plaintiff’s counsel to submit a fee request. This amount is now what the plaintiff paid her lawyers. Nearly all FDCPA cases are taken on contingency, meaning the lawyer gets paid if they win the case or settle. These fees almost always dwarf the statutory damages. This case was no exception.

            The plaintiff’s lawyers requested $101,995 in fees and $8,071.86 in costs (the cost of mailing the class notice to 13,844 consumers who received unlawful letters from Phoenix). Phoenix had earlier ignored the opportunity to settle for $20,000 and only offered to settle after 22 months of litigation, and then only for a nuisance value.

            The judge hasn’t ruled on the fee request.

First thing I do when I review a debt lawsuit.

The first thing I do when a potential client comes with a lawsuit on a debt is to check to make sure it was filed in the correct place. I do this check because a lawsuit filed in the wrong place is usually a violation of the Fair Debt Collection Practice Act (FDCPA). Finding a violation of the FDCPA is, at the very least, great leverage to use against a debt collector.

            To avoid violating the FDCPA, suits to collect a consumer debt must be filed in one of two places:

  • Where the contract was signed; or
  • Where the consumer lives when the suit was filed.

            When cases are filed in district or county court, the debt collector needs to file in the correct county. When the case is filed in justice of the peace (JP) court, the debt collector needs to file in the correct justice of the peace precinct. I usually see this problem with suits filed in JP court and rarely in county or district court.

            I first determine what JP precinct the potential client lives in. Some counties, like Travis, publish maps. Others, like Williamson, have an address search. For most counties, the only way to discover is to call a JP’s office and politely ask. If the suit was filed in the same precinct that the potential client lives in, the debt collector filed in the correct venue and did not violate the FDCPA.

            If the precincts are different, I need to figure out where the contract was signed. Was it signed a business? If so, what precinct is that business in? Was it signed at a previous address? If so, what precinct is that residence in?

            If a debt collector sues in the wrong place, a motion to transfer venue is usually appropriate. And I will ask my client to consider suing the debt collector in federal court for violating the FDCPA.

How to resolve an old judgment when you can’t find the person to pay.

As an example, let us say you got evicted in 2016 and your landlord got a judgment for $1500 against you. You forgot about the matter because you own your own home. But now you want to sell your house and the title company says you must take care of the judgment before they will sign off. Unfortunately, you cannot find the landlord.

            How do you resolve the old judgment?

            Fortunately, Texas law provides a solution, in § 31.008 of the Civil Practice and Remedies Code. The bad news is that it takes at least 15 days and realistically more like 30-45 days. The solution is that you can pay the full judgment, plus interest, into the registry of the court after making exhaustive efforts to find the landlord. In legalese, in this case the landlord would be called the “judgment creditor” since they were the winner.

            Section 31.008 requires sending letters certified mail, return receipt requested. Click here for more information sending certified mail. The letters must go the judgment creditor’s last known address, the address appearing in the court records for the judgment creditor and its lawyer, and the address for the judgment creditor’s lawyer as appearing on the State Bar of Texas’ website.

            If after 15 days the judgment creditor does not respond, you can file an affidavit with the court stating the notice was sent, the judgment creditor did not respond, and that their location is unknown. The court should then let you pay the judgment into the registry of the court. You must then prepare a release of judgment, which the court will then sign on behalf of the judgment creditor.

            If the judgment creditor can be found but refuses to accept payment, or accepts payment but refuses to sign a release of judgment, things are more complicated and a court hearing is required.

What does it mean to “re-age” a debt?

To “re-age” a debt is to change the date the debt was defaulted. A debt is defaulted when a consumer fails to make a payment as scheduled. By re-aging a debt, a debt collector can make it appear that a debt is newer than it is.

            By making old debts look newer, debt collectors can keep debts on a consumer’s credit report longer than allowed. (Most debts fall off a credit report after seven-and-half years.) Re-aging can also make it appear that a debt is still within the statute of limitations (four years for most debts in Texas) and that the consumer can be sued to collect it. Finally, re-aging hurts consumers because older negative entries effect a credit score less than newer entries.

            The best re-aging cases are the first two categories: reporting non-reportable debt or making debt look within the four-year statute of limitations.

Identity theft and debt collection

Identity theft can ruin a credit score. After the thief steals an identity, they will use the stolen identity to make purchases on credit and then disappear. The victim is left to deal with the debt collectors and the consequences.

            Debt collectors should cease collection efforts after they receive notice that the debt results from identity theft. Click here to learn how to send that notice. Smart debt collectors stop not just because it is the right thing but also because continuing to collect such debts might violate federal law.

            Victims of identity theft rarely legally owe the debts the thief racked up. When a debt collector has been informed that the debt results from identity theft and continues to try to collect, they are attempting to collect money not owed. In legalese, they are “making a false representation of the amount of the debt.” That violates the Fair Debt Collection Practices Act (FDCPA) and the Texas Debt Collection Act.

            The FDCPA also prohibits communicating credit information which is known or should be known to be false. A debt collector cannot just stick their head in the sand and ignore a consumer telling them the debt is not owed.

            To avoid liability under the FDCPA for an error, a debt collector must show they have procedures designed to avoid that specific error. It is exceedingly difficult to convincingly argue that a debt collector has reasonable procedures to avoid an error, like collecting money not owed, when they persist in making the error after being informed of it.

            Debt collectors must operate their business in compliance with the law. When they choose not to operate lawfully, consumers have powerful tools under state and federal law to force compliance and recover damages.

How to dispute a debt with a debt collector

            Consumers have the right to dispute debts in collection. The best way to dispute a debt is in writing with trackable delivery. Sending a letter via certified mail return receipt requested with the United States Postal Service is the gold standard method.

            First, pull a copy of your credit report.

            Second, carefully review the entries on your credit report. It will look something like this:

            Third, address the letter to the debt collector using the address on the credit report (red box).

            Fourth, include information that will allow the debt collector to identify the account like your name, the account number (blue box), the original creditor (green box) and the balance (purple box).

            Fifth, write a very short letter. A dispute letter should not be fancy. The 5th Circuit Court of Appeals wrote, “Aside from invoking the word “dispute,” we struggle to see how a debtor could dispute a debt more clearly than by writing, “the amount you are reporting is not accurate.“”

            Sixth, make a copy of the letter. Put the copy someplace safe. I recommend taking a photo using a phone and then emailing it to yourself so you still have the copy if you lose your phone.

            Seventh, send the letter certified mail return receipt requested at the Post Office. There are two things that need to be attached to the envelope:

Green card for certified mail return receipt requested

and

Certified mail receipt

            Finally, mail the letter and keep the returned green card. Mailing a letter this way will cost about $7.00.

You should never* default on a debt collection lawsuit

A default judgment is the legal version of a forfeit victory. When the defendant doesn’t “show up” by filing an answer to lawsuit so the plaintiff wins by default. Debt collectors like Midland Credit Management, Inc. (“Midland”) and Portfolio Recovery Associates, Inc.  (“PRA”) rely on default judgments. These debt collectors know consumers usually file no response with the court in a collection suit.

            Consumers fail to respond, calling filing an answer in legalese, for several reasons. It is too stressful. They think owe the money. They can’t afford an attorney. Some consumers even believe failing to respond will stop the lawsuit until they do.

            Debt collectors need consumers to default to make a profit. Midland and PRA file thousands of lawsuits each year in Texas courts. Litigating each case would quickly suck all the profit out of collecting these debts. Instead, these businesses rely on the knowledge that consumers will fail to respond over 75% of the time.

            When consumers fail to file an answer, the consumer gives up their best opportunity to resolve debt. The resolution could be beating the debt collector’s case, or settling for less than full value owed, or correcting the debt collector’s inaccurate requests. Once a debt collector has turned a debt into a judgment, the debt collector has far more leverage to use against a consumer. And the consumer has far fewer ways of challenging inaccuracies.

            Once a debt has become a judgment, a debt collector can use the courts to freeze bank accounts, seize non-exempt property, and make it difficult to buy or sell property.

            Failing to respond to a lawsuit rarely makes the situation better and frequently makes it much worse.

            * Almost never. I can think of some far-fetched circumstances when failing to respond is the best option but that happens very rarely. In any case, consult with a lawyer. Hiring a lawyer isn’t’ cheap but consulting a lawyer usually is.

Texas is the Wild West for debt collection

In Texas, you must undergo hundreds of hours of instruction and have a license to be a barber. A bartender must complete an accredited training course to pour drinks statewide. But to start a debt collection agency, all that is needed is cheap and easy to acquire surety bond.

            The only requirements to operate as a debt collector are obtaining a $10,000 surety bond and filing it with the Texas Secretary of State. This requirement is not for each person acting as a collector but for each company. Hundreds of people can work under just one bond.

            There is no training required to work as a Texas debt collector and no background check is required. Felons are free to work as debt collectors in Texas.

            Texas debt collectors do not have to register anywhere so it is impossible to know how many exist. However, their numbers can be estimated by the number of active bonds on file with the Texas Secretary of State. As of March 2021, there are 2300+ active debt collector bonds.

            Breaking the Texas Debt Collection Act is technically a misdemeanor criminal offense but the maximum penalty is only $500, no matter how egregious the conduct. And I am not aware of any debt collector ever being prosecuted for violating the TDCA.

            The Attorney General of Texas has a Consumer Protection division. The AG does important work but they are spread too thin to deal with even a small portion of the complaints and tips sent their way.

            The only real deterrent to unlawful behavior by debt collectors is private attorneys who file civil cases against them. Even then, many predatory debt collectors can violate the law for years between being sued. Only about 7,000 Fair Debt Collection Practices Act cases were filed in federal court in 2020, down about 18% from 2019. The numbers are down not because debt collectors are following the law better but because it is getting harder to sue them.

            With so little regulation, and so little protection for consumers, debt collectors make money by breaking the law than following it.

Who is Phoenix Recovery Group?

You may have seen an entry on your credit report for something named “Phoenix Recovery Group”. Phoenix Recovery Group is the assumed name for Tolteca Enterprises, Inc. Phoenix Recovery Group is a Texas based debt collector formed in 2002.

           They frequently collects debts related to apartment leases. Phoenix reports information on apartment debts to make it difficult for the consumer to lease an apartment or purchase a home.

Example of a Phoenix Recovery Group entry on a credit report

Phoenix explicitly uses potential homelessness as a collection tool.   Many landlords will not rent to a potential tenant who owes money to a former landlord. Phoenix knows this and uses it to extract money from consumers.

            This would be unfair by itself but Phoenix frequently makes errors.

            Phoenix has been sued in federal court for alleged violations of the Fair Debt Collection Practices Act. Phoenix has been sued for attempting to collect money not owed, adding prohibited fees, or failing to make required disclosures. In December 2019, a federal court ruled that Phoenix’s letters to consumers violated the FDCPA by failing to make required disclosures and was misleading as to the amount of the debt.

            I can help you effectively use your rights on state and federal law to make sure Phoenix Recovery Group is reporting only accurate information on your credit report.

            Don’t let an inflated, inaccurate, or wrongful debt keep you from safe and decent housing.

Misrepresenting the amount of a debt

The best Fair Debt Collection Practices Act (“FDCPA”) cases are simple. And one of the simplest type of cases is a debt collector collecting the wrong amount. In legalese, a debt collector who tries to collect the wrong amount is “misrepresenting the amount of the debt.” This violates 15 U.S.C. 1692e(2)(a) of the FDCPA. That section states:

A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:

(2) The false representation of—

(A) the character, amount, or legal status of any debt[.]

     Misrepresentation of the character or legal status of a debt can be complicated to prove. Misrepresenting the amount of a debt is much easier.

            If a debt collector tries to collect more than is owed, they have misrepresented the amount. If they try to collect too little, they have misrepresented the amount. If they try to collect two different amounts for the same debt, it is likely at least one amount is misrepresented.

            It is obvious why it is unlawful to collect too much but why is collecting too little wrong as well? Here is an example:

            Debt Collector Dave tells Consumer Cathy she owes $400 even though he knows she allegedly owes $1000. She scrapes together all her money and pays $400. Dave then says he has made a mistake and Cathy still owes $600. Cathy would justifiably feel she has been conned.

            Debt collectors need to be accurate each time they try to collect money. Consumers cannot make informed decisions without accurate information. The FDCPA allows consumers to sue debt collectors who fail to meet their obligations under the law.