Collection & Bankruptcy Errors: What You Need To Know

Collection & Bankruptcy Errors: What You Need To Know

As consumer debt increases, so does the demand for collection and bankruptcy legal services. According to the Bureau of Consumer Financial Protection (CFPB) 2020 annual report, “the volume of new debt placed in the litigation channel has increased significantly.” This indicates a growing market for collection and bankruptcy lawyers. It may be tempting for an attorney to increase profitability by handling a large volume of these cases, but this obviously comes with increased risk of a legal malpractice lawsuit as this is one of the areas of practice with a higher frequency.

Claims in the area of practice generally vary in terms of severity. This is because legal malpractice is a case within a case, so the severity of the claim is dependent on the damages in the underlying case. Furthermore, it is common in this area of law for attorneys to assume the attorney fees of the opposing counsel when a suit is lost, thereby increasing expenses. The most common errors for collection and bankruptcy are malicious prosecution and abuse of process, inadequate discovery of facts/inadequate investigation and failure to know or properly apply the law.

Malicious Prosecution or Abuse of Process

Wrongful foreclosure cases represent a majority of these lawsuits. They usually emerge as a result of poor communication. Generally, there is a discrepancy in the amount that is said to be owing. This can be as a result of many factors such as: 

  • Error in interest rate calculations
  • Inclusion of attorney fees 
  • Incorrect application of payments
  • Miscommunication between the lender and the borrower.

These cases usually take longer to litigate and can be very expensive as damages include both compensatory and punitive damages. The best way to mitigate against this error is to keep accurate records and constantly evaluate communications with the lender. Double check the agreement to see if attorney fees are allowed and any limitations on the amount of attorney fees recoverable for bringing an action to enforce the agreement.  Doing this will allow you to catch possible errors from the onset.

Inadequate Discovery of Facts or Inadequate Investigation 

Collections and bankruptcy are complex areas of practice. Understanding the facts of the case and conducting due diligence is key in mitigating the risks of legal malpractice. Every attorney in this area of practice must be familiar with the Servicemembers Civil Relief Act (SCRA). SCRA, an amendment and expansion of the Soldiers’ and Sailors’ Civil Relief Act (SSCRA), provides legal benefits to active duty servicemembers. For example, the act protects servicemen from default judgments such as eviction of family members from a leased/mortgaged property while the service man is in active duty. The consequences of not complying with SCRA can be severe. One of the difficulties with navigating this particular area is that it can be vague, and violations do not need to be complete in order to face legal action. Any attempt to begin a foreclosure is enough to trigger a violation of SCRA. To mitigate against this error, be sure to check military status using SCRACVS (Servicemembers Civil Relief Act Centralized Verification Service). Also, stay abreast with the law and changes regarding the law.

Failure to Know or Properly Apply the Law

The most common claims in this area usually result from violation of the Fair Debt Collections Practices Act (FDCPA). Attorneys collecting debts on behalf of their clients are considered debt collectors and are subject to FDCPA compliance and can be liable for damages and attorney fees resulting from violation of the act. Violations include but are not limited to: 

  • Unfair practices
  • False or misleading representations in the collection of a debt
  • Harassment e.g. calling before 8:00 a.m. or after 9:00 p.m., repeated calling, etc.
  • Failure to notify/send notice of debt
  • Illegally informing a third party about an alleged debt.

The FDCPA requirements have a strict liability statute. To mitigate against these claims, do not dabble in this area of practice. This area is highly technical, and mistakes are very easy to make. Once the error is committed, there is limited defense to rectify the mistake. Since fees shift from one attorney to the other, an attorney that has committed a technical violation can often find themselves with a large bill resulting from litigation.

If you are an experienced collection and bankruptcy lawyer, continue to educate yourself about the FDCPA through CLE courses. Furthermore, if your firm is involved in a significant amount of FDCPA work, hire an expert to audit the firm’s processes and procedures to ensure conformity to FDCPA regulations. If you have violated the FDCPA guidelines, report these cases as quickly as possible to your legal malpractice carrier.

In conclusion, do not dabble in this area of practice and if you are a seasoned lawyer in collection/bankruptcy, stay abreast with the law, follow FDCPA guidelines and check military status when seeking judgement and/or foreclosure against a debtor. Before taking on a case, ensure that you have the skill and knowledge to competently handle the case. 

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