§ 4.1:1Confirm Debtor’s Location
Mailing an envelope to the debtor at his last known address will either confirm that address as correct or provide information about a new forwarding address. If the notation “address correction requested” is included on the envelope, the post office will provide a forwarding address. See section 3.4 in this manual.
Letters from attorneys can be effective tools to motivate the debtor to pay. Every communication with the debtor or debtor’s attorney should encourage payment. A firm but civil tone to the attorney’s communications, combined with the message that this debt is one that must be dealt with, may encourage payment in situations in which a more strident tone might not.
A demand letter to the debtor should contain an assertion that the creditor has instructed the attorney to make only one demand for payment before filing suit. This assertion should be made only if true. Although there is apparently no liability for making such an untrue statement in connection with a commercial debt (as contrasted with a consumer debt, where such a false assertion violates the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692–1692p), the attorney sabotages his own authority and credibility by doing so. If the nature of the debt requires notice of intent to accelerate, that notice constitutes a second demand. See form 4-1 in this chapter for a commercial debt demand letter, form 4-2 for a consumer debt demand letter, and form 4-3 for a notice of intent to accelerate.
Demand letters should be sent both by certified mail, return receipt requested, and by regular first-class mail to take advantage of the mail presumption.
§ 4.1:3Determine Debtor’s Ability to Pay or Amenability to Suit
All communications to or with the debtor should be open-ended, encouraging the free flow of information from the debtor. If possible, the attorney should confirm the debtor’s address by asking the debtor if he received the demand letter and follow up with a request to confirm the debtor’s current mailing address. Dialogue with the debtor can tell the attorney about the debtor’s financial and employment status and whether the debtor has foreclosures or judgments. Most importantly, listening for any complaints the debtor may have can help determine if the debtor may file a counterclaim. While not everything the debtor says may necessarily be true, it will help the attorney decide in recommending suit and in drafting a more thorough status update for the client.
The attorney should never stop attempting to collect the debt. If the debtor responds that he is unable to pay in full, the attorney should suggest that the debtor offer to set up a payment plan or be creative in trying to reach a compromise, such as allowing the debtor to make smaller payments during off-peak times. See section 4.12 below.
§ 4.1:4Predicate Liability for Attorney’s Fees
In a variety of cases in which there is no express contractual liability for attorney’s fees, demand for payment must be made before attorney’s fees can be recovered. This topic is discussed at length in section 1.23 in this manual. See also Tex. Civ. Prac. & Rem. Code ch. 38.
If the debt is payable in installments, it must be accelerated before the creditor can either foreclose on any collateral or sue on the debt. In addition, unless there is a valid waiver in the loan document, the creditor must give notice of intent to accelerate before actually accelerating the debt. See form 4-3 in this chapter for a notice of intent to accelerate. Acceleration of a debt payable in installments is discussed at section 2.111 in this manual. The notice of intent to accelerate and notice of acceleration must be clear and unequivocal. Ogden v. Gibraltar Savings Ass’n, 640 S.W.2d 232 (Tex. 1982). The attorney should not demand any interest not yet accrued or expenses such as attorney’s fees not yet incurred; such a demand may be usurious. See Jim Walter Homes, Inc. v. Schuenemann, 668 S.W.2d 324 (Tex. 1984).
§ 4.2Actions Prohibited by Statute
See sections 2.11 through 2.36 in this manual for a discussion of the application of the federal Fair Debt Collection Practices Act and the Texas Debt Collection Practices Act to the collection of consumer debts. The fact that those statutory provisions are not repeated here does not lessen their importance in this area.
Demanding or collecting more money from the debtor than is owed may violate usury laws. If the claim is a consumer claim, the excessive demand may also violate the Fair Debt Collection Practices Act and the Texas Debt Collection Practices Act. See sections 2.17:1, 2.33:2, and 2.52:2 in this manual. It is therefore vitally important that the debtor be given accurate payoff figures. See Waterfield Mortgage Co., Inc. v. Rodriguez, 929 S.W.2d 641 (Tex. App.—San Antonio 1996, no writ); Seitz v. Lamar Savings Ass’n, 618 S.W.2d 142 (Tex. Civ. App.—Austin 1981, no writ). The creditor may be able to claim bona fide clerical error as a defense to usury if an incorrect payoff figure is quoted. See Tex. Fin. Code § 305.101.
If an attorney gives an incorrect payoff amount or demands more money than is owed, the attorney violates the debt collection statutes unless he can show that it was a bona fide error that occurred despite the use of reasonable procedures designed to avoid the error. See sections 2.19, 2.35, and 2.61:1. It is better for the attorney to become familiar with how the creditor computes the amount owed so as not to inaccurately state the amount of the debt to the debtor. See Duffy v. Landberg, 215 F.3d 871 (8th Cir. 2000). If the debt bears interest, the attorney should try to ascertain a per diem charge based on the interest rate so as to more easily give a payoff quote for any particular day. See section 2.43 regarding how interest is calculated.
§ 4.2:2If Debtor Is (or Claims to Be) Represented by Counsel
Both federal debt collection law and the Texas Disciplinary Rules of Professional Conduct require debt collection attorneys to communicate only with the debtor’s attorney if one has been engaged. See 15 U.S.C. § 1692b(6); Tex. Disciplinary Rules Prof’l Conduct R. 4.02(a), reprinted in Tex. Gov’t Code Ann., tit. 2, subtit. G, app. A (West 2013 & Supp. 2015) (Tex. State Bar R. art. X, § 9).
If a claim of representation comes from the debtor instead of the debtor’s attorney, the attorney should verify representation by telephone or written contact to the debtor’s attorney. A letter to the debtor’s alleged attorney may be advisable, asking for verification of representation within a period of time and stating that otherwise it will be assumed that there is no such representation. Written permission from the debtor’s attorney is needed before the collection attorney may speak to the debtor, even if the debtor has initiated the contact.
§ 4.3If Debtor Requests Verification of Debt
The validation notice required by the Fair Debt Collection Practices Act for consumer claims is governed by 15 U.S.C. § 1692g and is discussed more extensively at section 2.13 in this manual. If it is a commercial claim, verification is not required. But as a practical matter, it may help in furthering discussions and obtaining payment.
[Sections 4.4 through 4.10 are reserved for expansion.]
II. Payment Agreement with Debtor
If the debtor knows that the debt is not going to be forgotten or forgiven and that all the creditor’s remedies (such as repossession, foreclosure, execution, garnishment, or turnover) will cause a significant disruption in his life, the debtor may be motivated to work with the creditor’s attorney. When encouraging the debtor in this manner, it is entirely proper for the attorney to point out the remedies available to the creditor—if the action is lawful and the creditor or debt collector intends to take that action. 15 U.S.C. § 1692e(4), (5); see United States v. National Financial Services, Inc., 98 F.3d 131 (4th Cir. 1996); Bentley v. Great Lakes Collection Bureau, 6 F.3d 60 (2d Cir. 1993).
§ 4.12Potential Settlement Means
Assuming that the debtor does not have sufficient liquid resources to pay the debt, several means exist for settlement. A nonexhaustive list includes obtaining the money from friends, family, or another lender; selling assets; paying the debt in installments; making a partial payment of the debt in installments, with a balloon payment afterward; and the creditor’s accepting less than the full amount of the debt. Often, two or more of these options are used in the same settlement.
§ 4.13Form and Content of Agreement
Although an oral agreement to pay money is generally enforceable unless barred by the statute of frauds, an attorney should evidence the agreement in writing and memorialize its terms. This agreement can be any kind of memorandum, such as a letter agreement, or it can be a more formal promissory note.
The manual committee has not included a promissory note form in this manual, believing that the creditor’s interests are usually sufficiently protected by the documentation from the original transaction combined with a letter agreement setting out the terms of the settlement.
The agreement should—
1.recite the amount owed including, as a sum total, principal, interest, and other charges;
2.contain a valid waiver of limitations;
3.state how the debt is to be paid—for example, in monthly installments of $247.50;
4.recite that the agreement is one to pay the debt or judgment already existing and does not create a new obligation (unless a new obligation is desired);
5.if payable in installments, contain an acceleration clause;
6.if a promissory note, waive presentment; and
7.in all cases, waive notice of default, notice of intent to accelerate, and notice of acceleration.
The attorney may also consider adding a mutual release to avoid future litigation regarding the services or goods provided that were discounted during the settlement process.
§ 4.14Securing Obligation Created by Agreement
Although it is generally preferable to have a secured debt rather than an unsecured one, several matters must be considered before agreeing to accept the debtor’s property as collateral. First, does the debtor own the collateral? Second, what liens already exist against the collateral? Third, what price would the collateral bring at foreclosure sale? The decision to take collateral does not necessarily have to be only economic; the threat of losing property to repossession and foreclosure can motivate a debtor to comply with the agreement.
When drafting an agreement to accept any payment in the future, the attorney should consider collateralizing the agreement in some manner. Unless the loan is nonrecourse, the creditor will have at least a partial recovery, and the remainder may be sued for in a deficiency suit. See generally chapter 5 of this manual regarding nonjudicial repossession and section 14.29 regarding deficiency suits.
§ 4.14:2Equity Lien against Debtor’s Real Property
Traditionally, Texas creditors have shied away from securing any payment agreement with a consumer debtor that included a mortgage against the debtor’s real property, because such a mortgage would be unenforceable against the debtor’s homestead. Such loans are possible now, but the creditor and the attorney should know the numerous requirements involved with such a loan. From a debt collection view, the most important requirement is that a home equity loan must be nonrecourse, unless the owner or his spouse obtained the loan by actual fraud. Tex. Const. art. XVI, § 50(a)(6)(C). This nonrecourse provision will limit the creditor’s ultimate recovery to the amount realized at foreclosure sale.
See section 17.65 in this manual regarding waiver of limitations.