Someone Ripped Me Off and Sold My Debt, and Now That Company Is Suing Me - What Can I Do?

Retail businesses that use a lot of "hard sell" techniques in their selling, like gym memberships or cell phones, or that are a little shady, like many time-share organizations, will often "sell the paper" (sell the installment contract) to a financing company as soon as they have inked the deal with the consumer. Then if the consumer has any complaints, the lender shrugs its shoulders and says, in effect, "your problem is with THEM, but you owe ME the money. Alternatively, the company that ripped you off may have gone out of business, but your debt to the financing company supposedly lives on. I believe this particular game still gets played quite a bit, but the Federal Trade Commission has gone a long way toward correcting it. If you are being harassed or sued for a debt you got under questionable circumstances, you need to know about the "FTC Rule" of assignee liability.

Simply stated, the FTC Rule of assignee liability (formally known as the FTC Rule on Preservation of Claims and Defenses, 16 CFR 433) is this: a consumer keeps all the defenses against any "assignee" of an installment contract that he had against the original seller, and language to that effect must be written into any installment contract for consumers. You can use that language with deadly effect if the sues you to collect. In that situation, you will have a counterclaim against the debt collector for whatever fraud you believe occurred at the time of the sale, and whereas you will be able to testify to most if not all of what you need to prove in your fraud claim, the debt collector will have to try to find witnesses to defend itself.

As I have often pointed out, a good offense is a great defense against the debt collectors, and they would usually rather settle up with you, wipe out the debt, and walk away in search of someone else to sue.

What frequently happens in the time-share and used car business (among others), though, is that the seller never actually enters into a financing agreement with the buyer at all. Instead, the buyer is "referred" to a lender who has already agreed with the seller to provide the financing. This is known as a "purchase money loan." In many cases the consumer is not even aware this has happened: the sales process is seamless, and the contract is only sent over to the financing company afterward for "approval." Or not at all. On paper, there is no installment sale, but instead there is a direct loan, usually secured by the item sold, from the bank or finance company. This is supposed to look like a cash deal from the point of view of the sales transaction, with the consumer taking out a loan from a third party in order to pay the seller cash.

It is inherently deceptive.

The FTC Rule on Preservation of Claims and Defenses has a second notice requirement in addition to the notice required in installment sales contracts. This notice is required when there is a referral, affiliation or business arrangement between the seller and the lender. This notice subjects the lender to claims and defenses available against the seller, again as a matter of contractual agreement.

Whereas installment sales agreements entered into with sellers typically do have the required FTC holder liability language-though the companies involved may seek to downplay it, purchase money loans entered into directly with finance companies and banks often do not have the required notice.

There are some legal complications arising out of this fact, and if you are being sued under these circumstances, this would likely be a good one for seeking an attorney's help.This is so both because the case is a little more complicated and because there may well be valuable rights to damages and attorneys' fees attached to this sort of behavior.

Even if you cannot find an attorney who takes these kinds of cases, you can make the arguments yourself, both as a defense and a counterclaim. Most state consumer rights statutes make the lender's failure to put the claims and defenses language in the loan agreement illegal because they confusing and misleading, or because it is omitting to mention a "material" fact.

Most states impose a duty on the lender not to mislead the consumer. If there is a referral or other business arrangement between the seller and the lender, the lender is misleading the consumer if the consumer is not notified of the required FTC language. A consumer's defenses and counterclaims could then include, in addition to the deception or fraud, a claim for conspiracy to commit the deception, among other things.

Again, from the point of view of a consumer trying to fight off a collection case, a good offense is an excellent defense. I would reiterate, however, that if your situation is similar to the one discussed here, you should at least seek help from a consumer lawyer knowing that there is a good chance the debt collector will eventually have to pay all the attorney's fees if you hire one.

If you are being harassed or sued for debt, you can get a lot of help, much of it free, from my website at: http://yourlegallegup.com.
Or please take a look at a brief video presentation: http://www.youtube.com/watch?v=zT60kiHn8G8

Kenneth H. Gibert.

I Received a J.D. from Washington University Law School in 1989 and practiced law in St. Louis city and county (federal, state and local courts) for almost fifteen years, the last several of which were focused almost exclusively on debt litigation. My mission is to protect ordinary people from being taken advantage of by the debt collectors. Sign up for a free report and more help for people struggling with debt.