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Debt Collector’s Interest Bid Reined In by Court

(CN) - Because the original creditor waived its right to collect interest and charge off the debt, the 6th Circuit refused to apply the 8 percent usury rate in Kentucky.

The case at hand stems from Dede Stratton's delinquent credit card debt from 2008. When GE Money Bank charged off the $2,630.95 debt as uncollectable, it "stopped charging Stratton interest on her debt," a Friday decision from the 6th Circuit states.

"GE's decision was neither irrational nor altruistic: By charging off the debt and ceasing to charge interest on it, GE could take a bad-debt tax deduction, and could avoid the cost of sending Stratton periodic statements on her account," the ruling continues.

Portfolio Recovery Associates (PRA) bought GE Money's interest in Stratton's charged-off debt for between 4 cents and 14 cents on the dollar.

The 6th Circuit noted that the practice of letting creditors recover some money for bad loans, with an assignee seeking payment on the delinquency, is "increasingly common."

PRA sought a default judgment in Kentucky on the amount of Stratton's debt, plus 8 percent annual interest, the default usury rate under Kentucky law.

Stratton's attorney Ken Henry said in an interview that PRA's complaint "alleged that Ms. Stratton owed 8 percent interest from date of charge off."

PRA "later claimed [that the request for interest] was aspirational," Henry added. "But no, it was an allegation. They were trying to collect interest they were not entitled to."

Though the default 8 percent interest rate is far less than the 21.99 percent interest that Stratton's contract with GE Money provided, Henry represents Stratton in a federal class action that says PRA had no right to statutory interest since GE waived its right to collect interest on the debt.

PRA is "not entitled to any interest until a court awards it," Henry said, adding that its contrary assertion violates the Fair Debt Collection Practices Act (FDCPA).

Though a federal judge in Lexington dismissed Stratton's case, a divided three-judge appellate panel reversed Friday.

"GE gave up the right to collect 8% statutory interest when it had Stratton agreed to a 21.99% contractual rate of interest," GE cannot recover the right it bargained away simply because it later chose to waive the right for which it bargained," Judge Jane Stranch wrote for the majority in Cincinnati.

The court noted that debt collection agencies have started going straight to court to seek a default judgment against a debtor, rather than meaningfully negotiate payment on the debt.

Complaints against PRA across the nation based on the statute of limitations and harassment have led to at least one injunction against the debt collector.

The 6th Circuit found Friday that, as GE's assignee, "PRA cannot be given a right to collect interest - contractual or statutory - that GE waived."

Judge Alice Batchelder slammed her colleagues for a "'gotcha!' maneuver" that "impermissibly expands the scope of the FDCPA."

The ruling allows PRA to ask the court for prejudgment interest, rather than enjoying such interest automatically, she said.

"I confess that this distinction makes no sense to me," Batchelder's dissent states. "Under the majority's reasoning we are either authorized to award prejudgment interest under §360.010, or we are not. If not, we cannot 'exercise our discretion' and award interest anyway."

Henry told Courthouse News he was pleased with the ruling. "We look forward to getting the class certified and moving forward."

Defense counsel was not available for comment.

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