July 2015

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 By Attorney David A. Ambrosh

      The Fair Debt Collection Practices Act (FDCPA) is limited in its application to consumer debts; i.e. debts that arose out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes.”[1]

To determine whether a debt is a "consumer debt" for purposes of consumer protection laws, courts focus on the nature of the debt that was incurred, and not the purpose for which the account was opened.[2]  In identifying the "nature" of the debt, the relevant inquiry is the debtor's "use" of the loaned funds.[3]  Whether a debt is a consumer debt under the FDCPA is determined by the use of loan proceeds by the borrower and not by the motive or intent of the lender.[4] 

A debt incurred through personal use of a company card can be a consumer debt for FDCPA purposes.[5]  Conversely, it stands to reason that a personal credit card could be used such that the primary purpose of the purchases made with the card was business.[6]  The Act characterizes debts in terms of end uses.  In determining whether a debt is primarily for personal, family or household purpose, it is the funds’ actual use that is paramount.[7]

In some cases the nature of the debt may be easily identifiable.  For example, if the owner of a construction business takes out a loan in his name but the uses loan proceeds exclusively to acquire construction equipment, the loan is a business loan to which the FDCPA would not apply.  In some cases, however, the nature of the debt may not be so easily identifiable.  Take, for example, a scenario where an individual uses a personal credit card to invest in stocks.  In that case, courts have looked to other federal laws for guidance.  For example, courts analyzing the issue under the Truth-In-Lending Act (TILA) have concluded that when the credit transaction involves a profit motive, it is outside the definition of "consumer" credit transaction for the purposes of the Act.[8]  In the bankruptcy context, "[d]ebts that have a profit-motive are more properly classified as business in nature."[9]  Courts have specifically held that debts incurred for investment purposes are “business” debts rather than “consumer” debts because investments are, as a basic premise, made with the end goal of achieving a return, or profit, on an initial investment.[10] 

Debt collectors should remember that being a “consumer debt” is a prerequisite to bringing an action under the FDCPA.  The debtor has the burden of establishing that a debt is a consumer debt.[11]  If the debt is not a consumer debt, then consumer protection laws such as the FDCPA do not apply.

[1] 15 U.S.C. § 1692(a)(5)(emphasis added); see also Wis. Stat. § 421.301(17).

[2] Vick v. NCO Fin. Sys., Inc., No. 2:09-CV-114-TJW-CE, 2011 U.S. Dist. LEXIS 33348, 2011 WL 1195941, at *5 (E.D. Tex. Mar. 7, 2011), rec. adopted, 2011 U.S. Dist. LEXIS 32906, 2011 WL 1157692 (E.D. Tex. Mar. 28, 2011) (collecting cases). 

[3] See Garcia v. LVNV Funding, No. A-08-CA-514-LY, 2009 U.S. Dist. LEXIS 85967, 2009 WL 3079962, at *3 (W.D. Tex. Sept. 18, 2009)(citing Bloom v. IC Sys., Inc., 753 F. Supp. 314, 317 (D. Or. 1990)).

[4] Id.

[5] Perk v. Worden, 475 F. Supp. 2d 565, 569 (E.D. Va. 2007).

[6] Id.

[7] Bloom v. I.C. Sys., Inc., 972 F.2d 1067, 1068 (9th Cir. 1992).

[8] See Baskin v. G. Fox & Co., 550 F. Supp. 64 (D. Conn. 1982); Adema v. Great Northern Development Co., 374 F. Supp. 318 (D. Ga. 1983); Whiteside v. Douglas County Bank, 146 Ga. App. 888, 247 S.E. 2d 558 (1978). 

[9] In re Mohr, 425 B.R. 457, 461 n.5 (Bankr. S.D. Ohio 2010); see also Swartz v. Strausbaugh (In re Strausbaugh), 376 B.R. 631, 638 (Bankr. S.D. Ohio 2007).

[10] See, e.g., Burns v. Citizens National Bank, 894 F.2d 361 (10th Cir. 1990)(debt incurred for the purpose of investing in the stock market was a "business" and not a "consumer" debt and therefore the debtor's motion for attorney's fees under §523(d) was denied); see also In re Runski (Cypher Chiropractic Center v. Runski), 102 F.3d 744 (4th Cir. 1996).

[11] Boosahda v. Providence Dane LLC, 462 F. App'x 331, 336 (4th Cir. 2012)(affirming grant of summary judgment in favor of defendant where plaintiff failed to establish element of FDCPA claim that credit card debt was consumer debt).


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