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Articles by the Author – This Month ~ Debt Ownership – The Legal Loophole Exposed
Agency law and the assignment of debt. Debt selling. Yes it does happen in our country. Perhaps more often than we would like to think.
So what’s wrong with the law? And what’s the legal loophole around debt assignment?
When you borrow money from a bank (we will use a bank in this example) you enter into a contractural relationship with them. You most probably would have signed terms and conditions that contain a privacy waiver meaning the bank can pass over your details of outstanding debt that you owe them to a debt collector when you don’t pay. Nothing wrong with that.
The problem is how the debt gets assigned to the debt collection agent and the laws that govern the contractual relationship when a third party becomes involved. Sometimes a debt collector will be just collecting debt on behalf of a bank. You are still legally indebted to the bank. The bank can sue you in court for the money and you can sue the bank. Nothing wrong with that.
The issue is when a bank actually sells or assigns the debt to another party. This is where their legal rights to the money you owe them get passed to the collector. The collector then has legal right to sue you for the debt. The collector would have purchased the debt for what is known as “pennies on the dollar” which means they might have paid a very small percentage of the outstanding amount, then they collect the full amount from the debtor and the difference is their profit. Nothing wrong with that? Or is there?
My readings of the laws around the assignment of debt (courtesy of the University law library) say that debt can be legally assigned without the debtor needing to know who now owns the debt that is due. In law, there is the doctrine of the “undiclosed principle” and also the “disclosed principle” meaning the original owner may or may not be known to the other party. In the case of the undisclosed principle, if that is the debt collection agent (meaning the debtor does not know that the agent actually owns the debt because the bank sold it to them) the collector cannot in law take a greater benefit of the original contract.
The legal loophole is the debtor has no right in law to know or enquire who ownes the debt which then makes the contractural relationship no longer transparent. This opens the door for the collection agent (who has purchased the rights to the debt) to obtain a better benefit than the original contract by way of charging extra costs to inflate a debt that the debtor may not have legally been obliged to pay. Assignment of debt means also that when a bank sells the debt (the benefit of the contract) it may still retain the right to sue the debtor. Which keeps the Privity of the contract – meaning the contractural relationship remains intact. Least the bank should find itself with a claim against it by the debtor for breaking the original contract by selling the debt to another party. So on court documents the Plaintiff could be the bank or the debt collector.
What about the Property Law Act 2007 part 2 subpart 5 Section 51 – Assignment of Things in Action – that states that a debtor can apply to the court for an order to determine the right of any entitlement when a claim is made against them by a party? Certainly you would have to apply to the courts. No creditor will give that information to you just because you ask them to. Tyree’s Banking Law book which is authored by several New Zealand law experts does not even comment on those sections under Deeds of Assignment of debt.
In contract law there seems to be differences of opinion about what legal rights a debtor actually has to pay back oustanding debt to a debt collector if the debt has been sold – the issue being when the debtor has not acknowledged the debt or entered into any payment arrangement with the debt collector who has purchased the rights to the debt. Ever wondered why a collector goes to the “ends of the earth” to get you to agree to the debt over the phone. Your agreement creates a new contract with the debt collector, you make arrangments to pay them back, and the bank (original creditor) drops out of deal and you now have a new legally binding contract with the collector, which if you don’t pay they can take you to court.
My case with a bank is very interesting in that there is a statement of claim against one of my companies. The Plaintiff is the bank and the lawyer who is listed as being the solicitor for the Plaintiff Bank is actually acting for the debt collector. Maybe this is all perfectly legal but I have to wonder when the address for service while appears to be the lawyers address and phone numbers, actually belongs to the debt collector. This may be a deliberate effort to hide the true owner of the debt. In my case material facts have been altered and omitted so it becomes difficult, if not impossible to know whether the claim against my company is legally valid. This disadvantage to the debtor is made possible by our current agency and debt assignment laws, or lack thereof.
Another issue, and probably untested in court are the rights and obligations that cannot be passed from the bank to a debt collector if they sell a debt. Debt collectors in NZ are not licenced and do not operate under the same laws as banks, so what could possibly be illegal under a contract with a bank in terms of debt, becomes null and void once debt is assigned to another party.
In my debt case the loan contract I signed with the bank for earthquake relief money has been omitted entirely from the statement of claim and as such no mention of the interest removal awarded in my favour by the banking ombudsman, anywhere to be seen. I wonder if it means the loan contract was null and void in the first place.
It pays to read the contract and don’t confirm or agree to anything if you don’t know who owns the rights to debt against you. The burden of proof is for the person bringing the claim against you to prove it. Let them prove it with their evidence. You have the right to defend the claim. Make sure you keep a copy of anything you sign. Keep all evidence including phone calls, letters, emails and contact. Don’t be surprised if vital “evidence” magically disappears so the creditors and the debt collectors can squeeze more money out of you that they were not originally legally entitled to.
What might surprise you, and it certainly surprised me is that the methods used to collect debt in this country are fairly standard within the industry. Time for some serious law changes.