7th Circuit Says Debt Collector can Charge Percentage-Based Fees

Illinois residents and any debtors in states governed by the 7th Circuit Court of Appeals should know about a recent case concerning debt collection companies and their right to charge fees to debtors. According to a recent report in Reuters, the 7th Circuit Court of Appeals just held that the debt collector National Recovery Agency “did not violate federal collection law by charging consumers fees based on the percentage of the debt collected.”

The 7th Circuit Court of Appeals covers Illinois, Indiana, and Wisconsin. Federal decisions in the Court are binding in those states, and the decisions can be persuasive in other jurisdictions. In other words, Oak Park residents will need to pay close attention to the recent case because the outcome could be applicable to them.

Getting the Facts of Bernal v. NRA Group, LLC
The recent 7th Circuit case is Bernal v. NRA Group, LLC (2019). As the Court explained the case, the primary issue it had to decide in this case was “whether a debt collector’s fee count as a collection cost.” It determined that a debt collector can recover “any cost it incurs in collecting past-due payments, and that includes a standard collection fee” that can be a percentage-based fee. In short, debt collectors are allowed to collect percentage-based fees from debtors in addition to the debt owed. We want to provide you with more details concerning the facts of this case to explain how the Court reached its decision.

In this case, the debtor purchased an amusement park pass and agreed to a contract that indicated, if he did not make timely payments, he would “be billed for any amounts that are due and owing plus any costs” incurred by the creditor “in attempting to collect amounts due.” The debtor failed to make “several monthly payments,” and the creditor (the amusement park) hired a debt collection company to recover the debt owed. When the creditor hired the debt collector, it entered into a contract that said the debt collector could charge the creditor “a 5%management fee plus an additional amount based on the number of days that the debt was delinquent,” or an additional 20%.

The debt collector contacted the debtor, seeking the debt owed along with additional costs that totaled less than the 25% that the debt collector was permitted to collect according to the contract. The debtor filed a claim under the Fair Debt Collection Practices Act (FDCPA) and alleged that the debt collection fee was “not expressly authorized by the agreement creating the debt.” The claim was a class-action lawsuit.

Is a Collection Fee a “Cost” Under the Language of the Contract?
The debtor argued that the percentage-based fee was not a “cost . . . incurred in attempting to collect amounts due” according to the language of the contract. The debt collector argued the opposite—that the percentage-based fee was in fact a “cost” under the language of the contract.

The Court had to decide two related issues:

  • Is a percentage-based fee a “cost”; and
  • If it is a “cost,” is it a cost “incurred . . . in attempting to collect” based on the language of the contract.

The Court reasoned that the term “cost” includes both actual costs in addition to fees, given that the language of “cost” is broad. It concluded that “a percentage-based collection fee is a ‘cost.’” Next, the Court concluded that a percentage-based fee—even though it is not an amount that existed prior to the billing by the debt collector—can be construed as a cost “incurred . . . in attempting to collect.” It reasoned that, when one looks at the language of the contract as a whole, “the word ‘incurred’ lacks a specific temporal restriction.”

Accordingly, the Court permitted the debt collector to charge the percentage-based fee.

Contact a Consumer Protection Lawyer in Oak Park

If you have questions about your rights as a debtor under the FDCPA, an Oak Park consumer protection attorney can help. Contact the Emerson Law Firm today.


See Related Blog Posts:

Bankruptcy Program Designed to Help Student Loan Debtors

Creditor Objections to a Chapter 7 Bankruptcy Discharge

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