Distressed Maryland debt
Certain states impose a heightened burden on debt collectors in order to regulate the collection of delinquent debt. In Maryland, investors in bad debt need to obtain a license to collect this debt; failure to do so may lead to violations of both federal and state consumer protection laws.
The Maryland law allows for very few exceptions. There is no carveout for debts that are actually bought (and therefore not being collected by a paying client); the Maryland licensing act specifically includes investors of delinquent debt, even when being collected for their own benefit. As long as a debt is in default when purchased, that investor cannot collect that debt without first obtaining a Maryland license. The Consumer Protection Commissioner can impose hefty fines on investors who do not jump through this critical hoop.
Although there is no direct right by consumers to enforce the licensing act, courts have made life particularly difficult for unlicensed investors who run afoul of the licensing requirement. Under the federal consumer protection act, any violation can be actionable, including a violation of state collection regulations. Under the Maryland consumer protection statute, a violation of the licensing act can lead to a lawsuit if the violation is done “knowingly”. Courts have ruled that since the collector is presumed to know that it needs to be licensed (ignorance is no defense), any unlicensed collection efforts are done “knowingly” and therefore borrowers almost automatically overcome that otherwise difficult burden of proof.
What damages are available to borrowers is not fully settled under the law. Many courts rule that borrowers cannot recover the amount they repaid on the debt, because that amount is actually due and owing (the distinction is a fine one: the debt is valid, but until the owner of the debt is licensed, it cannot be collected). However, because the consumer protection statutes focus on misrepresentations (i.e., a collector who is unlicensed misrepresents that it has the ability to collect a debt when in fact it does not), borrowers who sue under these regulations can collect damages for emotional distress, even without proving that they suffered an accompanying physical injurty (a requirement in negligence cases).
The failure to become licensed as a debt collector in states like Maryland can lead to expensive and time consuming litigation that can completely defeat any profit built into even the best debt purchase, and should be a significant item on the due diligence checklist of any investor interested in purchasing delinquent debts.