Protecting Your Firm from Collection Business Liabilities

If you are part of a law firm with a regional or nationwide collection practice, protecting your firm from potential inherent business liabilities begins with proper registration and licensing. Under the FDCPA, virtually all collection attorneys are considered debt collectors, requiring compliance with state registration and licensing regulations. There is no federal standard controlling who must be licensed, so requirements vary by state. These variations have the potential to cause confusion and accidental non-compliance for even the most conscientious industry practitioner.

While a law firm cannot sue a consumer in a state where it is not licensed to practice, it is often feasible for the firm to collect through traditional means. If they are collecting debts in the regular course of business, many states do not require attorneys to obtain a debt collection license. The definition of “regular course of business” varies from state to state, but usually includes collecting for a client in the firm’s true name or in the name of the client. Further, there is no clear interpretation of these state-by-state definitions. See, for example, Colorado – Op. Att’y Gen. 5 (1994) that describes “regular” as “a handful of times”).

At least a dozen states require attorneys not licensed to practice law in that state to register as a foreign business entity and obtain a collection agency license. Typically, these states provide an exemption for attorneys licensed in their state. For example, Maine requires out-of-state attorneys to become licensed as debt collectors, if they conduct debt collection activity in Maine. 32 Me. Rev. Stat §11002(6).

A few states have regulations so restrictive that out-of-state attorneys are actually excluded from collecting debts owed by consumers residing in their state. North Dakota allows law firms to conduct collection activity in their state if the activity is conducted by a ND-licensed attorney. Non-attorney employees of a law firm cannot participate in the collection activity. 17 Letter from the Comm’r 1 (2005) . Attorneys who want to collect debts in states with regulations like North Dakota must either be licensed to practice in that state or constitute a general collection agency. See also, Illinois – 225 ILCS 425/9(a)(22); and Massachusetts – 06-59 Op. Att’y Gen. (2006))

Finally, attorneys who only collect commercial debts throughout the country may also be subject to state licensing requirements. For example, Idaho requires virtually anyone who collects a commercial debt within their state to obtain a collection license.

The moral of this story is…. Attorneys with an out-of-state collection practice must carefully review the definition of “debt collector” in each state where they attempt to collect debts, and ensure they comply with all registration, licensing and bonding requirements.

By Scott J. Seiler, Partner, SeilerSchindel, PLLC

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