The U.S. Court of Appeals for the Second Circuit has ruled that the Fair Debt Collection Practices Act (FDCPA) does not require a debt collector to disclose the possible tax consequences of a debtor’s acceptance of a settlement offered by the collector.

In Altman v. J.C. Christensen & Associates, Inc., the debt collector sent a letter to the debtor offering three settlement options. One of the options was a lump-sum payment which the letter stated would be “a savings of 48 percent on [the debtor’s] outstanding account balance” and another option was for the debtor to make three payments which the letter stated would be “a savings of $2,123.85 on [the debtor’s] outstanding account balance.”

The debtor filed a putative class action complaint in which he alleged that the letter violated the FDCPA’s prohibition against using “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” The debtor alleged that the letter’s statements about the amount of the savings resulting from the two options were deceptive because any savings could be less than the specified amounts after taxes were taken into account. The debtor claimed that the debt collector therefore violated the FDCPA by failing to advise him in the letter of the possible tax consequences of accepting the offer.

Observing that the debt collector’s letter clearly stated that debtor’s savings were “on [his] outstanding account balance,” the Second Circuit found that “the fact that a debtor may then have to pay tax on the amount saved is simply not deceptive in the context of what the savings are on the debtor’s ‘outstanding account balance.’” Affirming the district court’s dismissal of the debtor’s complaint, the Second Circuit concluded that because the debtor’s reading of the letter was “objectively unreasonable under the least sophisticated consumer standard,” it could not form the basis for an FDCPA claim.

The debtor had attempted to rely on a 2010 decision of the U.S. District Court for the Northern District of New York in which the court refused to dismiss a complaint alleging that a debt collection letter that offered to discount or forgive a specified amount or percentage of the debt violated the FDCPA by failing to notify the debtor of the possible tax consequences. The Second Circuit appears to have found that decision to be “unpersuasive” because, unlike the collection letter at issue in Altman, the letter did not make clear that the specified discount or amount forgiven was based only on the debtor’s account balance.

Attorneys in Ballard Spahr’s Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. To assist clients in responding proactively to the documentation-related challenges being faced by the debt collection industry and creditors attempting to collect their own debts, the Group has formed a Collection Documentation Task Force. Attorneys in the Group also prepare clients for Consumer Financial Protection Bureau examinations. The Firm’s Tax Group frequently advises creditors on the Internal Revenue Service reporting requirements for debt discharges.

For more information, please contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or, or our Tax Group Practice Leader Wayne R. Strasbaugh at 215.864.8328 or, John L. Culhane, Jr., at 215.864.8535 or, Collection Documentation Task Force Chair Christopher J. Willis at 678.420.9436 or

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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