Maximizing the Use of Interest by Richard S. Loudermilk, Esq. Charging interest to a debtor can be a powerful addition to your collection arsenal, and the debtor probably will not expect it. If your debtor has yet to receive an invoice that spells out the itemized interest, seeing that interest in print can have a substantial impact. At the very least, the debtor most likely will be surprised to see that the creditor, collection agency, or attorney has taken the time to calculate the interest-and hopefully your debtor will be unpleasantly surprised at how much interest has accrued. The creditor even may be willing to waive the interest, which in turn can give a collector or attorney a good place from which to start negotiating. A detailed review of state interest and usury laws is, unfortunately, outside the scope of this article. This article is not meant as legal advice, but rather it is my hope that the following points will provide an overview of some of the issues that a creditor, a collection agency, or an attorney may face in dealing with interest. Rates vary, depending on state law and the type of transaction The first stop should be the contract or credit application, if there is one, because the document may allow for a higher rate than a state's statutory rate (which essentially is the "default" or fallback rate). In Florida, for example, the state's chief financial officer sets the rate each calendar year; this is the rate of interest for all judgments entered that year, and it also acts as the default rate if a contract does not specify an interest rate. Based on my informal survey, some states tie interest rates to the prime rate, and your state may even vary the interest rate depending on whether the account is retail or commercial. In addition, the amount of the debt can affect the interest rate. For example, Florida's maximum interest rate of 18 percent increases to 25 percent if the debt is more than $500,000.00. Usury concerns, and other disadvantages to charging interest Making sure that the interest charged does not violate state usury laws is probably the biggest interest hurdle a creditor will face. Generally, usury means charging or accepting more interest than the law allows. Charging interest on interest is another potential pitfall, and so a creditor must take care to charge only simple interest (unless allowed to do otherwise). Penalties for violating usury laws can be severe: in Florida, a creditor may be forced to refund double the interest collected, can forfeit the right to collect any future interest, and may have to pay the debtor's attorney's fees. If a debtor owes for more than one transaction, shipment, or invoice, then calculating the interest can be challenging-and potentially time-consuming-because each transaction will carry interest with a different start date. The provisions of the federal Fair Debt Collection Practices Act ("FDCPA") must be kept in mind when charging interest on a consumer debt. For example, if a collector or attorney charges more interest than the applicable state law allows, the same is a violation of the FDCPA. In addition, case law interpreting the FDCPA has confirmed that if interest is charged, the collector or attorney should specify the exact amount of interest (as opposed to demanding a sum "plus interest," for example). For more information, please see Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, and Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000). In conclusion, although care should be taken when imposing interest charges, those charges can have a significant impact on the amount of the debt you are collecting. Richard S. Loudermilk, Esq. Abel Band, Chartered 240 South Pineapple Avenue Sarasota, FL 34236 Telephone: 941-366-6660 Direct: 941-364-2785 Fax: 941-366-3999 Rloudermilk@abelband.com www.abelband.com Abel Band, Chartered was established in 1960 and consists of 37 attorneys supported by a staff of 63. Our principal office is located in Sarasota, along Florida's Gulf Coast. The firm has satellite offices in Tallahassee and Venice, Florida, and in Denver, Colorado. Abel Band attorneys represent clients in many diversified areas of the law including creditors' rights, bankruptcy, project development, construction, administrative law including land use and litigation, telecommunications, energy, public utilities regulation and litigation, residential and commercial real estate, business law, employment law and litigation and dispute resolution, business and civil litigation, probate, tax, and estate planning, community association law and litigation, and commercial finance and lending. Abel Band is dedicated to providing clients with close, personal attention and delivering legal services specific to the needs of each client.