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FTC alleges debt collection via text message

Christine Balderas | Photodisc | Getty Images

Debt collectors have a job to do, but they must play by the rules when they contact you—even if that communication is via text message.

A debt collector based in Glendale, Calif., agreed this past week to pay the federal government $1 million to settle charges that its text messages and other business practices violated federal law. This is the Federal Trade Commission's first case against a debt collection company for allegedly sending illegal texts.

In the complaint filed last month, the FTC said companies owned by Archie Donovan sent texts and made phone calls (in both English and Spanish) that violated the Fair Debt Collection Practices Act. The lawsuit said these communications were illegal because they:

  • Did not disclose that they were from a debt collector as is required
  • Falsely portrayed the companies as law firms by using the names National Attorney, National Attorney Services and Abogados Nacionales
  • Falsely threatened to sue people or garnish their wages for not paying their debt
  • Misrepresented or implied that nonpayment of a debt would result in an arrest or imprisonment

"There is nothing in the Fair Debt Collection Practices Act that forbids the use of text messaging," said Christopher Koegel, an assistant director in the division of financial practices. "But the protections of the law apply regardless of the mode of communication used."

(Read more: Privacy doesn't trump financial abuse of elderly)

Barry Cutler, the attorney who represented Archie Donovan in this case, told CNBC his client did not intend to violate the law.

"This is very complicated stuff, and with a text you have to say a lot in a few words," Cutler said. "But they are in complete compliance now."

Other problems cited in the lawsuit

The FTC also charged Donovan and his companies with illegally revealing debts to people's friends, co-workers and family members, often through letters.

"They tried to shame consumers through embarrassment into paying the debt," Koegel said.

(Read more: How to complain about your bank)

Federal law does not allow a debt collector to publicly disclose a person's private debts because it could cost them their job or ruin their reputation.

One of the allegedly unlawful tactics used: envelopes with a cartoon picture on the front of the envelope that showed a large arm shaking money from someone who is being held upside down.

"This is something specifically prohibited by the law and resulted in a lot of shame and embarrassment to consumers," Koegel told me.

Mailing envelopes can only have the name and address of the company and cannot indicate that a debt may be owed.

(Read more: Student debt relief businesses draw scrutiny)

Using the picture was "foolish and bad judgment," Cutler said. But he insisted Donovan did not know this would violate the law.

As part of the settlement, Donovan agreed that his companies will not communicate with people via text without their express consent. They are also prohibited from falsely claiming to be a law firm or to falsely threaten a lawsuit or other legal action they do not intend to take.

More Information:

—By CNBC contributor Herb Weisbaum. Follow him on Facebook and Twitter @TheConsumerman or visit The ConsumerMan website.

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