The Washington Post recently ran a terrific article on a debt collection practice called “debt tagging,” whereby debt collection agencies try to collect debts from consumers who may have the same name as someone who owes money, but who do not owe the money. Debt collection agencies often go several steps further, by tarnishing the credit reports of consumers who do not owe the debt in question. The Post mentions the $1 million Federal Trade Commission settlement with Credit Bureau Collection Services (CBCS) for debt tagging.
At the root of the problem is the debt buying industry, which purchases blocks of debt but which often gets little information about the consumer who owes money. So, for example, you might have been assigned a phone number that was once owned by someone who owed money, or you may have moved into an apartment once rented by someone with an outstanding debt. As a result, you may get collection calls or collection notices that simply don’t belong to you. All too often, the debt buyer hounds the consumer into paying, or dings his or her credit report.
The takeaway? First, demand validation of the debt. Second, check your credit report and dispute any debt that is not yours. Third, contact a fair debt attorney to assert your rights under the Fair Debt Collection Practices Act and the Fair Credit Reporting Act.
The Federal Trade Commission has amended the Telemarketing Sales Rule that prevents for-profit companies that sell debt relief services over the phone from collecting fees before settling or reducing a consumer’s debt. The rule, which takes effect October 27, 2010, will hopefully prevent companies from making false promises and collecting up-front fees.
Other amendments to the Telemarketing Sales Rule take effect September 27, 2010, including those that require debt relief companies to make certain disclosures to consumers, that prevent them from making misrepresentations, and that extend the rule to consumers who call debt relief companies in response to advertising.
We’ve previously discussed the growing trend of debt collection agencies using the taxpayer-funded justice system as a powerful – and profitable – way to get judgments against consumers. Many times, consumers aren’t aware of the lawsuits, or don’t know how to mount a defense, and can find that old debts come back to haunt them. We’ve also discussed the way that debt collection agencies are manipulating the Minnesota court system so it acts like an ATM.
The Minneapolis Star-Tribune published “Hounded,” awhile back, which was a series of investigative articles about debt collection in Minnesota. As a result, U.S. Senator Al Franken asked the Federal Trade Commission to investigate the practices of debt buyers in Minnesota. One article in particular point to the low threshold that debt collectors have to meet in order to collect on debt that would be deemed uncollectible in many other states. According to the article, debt buyers often “base their claims on data up to 15 years old that can be impossible to verify.” Unfortunately, the Minnesota court system “rubber-stamps most debt claims without scrutinizing them for accuracy. Proof is needed only if a debtor disputes a claim in writing, which happens in less than 10 percent of cases.”
The article goes on to paint a fascinating portrait of the history of debt buying, which has its roots in the savings and loan scandals of the 1980s. When S&Ls failed, the feds auctioned off $500 billion of unpaid loans, giving birth to the debt buying industry. Eventually, debt buyers moved onto consumer debt, and then were fueled by changes to bankruptcy laws in 2005.
According to the article, “The nation’s five publicly traded debt buyers last year paid $835 million to acquire $20 billion in old debt.” For every publicly traded debt buyer, though, there are dozens of private companies that also buy debt. In other words, it’s a huge business that is bent on preying on consumer ignorance.
The Minneapolis Star Tribune recently compiled a list of the most litigious debt buyers, who raked in over $223 million in court judgments against Minnesotans from 2005 to 2009. The top ten were: Midland Funding, Dakota Bluff Financial, LVNV Funding, Asset Acceptance, Arrow Financial Services, North Star Capital, Unifund CCR, Palisades Collections, Portfolio Recovery Associates, and Credit Acceptance Corp.
We’ve often noted that taking consumers to court is a favorite tactic of debt buyers. They purchase debt for pennies on the dollar, file lawsuits against unwitting consumers, and then obtain judgments. Consumers often don’t know that they’re being sued, don’t know how to properly defend themselves, or don’t think that it matters since they don’t have any assets. The thing is, once you have a judgment against you, a debt collection agency can pop up at some point in the future and garnish your wages. It’s important to stay alert and to defend yourself if you’re sued by a debt collection agency.
Portfolio Recovery Associates has been making news. At the end of July, the publicly traded debt collection agency (PRAA) announced its second quarter results, boasting a profit of $19.5 million, or a 67% increase over the same period last year. Portfolio Recovery collected a mind-boggling $128 million in the second quarter, but dig a little deeper, and it becomes clear that the debt collector is following (or leading) an industry trend. Portfolio Recovery’s call center collections increased only 9%, while their internal legal collections grew 167%. In other words, they’re taking consumers to court and getting judgments against them. In the debt collection agency’s operating highlights, it noted, “Internal legal collections…represent an important, emerging collections channel the Company has been developing over the past 4 years.” All too often, unfortunately, consumers aren’t aware they’re being sued by a debt collection agency, and don’t show up to defend themselves, resulting in default judgments. The New York Times and others have noted that debt collection agencies are increasingly using the taxpayer-funded legal system as a debt collection tactic.
In other news, Portfolio Recovery Associates recently hired a slew of attorneys for its Office of General Counsel. The attorneys include those working in corporate counsel, finance and risk management counsel, compliance counsel, disputes, and litigation.
The Federal Trade Commission, the agency charged with overseeing the Fair Debt Collection Practices Act, last month released a much-anticipated report entitled, “Repairing a Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration.” According to the FTC’s press release:
The FTC’s 2009 report found that debt collection litigation raised concerns about collectors failing to properly notify consumers of suits they have filed, collectors filing suits based on insufficient evidence of indebtedness, courts frequently granting default judgments against consumers who do not appear or defend themselves, collectors seeking to recover on debts beyond the statute of limitations, and banks freezing funds in bank accounts that are exempt from garnishment by law. In its new report, the Commission’s principal recommendations to address these concerns in litigation are:
- States should consider adopting measures to make it more likely that consumers will defend themselves in litigation, decreasing the prevalence of default judgments.
- States should require collectors to include more information about the alleged debt in their complaints.
- States should take steps to make it less likely that collectors will sue on debt on which the statute of limitations has run.
- Federal and state laws should be changed to prevent the freezing of a specified amount in a bank account including funds exempt from garnishment.
The FTC’s new report also addresses concerns about requiring consumers to resolve debt collection disputes through binding arbitration without meaningful choice, bias or the appearance of bias in arbitration proceedings, and procedural unfairness in arbitration proceedings. In its new report, the Commission’s principal recommendations regarding debt collection arbitration are:
- Consumers should have a meaningful choice about arbitrating debt collection disputes.
- Arbitration forums and arbitrators should eliminate bias and the appearance of bias.
- Arbitration forums should conduct proceedings in a manner that makes it more likely that consumers will participate.
- Arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated.
- Arbitration forums should make their process and results more transparent.
If you’re not familiar with the term “out-of-statute debt,” you’re not alone. Yet, as Andrew Martin reports in the New York Times, there’s a burgeoning business surrounding the purchase and collection of debt that’s legally uncollectible. These debts are so old that the statue of limitations has run out, and the debt owner doesn’t have the right to take a consumer to court over the debt.
But that doesn’t stop old debt buyers from trying to collect on the debt, and to use increasingly abusive tactics to do so. To those debt buyers, it’s all a numbers game. If they buy $1 million of debt for $10,000 or less (the going rates is one cent or less on the dollar), all they have to do is harass a few consumers into making a tiny payment on the old debt. When that happens, the clock is reset, and the debt becomes current in the eyes of the law. Once the debt becomes current, the debt buyer can take the consumer to court to collect on the full amount of the debt.
What does that mean for you? Before sending a dime to a debt collection agency, make sure that the debt is yours to pay, and make sure that it’s collectible under your state’s law. The statute of limitations on debt collection varies from state to state, ranging from three to ten years.
Sergei Lemberg
