This week, we’ve been discussing the Federal Trade Commission (FTC) report, “The Structure and Practices of the Debt Buying Industry.” (A copy of the report can be downloaded from http://www.ftc.gov/os/2013/01/debtbuyingreport.pdf.) The last aspect of our in-depth look at the study pertains to old debts.
The issue with old debts is the statute of limitations. Most states have a statute of limitations, after which debt collectors can’t take a consumer to court. However, different states have different statutes of limitations, typically ranging from three to six years. In addition, some debt collectors try and game the system. In some instances, they sue the consumer in court and obtain summary judgments when the consumer doesn’t defend himself or herself. Indeed, the FTC study found that at least 90% of consumers don’t appear in court to argue for dismissal based on the statute of limitations. There is typically no requirement that the debt collector prove that the debt is current. In other instances, debt collectors trick the consumer into either admitting that the debt is his or hers to pay, or into making a small payment toward the debt. Either of these can “reset the clock” and make the debt current again. This means that the debt collector can then continue with collection activities.
The FTC study acknowledges the deception involved when debt collectors sue or threaten to sue over time-barred debt (another term for debt that’s past the statute of limitations). The agency also says that, as debts age and are resold from one debt buyer to another, the data about the debts can become less accurate. This can result in a debt collector going after the wrong consumer or trying to collect the wrong amount.
Keeping in mind that the statute of limitations typically ranges from three to six years, the following FTC data about the age of debts when sold is illustrative:
“(1) 68.2% of the debt that debt buyers in the study purchased was less than three years old at the time it was acquired; (2) 19.3% of the debt was between three and six years old; (3) 11.3% of the debt was between six and fifteen years old; and (4) 0.8% of debt was over fifteen years old at the time of acquisition.”
While it appears that two-thirds of the debt purchased is generally within the statute of limitations (less than three years old), the FTC notes that the statistics don’t tell the whole story. The rest of the story is that the study only examined the largest debt buyers, who often buy from original creditors; that debt buyers resell debt, which increases the age of the debt; and age is defined as the moment the debt is purchased, not the time when it is collected.
According to the FTC, the age of debts skews upwards when one debt buyer sells debt to another debt buyer: “(1) 37.9% of the debt purchased from resellers was less than three years old; (2) 32.1% was between three and six years old; (3) 27.5% was between six and fifteen years old; and (4) 2.6% was over fifteen years old.”
Keep in mind that it is a violation of the Fair Debt Collection Practices Act for debt collectors to threaten to sue in order to collect time-barred debt. The FTC study notes that, although the debt collection industry says that it’s hard to know whether or not a debt is time-barred, the data say otherwise. The report says:
“(D)ebt buyers usually are likely to know or be able to determine whether the debts on which they are collecting are beyond the statute of limitations…. (T)he information debt buyers receive as part of the process of bidding on debts and the information they receive when purchasing debts usually indicates the date of last payment or the charge-off dates for debts. In most circumstances, this information should allow debt buyers to readily determine if debt is time-barred. Moreover, to the extent that there are questions about the date of last payment or charge-off information, it is unclear why debt buyers cannot seek this information from the original creditor or from a reseller of debt.”
While the FTC could have gone further in studying some aspects of the debt buying industry, the agency did an outstanding job in pulling back the curtain on what is generally a mysterious process.