How credit card debts are bought and sold
By Jeremy M. Simon | Published: August 31, 2006
See more recent story on debt collection problems: "Consumer credit woes mean boom in debt collection."
In 2005, businesses that specialize in debt for collection purchased $66 billion in delinquent credit card accounts. That amount represented a golden opportunity for debt collectors, but something entirely different for an estimated 8 million credit card users -- who were targeted for repeated phone calls, dunning letters, lawsuits, wage garnishment, property seizure and sometimes even arrest as a result of their credit card debt.
Debt collectors pay just pennies on the dollar for the right to compel credit card holders to pay up. Debt buyers (many of whom also collect debt) work using different methods. The largest debt buyers purchase vast portfolios of credit card debt written off the books by major credit card companies. Then they divide the debt into smaller blocks for resale. Companies that buy this credit card debt first attempt to collect the money, then re-sell uncollected amounts to others further down the collection food chain.
As credit card debt is sold and re-sold, companies that acquire the right to collect it frequently know little about the debtor, just the name, last known address, card issuer and account number, and amount due. That limited amount of information can result in problems for all involved parties. Unfortunately, many large banks selling off debt have a "buy-it-as-is" attitude, supplying only minimal data when they sell accounts, and charging debt buyers sizable fees if they return for additional documentation. Due to the scant data, outdated addresses can result in consumers receiving no notice that they have been sued. And, increasingly, the wrong individual is targeted by the debt collectors.
Meanwhile, collectors encounter problems as well. Often, they have little evidence to support their claim on a past-due debt amount.
While federal banking regulators have set no rules regarding how much data the banks should provide when they sell a customer's debt, some states are taking action. For example, Maine, West Virginia and Minnesota are developing reputations for aggressively regulating debt collection agencies that mistreat customers. Separately, judges in several states, including New Jersey, Maryland and Michigan, consider the imbalance between debt collectors and debtors so troubling that they are seeking change.
Three justices of the Southfield District Court on suburban Detroit, Mich., are attempting to update court rules to prevent what they describe as "predatory" practices, especially for defendants unfamiliar with the court system and unable to afford an attorney. The judges wrote:
- The sale and resale of uncollected debts frequently results in cases involving outdated addresses, so debtors receive no warning when they have been sued.
- Suits are erroneously filed against the wrong consumers, or against people who have already repaid a debt.
- Debt collectors often lack evidence of the original debts that they are claiming.
- Debt collectors frequently misrepresent the amount owed by adding gratuitous interest charges.
Even credit card holders who pay off their debts have no guarantee the matter is finished. In numerous states, debt collectors who win court judgments are required to inform the court when a judgment is paid. However, many do not. That leaves consumers powerless to remove negative items from their credit reports when they go to buy a car or refinance a home. As a result, those consumers may have to take on a higher interest rate, and with them larger payments and an increased chance of slipping back into financial difficulty.
Yet regulators, policymakers, and legislators who could intervene to right the balance between collectors and consumers are either unaware of the debt collection problems, and the tens of millions on Americans caught up in them, or are simply unwilling to act. The Federal Trade Commission, responsible for enforcing a federal law that regulates the behavior of debt collectors, has done little despite a surge in consumer dissatisfaction. From 1998 to 2005, the number of consumer complaints regarding debt collectors surged tenfold to 66,627 from 6,678. But in the last six years, the FTC has taken enforcement action against only 10 corporations.
It should be noted that creditors have the legal right to collect what is due. And, consumers usually owe what collectors are after, though they are known to frequently dispute the steep fees and interest that have been tacked on. Often, consumers get into debt by spending beyond their means, whether due to carelessness, unfounded optimism about how much debt they could carry, or extreme need. But most often, debt become unbearable following an unanticipated life obstacle, such as a family member's death, a divorce, illness, or job loss. That is why it is important for credit card users to keep up-to-date with their monthly payments in good times and avoiding unnecessary spending on their credit cards.
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