Consumer credit woes mean boom in debt collection
Collection industry changing, debt collectors multiplying
Have you ever been contacted by a debt collector? Chances are growing that you will, especially if you're among the millions of Americans in arrears on credit card debt, facing mortgage foreclosure or defaulting on student or auto loans.
Debt collection activity in recent months has increased sharply across the country, industry analysts and consumer advocates say. The debt collection landscape is changing so fast that many consumers are finding it difficult to navigate. They must know how to respond -- or not respond -- to a debt collector, how best to pay off the debt, strategies for defending themselves in civil suits filed by debt collectors and protecting their banking accounts from being frozen in the event of a court judgment.
The best advice to consumers: Deal with it.
"Don't ignore the situation," says Howard Dvorkin, a nationally recognized consumer advocate and author of "Credit Hell: How to Dig Out of Debt." "Don't stick your head in the sand and hope the storm is going to go away."
Rising debt collection
Debt collectors, consumer advocates and regulators interviewed by CreditCards.com point to a number of factors fueling the debt collection boom.
"The amount of debt being assigned to debt collectors has gone up dramatically. We expect that to continue," says Rozanne Andersen, executive vice president of the 3,500-member ACA International, the largest credit and collection industry trade group.
"You have more people who are in more debt," says Kurt Johnson, who heads a group of state regulators that oversees debt collection investigations and complaints in 20 states. "More and more people are being exposed to debt collectors."
Reasons for the rise in debt collection activity include:
• An economic slowdown that has families and creditors pinched for cash.
• Rising bank charge-offs of delinquent credit card and other loan debts.
• A 2005 bankruptcy law rewrite that made it more difficult for consumers to file for protection from creditors.
• Buying and re-selling of old debt that may be resurrected as "zombie debt."
• A hodgepodge of state and federal laws governing debt collection practices.
• An increase in cases of mistaken identity where innocent consumers are pursued and pressed to pay debts they don't owe.
Stories of abuse
There is no shortage of stories about abusive, threatening or over-the-top debt collectors. Under the Fair Debt Collection Practices Act, the federal law governing debt collector conduct, collectors are banned from harassing consumers, calling their jobs when they know it is not welcome, disclosing the existence of debts to others or repeatedly calling their homes. They also cannot threaten to file lawsuits against consumers unless they actually intend to do so. But consumers often don't know their rights or have a hard time proving abuses have occurred. Many are often too embarrassed about their debts to seek help.
consumer credit advocate
"We've had collectors tell our clients to sell their blood, or even their bodies, borrow from relatives, threaten to take their kids, and a few years back a collector threatened to blow up an older couple's house," according to Tracy Johnson, an education specialist with the nonprofit Consumer Credit Counseling Service of Chattanooga, Tenn.
In January 2008, one debt collection agency -- Rawlins & Rivera Inc. of Florida -- settled a federal lawsuit filed by the U.S. Federal Trade Commission (FTC). Among the alleged abuses: sending misleading collection letters, making abusive telephone calls and falsely threatening to file lawsuits, seize property or garnish wages if consumers didn't pay their debts. The company was hit with a $3.4 million judgment -- the amount the debt collectors received from consumers by using deceptive collection practices.
In another case, settled in November 2007, LTD Financial Services of Texas was ordered to pay nearly $1.4 million in penalties. According to the FTC, the collectors allegedly called consumers at work, told family members, neighbors, employers and co-workers about the existence of debts and harassed consumers with abusive language, racial slurs and profanity to prod them into paying.
Credit counselors also say they've noticed a pattern: aggression and abusive conduct go into overdrive toward the end of the month -- when many agencies have monthly collection quotas they must meet.
There are even reports of debt collectors pressuring consumers to pay off past due credit card or other debts by putting it on their credit cards -- a move frowned upon by credit counselors who say it's throwing good (expensive) money after bad and only compounding a person's financial woes.
The debt collection profession, although unappreciated by the public at large, performs a vital function for businesses, industry observers say. Collecting on bad debts helps retailers, banks and other businesses hold down prices on goods and services sold to the general public. A July 2006 study conducted by ACA, the debt collection trade group, shows that third-party debt collectors returned $39.3 billion of more than $51 billion in outstanding debt in 2005.
executive vice president ACA
Andersen, the ACA spokeswoman, agrees more needs to be done at all levels to help improve relations between consumers and debt collectors. She notes several initiatives under way by her association to clean up the industry's image, add ethical standards and open the lines of communication between debtors and debt collectors.
"We do not agree that there is a problem out there in the industry," Andersen says. "We do agree that there is a problem with a small percentage of collection agencies."
In June 2007, ACA adopted a code of ethics that prohibits, among other things, dishonest, fraudulent or deceitful conduct and bans threats or harassment -- behavior already prohibited under the fair debt collection law.
The group has also launched a consumer complaint system and is encouraging the public to help police its members. Andersen says they expel about 12 members a year from the 3,500-member group for violations. There are an estimated 4,100 collection agencies in the United States. Andersen says her group members control 90 percent of the consumer bad debt market. "Our best way of self-policing is for consumers to help us."
ACA's complaint system is patterned after the Better Business Bureau's consumer dispute resolution model and Andersen says the group is negotiating to have a third-party organization, such as the BBB, handle all debt collection complaints.
She adds: "We're trying to figure out a solution. We don't want it to be a problem. We do believe that the majority of debt collectors do adhere to professional practices and ethical practices."
Selling bad credit card and other loan debt has become big business in the debt collection world. The amount of bad credit card debt sold to collectors has more than doubled since 2000 -- from $27 billion to more than $59 billion in 2006 (see chart). Credit card issuers traditionally handle delinquent credit card accounts less than 60 days past due with in-house collection divisions. The issuers contract with third-party debt collectors to go after more difficult or older collection cases. These collection agencies work on commission and get a percentage of what they collect -- 25 percent to 35 percent, for example -- with the rest going back to the banks to offset bad debt losses.
After 180 days, when federal rules require such open-ended loans to be written off the books as uncollectible, banks sell their bad debt portfolios for perhaps 5 cents on the dollar of the face value of the debt to third-party debt collectors. Creditors may also sell the debt sooner -- at 60, 90 or 120 days -- to cut their losses.
Debt buyers then attempt to track down the consumers responsible for the debt (a process called skip tracing) and contact them to solicit payment. Debts that are still uncollectible may be sold again to a second or even third debt buyer.
As the bad debts move through successive buyers, documentation about the original consumer debt -- sometimes but not always transferred in electronic databases during the sale -- may get harder and harder to obtain. Original creditors may go out of business or be absorbed by other companies in mergers. Years may go by.
Under the federal fair debt collection law, consumers can ask for written verification of debts within 30 days of being contacted by debt collectors. Collection calls and letters must stop until the debt collector provides proof of the debt, but that "proof" is minimal: the name and address of the original creditor.
For older debts, the statute of limitations -- the legal deadline for filing suit against consumers for nonpayment of debts -- may have expired. That time limit varies from state to state, averages about five years and may range from three to 10 years, according to the FTC.
The problem: Debt buyers may resurrect collection efforts on old debts that are beyond the statute of limitations (known as "time-barred" or "out of statute" debt), which may have been paid off or settled by consumers years ago or discharged through bankruptcy proceedings.
Like zombies, ancient debts may rise again to haunt consumers. Legal experts and consumer credit counselors say these debts raise a number of troubling issues that aren't currently addressed by fair debt collection laws.
How should consumers respond when called about debts they don't recognize? If they verbally acknowledge a debt that is time-barred, does that resurrect the debt and start the clock ticking anew on the statute of limitations (known in the industry as re-aging a debt)? If zombie debt can potentially rise at any time, how long should consumers keep documentation about payment of old debts?
"There's all sorts of problems with the older debt," says Lauren Saunders, managing attorney for the National Consumer Law Center. "Nobody should be permitted to collect on a debt unless they have the basic information about the debt. That's the problem with the debt buyer industry."
-- Lauren Saunders
Consumers who make payments on a time-barred debt and subsequently default on the payment plan may unknowingly re-age the debt, Saunders says. "You're better off ignoring a call about an ancient debt," she says. "It's best to send them a letter saying I don't recognize this or please verify it."
Andersen, of the debt collectors' trade group, says the industry is trying to resolve the zombie debt problems. "As a trade association, we are working very, very hard to identify due diligence procedures so that when a debt is sold, the proper documentation for a debt continues to follow that account. A certain amount of minimum information about the debt should be transferred with the debt, including the date of service, the original creditor, the identity of the consumer and information about the original credit arrangements."
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Mary Spector, co-director of a legal aid clinic run by Southern Methodist University's Dedman School of Law, says these older debts are often the basis of civil suits filed against consumers by debt collectors. She says consumers are losing many of the cases because they may ignore court summonses on suits, not show up in court or fail to hire attorneys to represent them in the suits.
"Without a party appearing in court to challenge the sufficiency of the evidence, the creditor wins -- often based on scanty information," says Spector, an associate law professor at SMU. At the SMU Civil Clinic in Dallas (Texas) County, requests for representation to fight off debt collectors have risen dramatically in recent months. The clinic handles more than 1,200 applications for representation a year.
"We've seen more requests for representation over the last six months than in the same period over the last 10 years," Spector says. Chief among the complaints: consumers who are unaware of alleged debts and those fighting court actions over older debts.
"There are more collection suits being filed," Spector notes. "That is probably a result of changes in bankruptcy laws that make it hard for consumers to discharge debts."
In 2005, bankruptcy laws were amended to make it more difficult to file for bankruptcy. Debtors must meet a means test and receive debt management counseling before they can file for protection from creditors. The impact of the changes has meant more consumers are deeper in debt for longer periods, legal observers say.
Laws with more teeth
Debt collection is an industry regulated at both the state and federal level. State consumer protection laws are enforced by the state attorney general's office in each state. The FTC, meanwhile, handles complaints nationwide through a toll-free hotline. Complaints filed with the FTC may only result in enforcement action if there are numerous complaints filed against a single debt collector. Individual consumer complaints may get no action.
Debt collection complaints
*Involve in-house collection departments of creditors rather than third-party debt collectors
Source: Federal Trade Commission Annual Report (2007, 2006 and 2005): Fair Debt Collection Practices Act
In 2006, more than 69,000 complaints were filed against debt collectors with the FTC (see chart), but enforcement actions were concluded against only three debt collectors that year.
Says FTC spokesman Frank Dorman: "We're not going to go to bat for one individual ... The consumer has the wrong expectation if they think 'I'm going to call the FTC and they're going to swoop down on these people.' "
Dorman suggests consumers file complaints with both the FTC and their own state attorney general's office or local Better Business Bureau branch.
The FTC "simply doesn't have the staff to address each individual concern. You may not get relief," says Johnson, president of the North American Collection Agency Regulatory Association (NACARA), a group of regulators from 20 states.
Johnson says consumers should ask if their state has a regulatory agency that licenses debt collectors. Only about half of the states in the United States have independent licensing requirements for debt collectors, Johnson says. Among them: Arizona, Colorado, Maine, North Dakota and Minnesota. "We can give individual attention to individual cases. We don't need to have a nationwide problem in order to do something."
Members of the collection industry, consumers, bankers and advocates met in Washington, D.C., in October 2007 for an FTC-sponsored workshop to address numerous issues currently swirling around debt collection practices, including the need to beef up the 31-year-old federal fair debt collection law.
"The Fair Debt Collection Practices Act contains some important protections, but it needs to be updated and expanded to address the problem of serial debt collectors," says Saunders from the consumer law center. She filed 59 pages of comments with the FTC for the workshop.
Spector, from the SMU law school, notes that individual consumers who file civil suits against abusive debt collectors are only able to collect up to $1,000 in damages beyond their attorneys' fees and actual damages. This amount, says Spector, Saunders and others, is tantamount to a slap on the wrist for debt collectors, who can easily absorb the $1,000 as a cost of doing business. Spector suggests minimum damages be increased to at least $3,500.
'Kinder, gentler' debt collectors?
Despite the rise in abuse complaints in recent years, some consumer advocates report a lessening in hostilities on some collections cases.
David Jones, president AICCCA
"The biggest trend that we have seen is a kinder, gentler debt collector," says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies (AICCCA), a national group that accredits nonprofit counseling agencies. "They are more interested than they ever were in working things out."
Leesa Kumley, a credit counselor in Rapid City, S.D., says she was surprised in January 2008 when a creditor who won a court judgment to garnish consumers' wages twice backed off and did not go through with the garnishments. That kind of thing happens so rarely, Kumley says, that it took her and the other credit counselors aback. "We were all just kind of like, 'Wow' when that happened," says Kumley, an accredited financial counselor with the nonprofit Pioneer Credit Counseling agency. "We've had a couple that were willing to stop the garnishment and allowed the client to have a payment plan."
Strapped for cash
Some say that a willingness to work out relaxed payments may be a function of the economy. Consumers have less cash as a greater percentage of their incomes going to basic living expenses such as gasoline, heating fuel and food.
"If consumers are cash-strapped, they're cash-strapped," observes Dimitri Michaud, an analyst with Kaulkin Ginsberg, publishers of "insideARM," an online newsletter for the account receivables management industry. "It's not going to be easy for debt collection agencies to call someone up and collect on loans."
Adds Andersen, the credit and debt collection trade group spokeswoman: "The whole industry knows that we're in an economic downturn and that will have a negative impact on ability to pay. Debt collectors are in a mode where they are willing to work with consumers to set up payment plans that consumers can live up to."
Maria Tabares, president of Medical Collections Specialists Inc., a Bargersville, Ind., collection agency, says the gentler approach has worked for her cases. She handles medical debts -- often incurred by families facing health care crises.
-- Maria Tabares
"We're compassionate. We treat everyone like we want to be treated," Tabares says. "Some people are so surprised that they call their doctor and say, 'These people are too nice to be debt collectors.' "
She adds: "We seriously try to do everything we can to work with the person. We've even taken $10 a month payments on a $2,000 account. We're not going to pressure them to do something they can't do."
Just as there are bad debt collectors who bend the rules, debt collectors say there are also consumers who manipulate the system -- deliberately avoiding payment of their financial obligations. Separating the debtor lists into clients who can't pay versus those who won't pay is a key part of how debt collectors minimize their costs and maximize receipts.
Consumer advocates say the vast majority of consumers want to make good on their debts, but struggle to make payments on limited incomes. Debt collectors, however, have stories of those who evade letters and calls and use delaying tactics in an effort to run the clock down on the statute of limitations.
"This is something that drives me mad," says Michelle Dunn, an author and CEO of Michelle Dunn's Credit and Collections Association, another collection agency trade group. Dunn fumes at deadbeat behavior. She calls it theft when consumers receive goods and services with no intention to pay for them.
"In my 20 years in this industry, there are always those consumers who think that if the statute of limitations has run out on their debt, they should not have to pay it or be asked to pay it," she says. "These are not upstanding citizens who need help or are having hard times. I have run across some consumers who do this all the time. They are trying to avoid everyone, the creditor or the debt collection agency, so they can ride out the debt and then claim the statute of limitations is up and therefore they don't have to pay."
Better off paying it?
Some consumers have actually paid off debts they knew were not theirs. Why? The debt collector put negative comments on their credit reports regarding another person's debts. Cases of mistaken identity -- where the wrong Mary Johnson is asked to pay another Mary Johnson's old debts -- are cropping up more often in debt collection and proving difficult for nondebtors to contest. Rather than going through the time, hassle and expense of trying to prove the debts did not belong to them, some consumers have given up.
Says Kumley, the Rapid City, S.D., credit counselor: "It's not unusual to have someone pay off the debt just to get it off their credit report. I advise my clients to push for a settlement. I wouldn't pay the full amount."
Steve Rhode, president of the MyVesta Foundation, a website for consumers with debt, says he, too, sometimes advocates paying off. "There's the cost of being right and there's the cost of having it go away. At some point, the stress and aggravation isn't worth it. There are plenty of people who paid off debts that they didn't believe they owed any longer simply to have the door closed on it and be done with it."
See related: Know your rights, Tips for dealing with debt collection, Expert Q&A, Debt collectors' code of ethics, Beware of tax bite that may follow debt resolution, Blog: I'm not a deadbeat but I play one on my cellphone, Blog: Debt collector calling...and e-mailing...and texting? Debt collection complaints still top FTC list in '07, Bankruptcies up 38 percent in 2007, State statutes of limitations for credit card debt
To comment on this story, write to: Editors@creditcards.com.
Updated: August 17, 2010
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