About 1 million U.S. consumers a year dispute the debts that collectors hound them for, according to a new Federal Trade Commission report.
And no wonder: When collectors buy the right to collect old debt, they buy it cheaply -- at an average of 4 cents on the dollar owed -- and only the skimpiest details about who really owes it gets passed along. Fuller details cost extra, so debt collectors often go hunting for their debt-owing prey armed with thin files and bogus information.
This large number of debts that people say they do not owe "is a significant consumer protection concern," the FTC concluded in its report, "The Structure and Practices of the Debt Buying Industry," released Wednesday.
The FTC study looked at 90 million accounts, 70 percent of them credit card debts, that were sold by nine large debt buyers. It found that the sold-off debts usually lacked key information that would help collectors verify the debt was genuine or that the amount was correct. Collectors with faulty information may target the wrong people or demand incorrect amounts, the agency said.
Documents such as account records, which would substantiate the debt, rarely went to the debt buyer. And sellers of debts rarely noted when debts had been disputed previously, the report found, so debts that had already been challenged were sold along with others.
Debts sold and resold
Critics of the debt-buying market said they were not surprised at the findings. The report echoed some long-standing complaints about the unregulated debt-buying market, where consumers' debts are initially sold by creditors, then potentially resold multiple times by debt collectors and intermediaries.
"They buy a few bits of information ... there is no documentation," said Joseph Mauro, a consumer attorney on Long Island. "To me, that sort of blind acceptance of minuscule amounts of information is very problematic."
CONSUMERS: DON'T JUST TRUST
THAT A DEBT IS YOURS, VERIFY
If a collector contacts you, you have the right to demand written verification of the debt they are trying to collect.
Your request for verification needs to be in writing, and it should be sent within 30 days of the first contact from the collector. Sending by certified mail isn't required, but is a good idea. (Download sample debt verification letter.)
The collector should respond with information that goes beyond a statement of the original creditor and account number. Different courts have set different standards for what constitutes adequate verification. Generally, collectors should be able to confirm that they have the right person and the correct amount. However, they are not required to provide extensive account records.
One of Mauro's clients was deluged with calls from multiple collectors for the same debt, after a debt broker resold the same accounts to multiple buyers, Mauro said.
The report comes as the Consumer Financial Protection Bureau (CFPB) is conducting the first-ever on-site examinations of large debt collectors. The CFPB could issue rules about the industry's collection practices, including how much documentation collection agencies need to have before setting their collectors loose. Some state and local governments, including Minnesota and the City of Chicago, have moved ahead of the federal government with standards for debt documentation.
No standard for verification "As of now there is no federal standard for documentation," said Mark Schiffman, director of public affairs for the debt collection industry association ACA International. "It would be our preference to see uniformity from state to state."
The FTC report noted some positive findings. The debt buyers resold only a very small number of disputed debts that could not be verified, the FTC found. And most of the debts were within the state statute of limitations for collection, meaning that the debtors were still legally obligated to repay.
However, in announcing the results, the FTC said the report indicated the need for more study about the conduct of smaller debt buyers, and the accuracy of the information that debt buyers used in their collection efforts, in order to inform policymakers.
The findings about thin documentation of debts may help explain the surge in complaints about debt collectors that regulators have seen. Complaints to the FTC about debt collection surpassed 185,000 last year, based on figures through early November -- more than double the number five years earlier. One of the most frequent gripes is that collectors are coming after them for debts they don't owe or have already paid.
In the FTC study of debt buying, 3.2 percent of sold debts were disputed by consumers. That volume of disputes, if applied to the entire debt buying industry, "indicates that each year buyers sought to collect about 1 million debts that consumers asserted they did not owe," the report stated.
When consumers demanded verification of a debt, the buyer was able to provide verification for only about half of the accounts involved in those cases, the report said. The FTC said it did not examine whether the verification provided by the debt buyer was adequate.
The information that buyers did receive with the debt usually included the amount, original creditor, the original account number and date of last payment, the charge-off date and the debtor's Social Security number.
Documentation? That costs extra
When a debt is challenged, debt buyers have difficulties obtaining account documents, the report said. Sellers told debt buyers that they might not be able to obtain account documents, and that there could be charges of typically $5 to $10 per document. Debt sellers also typically took 30 days to 60 days to supply the documentation, the report found.
Why would buyers of debts put up with a shoddy product? The average price for debt was 4 cents per $1 of face value, the FTC found, indicating that buyers may not expect high levels of service. Their small investment in the debts means they can absorb losses when some accounts turn out to be flawed, critics say. However, consumers who are targeted by faulty collection efforts also bear the costs of faulty debt sales.
"The consumer can scream that they don't owe $5,000 anymore, they only owe $3,000 because they made a payment before the debt was sent to the collector," Mauro said. "If the (debt) buyer doesn't have the last statement from the credit card, they have no way of knowing if the consumer is telling the truth."
YOUR OLD DEBT: PURCHASED FOR PENNIES ON THE BORROWED DOLLAR
Once a debt goes bad, it can be purchased and repurchased for pennies on the dollar by debt buyers, who then try to collect from the debtor. How many pennies? It depends on the type and age of debt. Select type or age of debt, then select the specific type or age to show how many pennies it costs to buy $1 worth of that type of debt.
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