Zombie debt business booms, putting consumers at risk
Do you have a debt from years ago that you never paid? If so, beware. That old account could come lurching back to life when you least expect it.
Very old debt, often referred to as zombie debt, can haunt consumers for a long time, according to Ira Rheingold, executive director of the National Association of Consumer Advocates (NACA), an organization that includes more than 1,500 consumer attorneys. "It's a debt that never dies -- it just keeps coming back in many different forms with different owners, and you can't kill it," Rheingold says.
Consumers should know what steps to take if they get contacted about an old debt, Rheingold says: "You need to be careful, and you need to know your rights."
The anatomy of zombie debt
Who makes debts come back from the dead? Debt buyers. "They buy debt really cheap, paying pennies on the dollar," Rheingold says. A debt could lie dormant for months or years before being purchased by a debt buyer, who then might either start trying to collect the debt or hire a collection agency to do so.
Before debt buying became a big business, credit card companies and other businesses used to spend a year or two trying to collect a debt, then give up, according to Bob Hobbs, deputy director of the National Consumer Law Center and author of the book "Fair Debt Collection." Some consumers would later pay to clear their credit, he says.
Now debt buyers snap up old debt in bulk from credit card companies, gyms, public utilities, cellphone providers, and other creditors, experts say, and their business has grown steadily over the past several decades. The debt buying industry began to take off in the late 1980s when a U.S. government-owned asset management company sold delinquent credit card debt to help fund the cleanup of the savings and loan crisis, in which hundreds of financial institutions failed, according to Mike Ginsberg, president of Kaulkin Ginsberg, a company that provides strategic advice to debt buyers and collection agencies. "The industry has been alive and well since then" he says.
In the past, unpaid credit card debt has made up about 80 percent of debt buyers' purchases, Ginsberg says, but the recession and credit crunch pushed debt buyers to turn to other areas such as delinquent mortgages, auto loans and medical debt. Debt buyers made about $3 billion in revenue in 2011, according to Ginsburg, and that number should hold steady this year. "It's hard to gauge if there is more debt in the hands of debt buyers now," Ginsberg says, since many debt buyers are still managing portfolios of debt purchased in the past, while others have bought debt from other debt buyers or issuers.
In any case, federal and state regulators are taking a hard look at how debt buyers operate. "The regulatory climate is intense right now," Ginsberg says.
Zombie debt can cause mayhem
The way many debt buyers do business can cause big problems for consumers who get caught in the zombie-debt trap, according to consumer advocates.
In fact, in January 2012, the U.S. Department of Justice, at the request of the Federal Trade Commission (FTC), sued one of the biggest debt buyers in the country, Asset Acceptance, alleging it violated the federal Fair Debt Collection Practices Act (FDCPA) and other laws. According to the lawsuit, the debt buyer made deceptive statements to consumers, gave false reports to credit reporting agencies and committed other violations. In response, Asset Acceptance agreed to pay a $2.5 million civil fine.
Some of this debt gets sold over and over again to different buyers -- it's sort of this constant thing.
National Association of Consumer Advocates
Problems for consumers start with the way companies buy debt, experts say. Instead of purchasing complete files with full documentation, they often buy electronic records that contain scant information, experts say. "It's just a stream of numbers -- a name, maybe a Social Security number and an amount of money," Rheingold says. "There's no paperwork whatsoever."
The lack of complete and correct information in the files contributes to a second problem -- consumers sometimes do not get notifications as required by federal law. For example, the federal Fair Credit Reporting Act (FCRA) requires that a debt collector notify a consumer that it might report information to a credit bureau. In the lawsuit against Asset Acceptance, the federal government alleged the company included the required notification in the initial notice of debt, which sometimes went to a wrong address and never made it to the consumer. Some consumers who don't get the notice first learn about the black mark on their credit report when they go to apply for a mortgage or auto loan, the lawsuit says, noting that those consumers sometimes then get denied credit or charged a high interest rate.
Out-of-statute debt collection
Finally, debt buyers sometimes illegally sue or threaten to sue a consumer after the state statute of limitations has run out, experts say. "There are allegations that debt buyers do this at a higher rate than other debt collectors," says Jason Schall, an attorney with the FTC, which is now conducting a study on the debt buying industry. Debt buyers count on consumers not showing up to court -- either because they're working, they don't have time or they never got served, Rheingold says. If the consumer doesn't show, he says, the debt buyer likely will get a judgment against them.
To make things even more complicated, a debt buyer sometimes will resell a debt. The more a debt gets sold, according to the federal lawsuit against Asset Acceptance, the less likely it is that documentation of the original debt will be available. Rheingold says: "Some of this debt gets sold over and over again to different buyers -- it's sort of this constant thing."
Consumers will have to keep watching over their shoulders for zombie debt, experts say, because old debt likely will continue to be big business. Rheingold says: "Debt buyers are buying this debt really cheap, and they're making enormous profits."
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