When a consumer fails to pay a debt, the creditor will eventually turn the matter over to a collection agency, which focuses on collecting the money owed. While it isn't very pleasant for the consumer, it's the way the system works, as long as the debt collector follows the rules.
When the collection efforts are unsuccessful, the creditor eventually writes the debt off its books. At that point, a debt collector often steps in and purchases the “bad debt” for pennies on the dollar.
If the debt collector is successful at collecting the full amount for an account it purchased for pennies, it stands to make a lot of money. In fact, the Center For Responsible Lending (CRL) says debt collection company revenue rose 600% between 2003 and 2012.
Nolen, of Marietta, Ga., is just one consumer who has experienced this. In a recent ConsumerAffairs post, he said there was a 5-year old charge on his AT&T bill that he disputed. He never paid it.
“Enhanced Recovery bought the paper February 2014 and immediately reported the charge as a collection, in the process dropping my credit score 100 points,” he wrote. “I learned of this action in March of 2014 after this reported collection had reduced my credit score. Now this company calls me 6 days a week at 8:30 with threats.”
At a disadvantage
If the AT&T charge was, in fact, legitimate then Nolen has few alternatives. AT&T is no longer the creditor, Enhanced Recovery is, since it bought the account and is no longer bound by many of the provisions of the Fair Debt Collection Practices Act.
As buying and collecting old debt becomes a growing practice, CRL says abusive and predatory practices have proliferated, with companies trying to collect debt consumers say they do not owe. One of the most high-profile cases involved defunct video rental chain Hollywood Video.
In 2011 thousands of former customers began getting collection calls for money they insisted they did not owe. The outcry was so loud that various state attorneys general stepped in to resolve the matter.
Unfortunately for consumers not involved in high-profile collection cases, there are few protections when a debt collector has purchased the old debt and has become the creditor. CRL says there should be.
Thin on documentation
In a report CRL cites an FTC analysis that found only 6% of debt accounts purchased by some of the largest debt buyers in 2009 came with any documentation. In other words the debt collectors bought old debt without having any proof that it existed.
CRL says debt buyers and collectors take advantage of financially-distressed consumers and extract billions of dollars in judgments for debts that may not even be owed. In many cases, it says the only information transferred is a name, last known address, and purported amount owed.
However thin the debt information may be, CRL says it’s all that’s necessary to begin collection attempts. Common complaints from consumers include misrepresentation about the amount or legal status of the debt, harassment and excessive contact, obscene or abusive language, and unlawful threats to sue.
Using the justice system
In fact, debt collection cases can quickly escalate. The report shows that more and more debt buyers are going to court, suing consumers for debts owed and obtaining default judgments in their favor when consumers fail to appear in court.
Why wouldn't a consumer show up in court if the facts are on their side? According to CRL, consumers often fail to appear because they never received notice of the lawsuit, can’t afford legal representation, or simply don’t understand the situation.
With a default judgment in hand, a debt collector can then freeze a consumer’s bank account, garnish wages, report the judgment to a credit reporting agency, and pressure a consumer into a payment plan.
At the most extreme, collectors in some states can have consumers arrested for lack of payment or seize personal property to satisfy a default judgment.
What's CRL's answer? Better oversight at the federal and state levels to make sure that when a debt collector comes calling, it's for a legitimate debt and that they follow the rules.
“We are not suggesting the dismissal of debt,” said Mike Calhoun, president of CRL. “Ensuring that debt is collected when owed is an integral component of the American financial system, and makes access to credit possible. What we’re seeing is a pattern of predatory practices when it comes to some kinds of debt buying and collection – and that’s what is concerning.”
Calhoun says while a creditor has a right to be paid money it is owed, borrowers should have the right to information about their debt and how it’s being handled and collected.
“With prudent oversight at the federal and state levels, there’s no reason why this problem can’t be fixed,” he said.
When a consumer fails to pay a debt, the creditor will eventually turn the matter over to a collection agency, which focuses on collecting the money owed. ...