The Collection Industry: Debt Buyers versus Original Creditors

Recent years have seen an increasing number of delinquent debts purchased by “debt buyers.” Debt buyers purchase the rights to over $100 billion in the face amount of debts each year. They pay pennies on the dollar, often 3 to 4 percent of face value. If the debts are old, they may pay less than 1 percent of face value. The debt buyers then try to enforce the debts against the consumer at 100 cents on the dollar, by correspondence, telephone calls, and collection lawsuits.

Some debt buyers do their own debt collection, some use third-party debt collectors, and some do both. A majority of the debts are credit cards. Others include second mortgages, mortgage deficiencies, small loans, automobile paper, telecommunications debts, utility debts, health club debts, bank overdrafts, and medical debts.

Debt buyers pose a particularly serious problem because they rarely acquire documentation of the debts, and the information they have is often seriously inaccurate. This has been documented in a series of Federal Trade Commission (FTC) reports, one of which was based on information subpoenaed from the largest debt buyers. The agreements for the sale of charged-off debts often provide that the debts are sold “as is,” without representation or warranty (see “The Structure and Practices of the Debt Buying Industry” (FTC, Jan. 2013), found at https://www.ftc.gov/sites/default/files/documents/reports/structure-and-practices-debt-buying-industry/debtbuyingreport.pdf; “Repairing a Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration” (FTC, July 2010), found at https://www.ftc.gov/sites/default/files/documents/reports/federal-trade-commission-bureau-consumer-protection-staff-report-repairing-broken-system-protecting/debtcollectionreport.pdf; “Collecting Consumer Debts: The Challenges of Change: A Federal Trade Commission Workshop Report” (FTC, Feb. 2009), found at https://www.ftc.gov/sites/default/files/documents/reports/collecting-consumer-debts-challenges-change-federal-trade-commission-workshop-report/dcwr.pdf).

Whether through inadvertence or design, debt buyers often try to collect debts from the wrong person, based on similar names and addresses. For example, in 2004, the FTC shut down a debt buyer called CAMCO. The following is from a press release issued by the FTC in connection with that case:

 

. . . In papers filed with the court, the agency charged that as much as 80 percent of the money CAMCO collects comes from consumers who never owed the original debt in the first place. Many consumers pay the money to get CAMCO to stop threatening and harassing them, their families, their friends, and their co-workers.

According to the FTC, CAMCO buys old debt lists that frequently contain no documentation about the original debt and in many cases no Social Security Number for the original debtor. CAMCO makes efforts to find people with the same name in the same geographic area and tries to collect the debt from them—whether or not they are the actual debtor. In papers filed with the court, the FTC alleges that CAMCO agents told consumers—even consumers who never owed the money—that they were legally obligated to pay. They told consumers that if they did not pay, CAMCO could have them arrested and jailed, seize their property, garnish their wages, and ruin their credit. All of those threats were false, according to the FTC.... (http://www.ftc.gov/opa/2004/12/camco.htm)

 

“Sometimes... they [debt collectors] go after people with the same names as those who owe money. They might also relentlessly call wrong phone numbers, hoping to pry information out of whoever answers. Some finagle enough identifying information to make people seem liable for debts they never owed” (Sonja Ryst, “‘Debt tagging’ by collection agencies a growing problem,” Washington Post, Business section, Sunday, Aug. 8, 2010, p. G01).

The possibility that a debt buyer is suing on a debt it does not own is very real. An article that appeared in the collections industry trade press in 2007 stated:

 

More collection agencies are turning to the debt resale market as a place to pick up accounts to collect on. Too small to buy portfolios directly from major credit issuers, they look to the secondary market where portfolios are resold in smaller chunks that they can handle. But what they sometimes find in the secondary market are horror stories: The same portfolio is sold to multiple buyers; the seller doesn’t actually own the portfolio put up for sale; half the accounts are out of statute; accounts are rife with erroneous information; access to documentation is limited or nonexistent. (Corinna C. Petry, “Do Your Homework; Dangers Often Lay Hidden in Secondary Market Debt Portfolio Offerings. Here Are Lessons from the Market Pros That Novices Can Use to Avoid Nasty Surprises,” Collections & Credit Risk, Mar. 2007, at 24)

 

A judge who regularly hears collection cases in New York noted, “[O]n a regular basis this court encounters defendants being sued on the same debt by more than one creditor alleging they are the assignee of the original credit card obligation. Often these consumers have already entered into stipulations to pay off the outstanding balance due the credit card issuer and find themselves filing an order to show cause to vacate a default judgment from an unknown debt purchaser for the same obligation” (Chase Bank USA, N.A. v. Cardello, 27 Misc. 3d 791, 896 N.Y.S.2d 856, 857 (Richm. Co. Civ. Ct. 2010)).

In addition, the growth of debt buying has given rise to the growth of scammers who claim to have purchased debts or to collect on behalf of debt buyers when they have no right to collect anything (Jake Halpern, “Paper Boys, Inside the Dark, Labyrinthine and Extremely Lucrative World of Consumer Debt Collection,” New York Times Magazine, Aug. 17, 2014; Jake Halpern, Bad Paper: Chasing Debt from Wall Street to the Underworld (New York: Picador, 2014)).

The FTC has brought multiple enforcement actions against such scammers (http://www.ftc.gov/news-events/press-releases/2014/07/ftcs-request-court-halts-collection-allegedly-false-payday-debts; http://www.consumer.ftc.gov/articles/0258-fake-debt-collectors). The FTC has also published a warning to consumers to “be on the alert for scam artists posing as debt collectors. It may be hard to tell the difference between a legitimate debt collector and a fake one. Sometimes a fake collector may even have some of your personal information, like a bank account number” (http://www.consumer.ftc.gov/articles/0258-fake-debt-collectors). The warning advises consumers to insist on receiving a validation notice, which “must include . . . the name of the creditor you owe,” and that consumers should not pay a collector who “refuses to give you all of this information.” If there is any question, the consumer is instructed to contact the creditor and “find out who, if anyone, the creditor has authorized to collect the debt.”

The Consumer Financial Protection Bureau (CFPB), which now has rulemaking authority with respect to the Fair Debt Collection Practices Act (FDCPA) and shares enforcement authority, has published a very similar warning (http://www.consumerfinance.gov/askcfpb/1699/how-can-i-verify-whether-or-not-debt-collector-legitimate.html).

In recent years, the FTC has brought at least seven proceedings against such “fake debt collectors,” naming dozens of defendants.

Often, the scammers have detailed information about the debts. Sometimes they appear to have obtained the information from loan brokers that consumers may have supplied information to for the purpose of obtaining a loan. In one criminal case, a person claiming to be a prospective purchaser of debt portfolios obtained portfolio information under that pretext and then sold the information. Credit reports are another potential source of information.

A consumer cannot know, and should not assume, that a debt buyer actually owns the debt or that a debt collector is authorized to act by the true owner of the debt, even if the person contacting the consumer has information about the debts. There are many instances when a consumer pays the debt only to later receive a call—or a lawsuit—from another debt collector about the same debt. A consumer has the right to receive proof that the debt collector owns the debt or is legally entitled to collect it. Even if the consumer recognizes the debt, believes he or she owes it, and believes that the amount sought is correct, the consumer should request, at a minimum, some proof of ownership of the specific debt, such as a copy of an assignment referring to the specific debt. Otherwise, there is no guarantee that the person trying to collect the debt is not a scammer, and payment to a scammer does not satisfy the consumer’s obligation. The fact that the person trying to collect the debt has fairly detailed information about the consumer or the debt does not mean that the collection attempt is authorized—the FTC and CFPB have repeatedly noted that scammers are getting such information.

Contact the original creditor and find out what happened to the debt. You may have to contact each party in the chain of title to find out what each did with the debt. Finally, contact the alleged current owner of the debt and find out whom the owner has authorized to collect it.

 

Summary

Many companies are in the business of acquiring charged-off consumer debts. If contacted by such a company, or by someone collecting on behalf of such a company, insist on proof that the company has the right to collect from you.

 

CAUTION

Do not assume that anyone who claims the right to collect a debt and has some information about you has any right to collect anything. Insist on a written “notice of debt,” and verify with the original creditor whether the person contacting you is authorized to do so.