Virtually every American adult has some form of debt. The economic crash of 2008 exposed the grand mistakes made by millions of people in getting way over their heads by borrowing too much money. In the years since that time and before, the business of collecting money owed, mostly to banks, has gotten incredibly shady.
The basics of debt collection seem simple enough. However, the money trail gets complicated with every twist and turn of the debt. When a consumer stops paying their debt or loan, a bank “charges off” the account after 180 days of non-payment and records it as a loss. This applies to all kinds of debt, such as credit cards, medical and auto loans and even gym fees and utility bills. The bank or lender then sells the debt in bulk to debt collectors. Sometimes this work is handled by lawyers, but billions of dollars’ worth of debt is purchased by other, often unscrupulous debt collectors. “Top” debt buyers bought nearly 90 million accounts at a face value of more than $140 billion from 2006 to 2009.
The voluminous accounts of debtors are traded from one debt collector to another until paid or abandoned. A single debt can be traded over a dozen times; meaning from the original creditor, the debt was sold to many other entities, diminishing in value with every new turn of the “paper.” “Fresh paper” is what comes directly from the banks. At some point, the debt is considered “bad paper” because it’s potential for collection has become slim-to-none. That’s when the experts – not the attorneys – come in to scoop up the leftovers, which can yield billions in collecting on “bad paper.” This is a “lawless marketplace” where actual criminals finesse each deal to get paid pennies on the dollar. One such expert is Brandon Wilson, a debt collector whose personal story is outlined in a new book entitled, “Bad Paper; Chasing Debt From Wall Street to the Underworld” by Jake Halpern. Bad Paper has pulled back the dark curtain of secrecy behind the “underworld” of debt collection.
Brandon says that he buys “crap,” which is the kind of debt that is so old or otherwise considered uncollectable by other debt collectors that no one else wants it to hustle. He calls himself the “King of Crap,” usually purchasing nothing more than spreadsheets, which indicate the debtor’s name, contact information and balance of the debt. That’s it; that’s all he needs. The FTC conducted a study of large debt buyers, finding that only about 6% of the time, the debtor’s account comes with an account statement. He and others like him, find the debtors through skip-tracing. Once located, the debtor is classified based on the chances of them paying. Most people actually want to pay their debts. If efforts by the debt collectors are resisted, they typically resort to aggressive and illegal means of collection, such as threatening lawsuits, which they cannot do.
While a house or a car cannot be bought two or three times simultaneously, a single debt can be held by more than one collector. This is because debts, in the form of basic information on a spreadsheet, can be stolen. One example is outlined in Mr. Halpern’s book; that of a Marine named Theresa, who made payments to a debt collector, who never legitimately owned the debt.
So, when the actual owner of her debt called her for payment, a confrontation ensued between the two debt collectors.
This raises the question of why and how a consumer debt, which has been bundled and traded multiple times, should pay what the collectors say is owed. First, the debtor cannot be sure whether or not the debt claimed is legitimate. It should also be noted that there is no legal reason to pay a debt over the statute of limitations period. However, debts stay on a consumer’s credit report for 7 years. Some debtors simply feel a moral obligation to pay whatever debt they are accused of owing. Other times, debtors are bullied by debt collectors and/or they just want the incessant calls to stop.
The system of consumer debt is chaotic: there is no central registry or regulatory agency, no attorney general and no better business bureau; there are simply no agencies that can control this market.
With respect to the law, a debt collector cannot threaten legal action if he or she is not an attorney. If the debt is beyond the statute of limitations (3-6 years, depending on State), it cannot be collected in court. The Fair Debt Collection Practices Act (15 U.S.C. § 1692) may be helpful to consumer debtors, but there are not enough agencies to ensure a safe marketplace for the buying, selling and collecting of debt.
The Consumer Financial Protection Bureau (CFPB), led by Elizabeth Warren, may create new rules to protect consumers from wrongdoing in this area. But, the GOP is targeting this agency for failure. Currently, consumers are not adequately protected by predatory lenders. Ringing in the nearly 10,000 collection agencies in the United States will not likely be possible and, therefore, offer assistance to the vast majority of consumers, who are prey to illegal collections practices. About 42% of collection companies have a small number of employees and can easily do business under the radar of any agency scrutiny.
In its first lawsuit, the CFPB accused a Georgia-based law firm of violating federal consumer protection laws. The suit claims that hundreds – perhaps thousands – of consumer defendants owe no money or less than what is claimed. It is also claimed that lawyers of the firm usually spend less than one minute reviewing each complaint. Perhaps that is how the firm filed over 350,000 lawsuits on behalf of credit card collection companies. Since most of these defendants do not show up in court, the firm collects on piles of default judgments. Interestingly, the CFPB says that it can sue law firms simply for operating as debt-collection businesses and not legal advisers.
In short, the debt collection business is the Wild West of a legal or quasi-legal forum. It is simply out of control and operating in what one expert, armed-robber-turned-successful entrepreneur, Brandon Wilson calls an “underworld.”
Sources: wnyc.org, “Fresh Air” 10/9/14; New York Times Magazine, “Paper Boys” 8/14; MotherJones.com, 9/26/14; The Wall Street Journal Online Law Blog 8/4/14.
Biographical information: Mona Conway has been a business law and commercial litigation attorney on Long Island for over 10 years. Ms. Conway is a State and Federal Court litigator with the boutique firm of Conway Business Law Group, P.C.