Chasing your debt

Bob Moon Mar 9, 2012

Sarah Gardner: With family budgets so tight, you might think bill collectors would be having a heyday. But the industry says profit margins are actually shrinking because collectors are working harder to get people to pay up. That, as you might expect, has resulted in more consumer complaints. Up ’til now, regulators haven’t had much power to rein in the industry. The Federal Trade Commission’s authority here is rather limited and it lacks the manpower to really dig into specific complaints.

Enter the new Consumer Financial Protection Bureau. It says it’s going to audit and supervise the biggest collection agencies. Our senior business correspondent Bob Moon reports on some of the questionable practices they’re likely to encounter.

Bob Moon: Harold Wood wasn’t surprised when a bill collector called a few years ago. Like many Americans, he’d hit some hard times. But Wood says he was always determined to make good, so he told the collector he wanted to make payments.

Harold Wood: He goes, “Well, what can you afford?” I said, “Well I can take, you know, couple hundred a paycheck, and we’ll get this worked out.” And he goes, “OK, fine.”

But then, something strange: The phone started ringing off the hook with collectors.

Wood: I start making payments to one, and all of a sudden I have another one. Then I have another one, and I have another one — and next thing I knew, I had 15 collectors. I’m sitting there going, “I know that I didn’t have this many debts!”

Wood, who lives near Seattle, decided he’d better ask more questions.

Wood: I started calling every one of them back and going back and forth, until I finally get the originating account number. And it comes down to, I was paying multiple times for the same account, to multiple different collectors. I had no clue that something like this could happen.

In fact, it happens too much, in the view of Consumers Union watchdog Suzanne Martindale. She blames “a woeful lack of regulation” over the selling of debt to third-party collectors. Banks and credit companies unload their delinquent accounts, often for pennies on the dollar. And those lists of people who owe can get passed around. In Wood’s case, it seems, duplicate copies were sold. Several collectors were chasing the same debt, seemingly without knowing that it was already being paid.

Suzanne Martindale: Debt buyers will purchase a portfolio of thousands of consumer debts, but what they’re really purchasing is little more than an Excel spreadsheet that has limited information. The debt-buyer resells the portfolio of debt, and never makes a note to, you know, cross that consumer off the list, for example.

And that’s not the only way these lists can be outdated. There’s actually a time limit in every state for how long a creditor has to take you to court and force you to pay. But some collectors use lists that are so ancient the debts are far beyond that “statute of limitations.” In some states, Delaware for example, the limit is just three years. In others, such as Ohio, it can be as long as 15.

Martindale says most consumers are unaware that they aren’t supposed to be sued after a certain date. And a crafty collector can put you back on the legal hook.

Martindale: If you make even a $10 payment, because, you know, the debt collector’s kind of putting pressure on you, that could restart the clock. And now, not only are they collecting against you, but they can go back and sue you now.

Before you do anything, you have the right to demand proof of your supposed debt. When all those collectors started calling Mr. Wood, he says he struggled just to get them to provide the original account number. As it turned out, that was the key to challenging their multiple claims against him.

Michelle Dunn is a veteran collector who’s written several books on the subject. She says with older debt especially, demanding proof can be all it takes to get collectors to back off.

Michelle Dunn: Collectors will try to collect debt without verification as much as they can, and then when they get asked for the verification, if they don’t have it, then they just move on to somebody else who might not know that they can ask for that verification — and they try to collect that money.

Much of this is a legal gray area, and Suzanne Martindale of Consumers Union sees a clear need to require better documentation. She also suggests a “sell-by” limit, a sort of “freshness date” for these lists. She argues that even if consumers paid their accounts in full, they aren’t likely hang onto proof forever.

Martindale: This is precisely why statutes of limitations are supposed to be there in the first place, because memories fade, records disappear, and you’re simply not supposed to be sued on debt like this when it’s that old.

But even if you can’t be sued, collectors say they should still be able to appeal to your sense of personal obligation for the debts you’ve rung up.

Minnesota collector Mark Nabe heads the industry association ACA International. He asks, why encourage people to run out the clock?

Mark Nabe: Imagine if we all could just sit back and try to avoid paying our debts until that magical day when we no longer could be contacted.

Unpaid debts would likely soar, he says, raising costs for everybody — from banks to consumers. But Nabe does see benefit in setting some kind of reasonable cut-off.

Nabe: One of the things we’re asking for is a federal statute of limitations of seven years, so this confusion about when a debt can be worked, and how long and what remedies there are — we get that to go away, and that would really help a lot.

Martindale at Consumers Union seems to agree with that time frame.

Martindale: Debt, at the very least, should not be getting sold if it’s more than seven years old and can’t even be reported on your credit report anymore. It’s got to stop somewhere, otherwise this debt truly is “zombie debt,” and it’s going to haunt consumers for the rest of their lives.

Which brings us back to Harold Wood. He sued those collectors for improperly demanding multiple payments for the same debt. And he says the settlements he reached helped him make good on almost all he owed. Even now, though, other collectors keep passing his name around, and forcing him to mail back demands to be left alone.

Wood: It’s kind of a cycle. It goes about six months, and then I’ll get some more calls and I’ll send out the letters, and around and around like that.

Suzanne Martindale of Consumers Union says the problem will keep coming around and around like that, until federal and state regulators start making collectors clean up their record keeping.

I’m Bob Moon for Marketplace Money.

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