Stop the debt-collection sleaze

June 2, 2010 - PRLog -- You may not want to hear this if you're overdue on a bill, but collection agencies are a necessary evil in a capitalist economy.

Collectors return billions of dollars a year to lenders, and that helps make credit more available while reducing its cost. (Trust me, lenders' current stinginess would be a lot worse if they didn't expect to recoup at least some of their massive amounts of delinquent debt.)

But, as I predicted nearly two years ago, a tough economy has led to rougher collection tactics and more consumer complaints. The Federal Trade Commission says complaints about third-party collection agencies rose 24% between 2007 and 2009, to 88,263 reports. Beefs against collectors were the second-largest area of consumer complaints the FTC tracked in 2009, after identity theft.

The biggest shield between overly aggressive collectors and consumers is the federal Fair Debt Collection Practices Act, and, unfortunately, the 1977 law is showing its age.

Some of the biggest areas of concern in recent years:

The debt-buying industry. No longer does a debt necessarily stay with the original creditor or get placed with a collector supervised by that creditor, according to Patrick Lunsford, the senior editor of Inside ARM, a newsletter that tracks the collection industry.

Now debts are frequently bought and sold, with each transaction increasing the chances mistakes will be made and important documentation will be lost. This is why people who have paid a debt get dunned by another collector a few months later or why victims of identity theft must repeatedly try to clear their credit reports of bogus collections.

Consumers under the debt-collection law have a right to challenge the validity of any collection effort, but a debt buyer might not be able to provide the proof and may not be able (by contract) to approach the original creditor directly.

A report by the Government Accountability Office in September traced the odd daisy chain that many debt buyers must resort to if a consumer asks for validation: First, the current debt owner must ask for the necessary documentation from the previous owner, which must in turn ask the company from which it bought the debt, which must in turn ask the original creditor.

"This process can be problematic because if any company in the chain fails to respond (or goes out of business), it can be difficult to obtain the media needed to document and verify an account," the GAO noted.

Some collectors drop their efforts when a consumer pushes back, but the relief is temporary because the debt will just be sold again. Others simply ignore the law and push on with collections, despite the lack of proof that the targeted consumer actually owes the debt.

As debt buying has grown, some companies have begun specializing in debts once considered uncollectable, either because the bills are so old or because collecting them is against the law. The GAO report noted that at least one debt buyer was snapping up debts that had been erased in bankruptcy court. Since attempting to collect a discharged debt is a violation of U.S. bankruptcy code, the practice of buying and selling these debts is, to reuse the GAO's phrase, problematic.

The use of lawsuits as a collection weapon. Creditors and collectors have always been able to sue delinquent borrowers, at least for a few years after a debt is incurred. (See "Is there a statute of limitations on debt?") But the rapid growth of the debt-buying industry has led to an explosion in debt-related lawsuits, because debt buyers tend to use lawsuits as one of their primary collection tools. The GAO report noted that "the majority of cases on many state court dockets on any given day are debt collection cases. . . . Consumer groups, attorneys, and FTC all acknowledge that the number of these state court cases has increased in recent years and is putting a strain on the state court systems."

Debt buyers have learned that many, if not most, borrowers won't show up in court, so the collectors can win default judgments against them. Consumer advocates say collectors are abusing the system by filing cases with weak evidence or on debts that are past the statute of limitations, knowing that they probably won't be challenged.

Changing technology. Not surprisingly, the debt-collection law doesn't address collection efforts made by e-mail, cell phone, auto dialers, caller ID or text messages, because those technologies weren't yet in use. Even answering machines were a relatively new development back then.

So that has left some long-standing paradoxes, said Inside ARM's Lunsford, like this classic: The debt-collection law requires collection agencies to identify themselves when contacting consumers, such as when leaving a voice-mail message requesting a call back. But if someone other than the intended recipient hears the message, that could be a violation of the law's prohibitions against revealing collection efforts to third parties. Similarly, collectors aren't supposed to mask their identities or use caller ID blocking, but what if a third party sees that U-Owe-Me Collection Agency just called?

Clearly, collectors want to reach out and touch you any way they can. But should they be able to call your cell phone or send you a text? And how would they do so within the "permitted hours" for such calling, 8 a.m. to 9 p.m. local time, if your cell shows an East Coast area code but you're now on the West Coast? By Liz Pulliam Weston, MSN Money.

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