Beware the Collector
Fred Day (not his real name) is a client of mine. He works in health care. He worked long hours, and saved, and bought a home, and had a nice new car. Then, in just a few weeks in 2005, it all fell apart. The radiology group he worked for closed and he lost his job. His wife became ill just a few months after their insurance lapsed, and thousands in debt piled up. He sold his house. He turned his car over to the bank voluntarily. And he did the only thing he could think to do. He returned home to his home state and moved in with family.
Over the next few years he worked harder than before. He was more careful than before. He tried to ensure that he saved more than he spent. He did everything right. He started to put away money for a new house. Then, after he had put away some money, he started negotiating with old creditors paying them off one at a time to rebuild his credit. And that's when his problems really started. He started getting calls on debts that were three to five years old. Then he got sued. That's where we got involved.
The area of "collections" is not something most folks ever get to know, and no one wants to learn about it by living through it. There are three kinds of collection agents: in-house, agency, and distressed debt buyers. Inside every major credit card or credit granting agency (GMAC, Ford Credit, Countrywide Homes, etc.) there is a collections department. These are generally good people who want to work with debtors to help them restructure their debt and avoid foreclosures and repossessions. In many cases they are successful. However, when they are not, they refer the claim out to a company that does business as a collection agency. A collection agency may be part of a law firm, or it may be a stand-alone agency that collects using the phone and letters. The conduct of these folks is closely regulated. The Federal Trade Commission investigates collectors who cross the line and break the Fair Debt Collection Practices Act.
It is the third tier of debt collectors, the "distressed debt buyer" that is the real challenge for consumers. Although it may not be obvious to most people, your account with Mastercard, your home loan, your delinquent phone bill, and your repossessed car note can all be sold to other persons. The legal term for this is the "holder in due course," and the way it works is through a process called "assignment."
Let's suppose you have an account with the South Bank of the Mississippi. You charge $5,000 on your Mastercard, and run into trouble. First you deal with the bank's in-house collectors, but can't get the matter resolved. When your account goes past 120 days, and the collection agency can't get you to pay, or doesn't think it would be worth the time and trouble to go after you, the debt is "written off" by the bank. In many cases the bank sends you a federal tax form indicating it has written off the debt (and causing you to pay tax on the $5,000 they "gave" you when they wrote off the note).
Along comes Creepy Capital LLC, a "distressed debt buyer" who says to South Bank, "look, we'll buy Mr. Consumer's debt from you for $50." Since the bank knows it isn't going to get the full $5,000, and would like to get something, it takes the deal and transfers the note by assignment to Creepy Capital, LLC. They now own a piece of paper (or more likely, an electronic file) worth $5,000 plus interest.
Creepy Capital checks your credit and finds you are still in debt. So it holds the note for a year, checks again, and finds that now you're working at Our Lady of Perpetual Billing and have a salary of $40,000 per year. It swings into action to collect its debt.
First it calculates interest on your note. At 21% interest, a $5,000 note can grow to $7,000 in a year or so. Now Creepy sends you a letter saying you owe $7,000. However, if you act today, they'll settle it for only $5,000. If you don't settle, they threaten to sue you. You may get calls at work, calls at home, and calls on your cell phone. In some instances they might call your employer. They might call your neighbors and ask them questions that imply you're a deadbeat. Many of them will stop at nothing to get you to pay the debt without a lawsuit. They operate on the theory that the more intrusive they can be in your life, the more likely you are to want to pay them. In many cases they will compromise the debt to half its value if they can get it quickly because, remember, they paid pennies on the dollar for what you owe.
When you cannot or do not pay, Creepy carries through with its threat and sues you, now asking for a total of $8,000 including attorneys fees, interest and court costs. In thousands of cases every day across the country, lawyers walk into court and take default judgments because the debtor, who sees the case as hopeless. Because the debtor can't imagine there's a way out, they just don't do anything. Within weeks the debtor's wages are garnished, his car, or boat may be seized and sold at auction, and any money in his bank account is taken by the creditor until the debt is paid off.
But, in many cases, the debtor has lots of options and ways to defend the debt. Remember Mr. Day? He took out his car loan in a state with a three year statute of limitations. A statute of limitations is a period of time prescribed by law that a creditor has to file a lawsuit. In Mr. Day's case, the last payment was made in 2005, and the lawsuit was filed in 2009. More than three years had passed, and the bank had not sued. Since the suit was not brought in time, the creditor could not sue. Mr. Day had a defense, and will ultimately prevail.
More importantly, in many of the cases, the banks or credit granting institutions had no document or paperwork that showed that the consumer ever signed any note. In about 50% of these cases, the creditor could not prevail because an elemental part of the proof of such a case - the note signed by the debtor - could not be produced. But unless a debtor seeks legal help, they usually do not know this. I've helped people who were sued after ten years on debts that were so clearly outside the statute of limitations that the collection lawsuit amounted to a fraud on the court. Lawyers call this debt "zombie debt" because if a debtor makes a payment on a ten year old debt, it reinstates the statute of limitations and can be legally collected. More importantly, if the creditor sues and the debtor doesn't defend, even if the defense is later discovered it may be too late to assert it! If you know someone who thinks things are hopeless, tell them to see an attorney.
The problem is that some third tier collectors like Creepy Capital don't stop with making calls and filing lawsuits. Sometimes they threaten to send the sheriff out to arrest the debtor for fraud. When they are later questioned in depositions about this, they say they meant to say that the sheriff was going to serve papers on the debtor, and that they never meant to scare the debtor. But in fact, the collector often tells people they're going to jail if they don't pay. NBC News recently had a special where the collectors impersonated police officers and threatened long jail sentences for debtors.
You may wonder why such tactics work. In most cases if you had to come up with $5,000 or go to jail, you could ask family or friends for help and get the money to avoid jail. The collectors know this, and prey on you and your family in this way. The tactics are against the law, and collectors that use such tactics are liable under the Fair Debt Collection Practices Act. And a $1,000 fine under the statute is no more than a cost of doing business when a collector can get $7,000 on a debt he paid $50 for. So the Creepy Capital type collectors flourish because their net profits are in the hundreds of thousands of dollars every month, even allowing for the money paid to collection attorneys.
If you have debt problems, see an attorney. Sometimes bankruptcy may be an option. If you're being sued, and you think the debt is an old or stale debt, see an attorney who may be able to help you turn the tables on the creditor. In Mr. Day's case he is suing for thousands of dollars for violating the Fair Debt Collection Practices Act.