A recent episode of “Last Week Tonight with John Oliver” shed light on some alarming statistics related to the current state of consumer debt in the US.
According to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, as of March 31, 2016, American households collectively owe more than $12 trillion dollars in debt. And $436 billion of that debt is seriously delinquent (i.e. 90 or more days past due).
Debt Buying: The New Kid on the Block
The fact that so many people are seriously delinquent on their debts has led to an entirely new industry within the debt collection industry – debt buying.
A debt buyer is not the same as a collection agency. Debt buyers often purchase thousands of debts in bulk sales from creditors for just pennies on the dollar, after those debts have gone into default.
Encore Capital Group, the largest debt buyer, tells investors that 1 in 5 US consumers either owes them money now, or has owed them money in the past.
A Largely Unregulated Industry
Unfortunately, the debt buying industry is largely unregulated and many states have a surprisingly low barrier to entry into this industry. While some states allow for the purchase of debt without any licensure requirements, other states allow for the collection of debt without a license.
Additionally, according to Jake Halpern, author of Bad Paper: Chasing Debt from Wall Street to the Underworld, when debt is bought and sold, the information changing hands doesn’t necessarily include a lot of verifiable information.
Often times, debt buyers are purchasing information in the form of – get ready for this one- an Excel spreadsheet. You read that correctly. A consumer’s debt may be sold in a simple Excel file that contains a shockingly small amount of information: the debtor’s name, social security number, address, balance, date the account was opened, and, perhaps, one or two other pieces of information. That’s it.
In many states, there is little obligation on the part of the debt seller to provide additional documentation. In fact, many leaked contracts have explicitly stated that debts are being sold “as is” and “with all faults”. Add to this the fact that debt buyers aren’t always meticulous about verifying information before beginning to collect, and many issues can (and do) arise.
Lawsuits and Zombie Debt
Once a company has bought a debt, whether the information is accurate or not, they will typically do whatever they can to try to collect on it – whether they do it themselves, or assign it to a collection agency to handle.
Disturbingly, many debt buyers use illegal tactics to try to collect money. And even those that operate within the law often use a sneaky strategy: filing lawsuits against debtors. As a matter of fact, leading debt buyers rank among the heaviest individual users of the state court systems throughout the US.
Why are lawsuits such a popular strategy? Since 90-95 % of these lawsuits go unanswered, debt buying companies count on consumers ignoring their lawsuits. And when the consumer doesn’t show up to court? They are automatically responsible for the debt. Worse yet, in many states, once a debt buyer wins a lawsuit, they have the power to directly garnish the consumer’s wages.
As if that wasn’t enough bad news, with such little industry regulation, debt buyers can even end up harassing consumers for debts that have past the statute of limitations, have been discharged through bankruptcy, or have already been paid. This is what is referred to as “zombie debt” – old debt that was thought to have been settled and buried, but that has come back to life.
A Brighter, More Regulated Future
Is there any hope that the debt buying industry will become more regulated and that laws will be put into place to protect consumers?
Some regulators and prosecutors have already taken some successful actions against big players in the debt industry, and some states have tightened their laws concerning debt buyers. Also, DBA International, the debt buyer’s trade group, has developed a code of ethics and claims the industry is working to regulate itself.
Even with these small wins, there are still a lot of changes that need to be made. But with the Federal Trade Commission (FTC) receiving more complaints about the debt collection industry (of which debt buyers are a big part of) than any other, we certainly hope to see more significant, positive changes in the near future.