ShareThisBad debts have become big business.
For decades, credit-card companies and other firms would eventually give up after attempting to collect from deadbeat customers. Now, companies are packaging and selling many of those overdue accounts for pennies on the dollar to debt collectors. The collectors then aggressively pursue the debtors to repay, or they turn around and resell those same debts to other collection firms.
This secondary debt market has mushroomed in recent years into a $60 billion industry. But the explosive growth has been accompanied by concerns over the business practices of the debt collectors. Government officials and consumer watchdogs question the industry's often-shoddy recordkeeping, and say overly aggressive collectors sometimes break the law when going after old debts.
"There are people who are attempting to get debt from consumers when they have no proof who the actual consumer is, no proof about the actual debt or the actual contract that incurred the debt, yet that has not stopped the debt-collection industry from going full steam ahead," says Ira Rheingold, executive director of the National Association of Consumer Advocates. "What these companies are interested in is collecting as much debt as humanly possible."
As old debts get sold, the new owner's only documentation often is a spreadsheet e-mailed from the previous owner.
J. Reilly Dolan, the assistant director of the Federal Trade Commission's Division of Financial Services, compared the debt-resale market to a children's game of telephone.
"The quality of information gets less accurate as time goes on," Dolan said. "That obviously is very important because when a debt collector calls a consumer saying they owe the debt, the consumer needs to be able to assess whether that debt is valid."
A case in point is Aleasha Lewis. She admits she owes $8,000 in credit-card bills stemming from a job loss, but says she has no way to know which debt collectors are legitimate -- or how much she really owes to each collector.
"These people are buying and selling your soul," said Lewis, 41, of the Baltimore suburb of Dundalk, Md.
Debt-collection companies have developed a brisk business buying and selling expired debts, Rheingold said. In most states, debt is not legally enforceable after several years, with the statute of limitations typically ranging from three years to 10 years.
"They may argue, 'We don't know it's old,' but they are buying debt that is old," Rheingold said. "It's a cost-benefit analysis. They don't get caught."
Rheingold said he thinks companies that knowingly act on questionable information -- especially law firms that sue to collect debts that are too old -- are breaking the law.
"It's illegal, unethical and immoral," Rheingold said. "If you know that a debt is old, you should not be attempting to collect it."
The old-debt market can be a gold mine for debt collectors.
NCO Group, a Horsham, Pa.-based firm that is the world's largest debt-collection company, owns $13 billion to $15 billion in repackaged debt, though CEO Michael Barrist says it hasn't aggressively pursued the market. This year, NCO will spend $60 million to buy at least $2 billion in new debt.
If NCO collectors are able to convince these new debtors to pay 10 cents on every dollar they owe, NCO could bring in $200 million in additional revenue.
"It is a business that we are in opportunistically," Barrist said.
Each year, collectors spend about $3 billion to purchase about $60 billion of credit-card debt, said Bob Hunt, assistant vice president and director for the Payment Cards Center at the Federal Reserve Bank of Philadelphia. The industry raked in $6 billion from repackaged debt in 2007, according to a report commissioned by ACA International, the Minneapolis-based voice of the collection industry.
Collecting this repackaged debt provides a disproportionate amount of revenue for collection companies. Recoveries of repackaged debt represent only about 10 percent of the total money that debt collectors recover every year, the report shows. Most of the other 90 percent is sent back to creditors. But because the collection firms get to keep every cent of the repackaged debt they recover, these proceeds represent about a third of the collection industry's overall revenue, the report shows.
The debt-resale market "mushroomed" from 2003 to 2007 as companies realized they could make extra money by selling their uncollected debts, said Rozanne Andersen, executive vice president of ACA International, the Minneapolis-based collection-industry trade group. She and other experts say debt sales have slowed during the recession, as collectors find an increasingly cash-strapped public unable to pay older debts.
While the debt-resale market can be extremely lucrative, it is also problematic. Andersen, Barrist and other experts say the market breaks down, because information about the actual debt isn't forwarded to purchasers.
Much like the home-loan market -- a central culprit in the financial meltdown -- financiers package together thousands of pieces of debt and dish them out to investors, who are far removed from the consumers, and usually don't have information about the underlying debts.
Bob Hobbs, deputy director of the National Consumer Law Center, a Boston advocacy group, says this missing information can make it difficult for collectors to accurately price the value of unpaid bills, causing investors to make bad decisions. "Who values the debt?" he said. "Is it (worth) 5 cents on the dollar or 90 cents on the dollar?"
"Federal legislation would stop the madness," Andersen told Scripps Howard. "It would help to clarify what needs to accompany that debt as it moves through the stream of commerce."
Barrist also says more oversight of the debt market is needed, though he's not sure what it should look like.
"Everybody agrees that we need a process and we need some rules to make sure that people are doing the right things," he said.
Barrist said that, in general, he's confident his company has proper documentation for debts, but he admits there have been instances when NCO officials realized they couldn't verify the accuracy of the records.
"There are situations where we do not litigate groups of accounts because we know from experience that we would not be able to get every piece of documentation we need," Barrist said. "So we just stop."
Most debt is bought and sold in private deals, experts say, but millions of dollars of debt can be purchased by anyone who has the money. In fact, Scripps Howard located $88.6 million in debt for sale on Web sites, including bounced checks, unpaid credit-card bills and even $3 million owed to a home-security company.
Dolan, the FTC official, said there's no federal oversight of this.
"As long as it remains a valid debt, it can be sold to others," Dolan said.
(E-mail Isaac Wolf at wolfi(at)shns.com.)
If you owe it, then pay it to who owns it.
The ability to buy old paper and collect it runs like any other business, except that when an agency buys the old paper it sometimes does not know where, or how many agencies had it before, or who collected it in the past. I think the transfer of title of this paper should be "posted", somewhat like a "title or home ownership" so that this can be tracked and determined who had it last and who paid what to who.
I have been in the business since 1986, when all the big banks began to merge and all this paper was sold to "anyone" who had hundred of thousand of dollars to get the best price or best paper because they bought it "right from the bank who owned it". I have bought paper alot of credit card paper from Chevy Chase Bank,Bank One, Bank of the West, Chemical Bank, and many other smaller Credit Unions and such, however, there is no direct paper trail outlining a true line of ownership to determine who owned it in the past and who owns it now,(except when your told who tried to collect it in the past)and this is the problem when an agency in the past "collected it", and failed to "post the payment", then they sold it as uncollectible and that starts the problem when the agency who just bought it now can't follow through to collect it as it was "settled by a past agency who bought it". The time line runs from each state that the debtor resided in, to 16 years in Ohio as a limatation of years that you can collect and not 10 years as stated in the article.Usually four to sixteen years from State to State.
I am in agreement with a system that will correct this situation, but since it is "so small of a balance owed, or problomatic in that each credit past records are not kept by the bank in a standard format with computer software, it is hard to transfere or have only one format to use to document the title of transfere as all these banks use a different systems to hold the data on and this is where this problem starts.The format changes and the process gets tangled.
If you have ant questions about the business I can be reached by e-mail at: acenet1@mindspring.com
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Statue of Limitations on Debt
Know the Statute of Limitations on your debts. Collectors will not likely give you that information unless you specifically ask for it-they don't want you to know that you are coming up on, say a debt that expires next month, due to a six year limitation. You see, if the collector can get your to pay as little as one penny on that debt, the statute will then be "reactivated" from THAT date, which you don't want to happen. This would mean that the debt collection can go on for another six years or again with a new payment date down the way. Date of Last Activity on an account is when the statute of limitations begins anew. This is an important concept to grasp. If the date of last activity on the account (which you will naturally ask for before offering to "send" a payment) was nearly six years ago, don't pay anything. Ride out the account's six years maximum time and then, put in writing to the company collecting that since the account now appears to be "past statute" to discontinue collections effort or you will report them to be in violation of the FDCPA (Fair Debt Collection Practices Act), which is against the law. Thereafter, don't be surprised if the account gets sold to someone else as it is now a dead file for the current collection agency. Of course, you will keep copies of all correspondence you have sent, dated and signed, for future purposes. You do not need an attorney to keep collectors and collection agencies at bay. Statute of limitations depend on the state you are living in and, if you have moved from one state to another. Also, if you have legal Judgment against you, the debt can ride out for 20 years, maximum, unless you have filed bankruptcy. Of course, student loans are not dischargable by bankruptcy but there are certain circumstances where they may be. Afterall, the government needs a steady source of income to fund their useless war.