Every year the debt collection industry generates far more consumer complaints to the Federal Trade Commission that any other. These mounting complaints led the FTC to conduct a comprehensive investigation into the debt collection process. That study highlighted what the FTC called “the most significant change in the debt collection business in recent years,” ie. the sale and purchase of consumer debt portfolios. Of particular concern were the significant mistakes made by debt-buyers. As many consumers find out first-hand, these buyers frequently contact the wrong party, make inaccurate claims about debt, and have incorrect documentation to prove their claims.
The FTC’s follow-up examination of the rise of debt-buying sought to better understand how the industry operates and figure out why mistakes are so common. The full report can be found online here.
Debt buying companies spend pennies on the dollar to purchase debts from others (banks, credit card companies, etc.). The companies then try to collect on the original debt from the consumer at significant profit levels. The FTC found that, on average, the debt-buying company pays 4 cents for every dollar of debt. This means that they stand to gain significantly from each debt they are successful in getting paid.
Unfortunately, the FTC found that there is often poor communication between the original owner of the debt (the bank) and the debt-buying company. These purchases are often made quickly, with a minimum amount of detail for each account. Often, the buyer is provided no information on the breakdown of the debt into principal, interest and fees. In addition, few supporting documents are transferred between the original creditor and the buyer, and the purchase contract often limits the period during which and the number of documents the buyer can request without incurring additional fees . Many of these sales are conducted “as is,” effectively limiting the seller’s warranty as to the accuracy of the information that transmit.
The FTC also reports that only 3.2% of the debt studied was disputed by the debtor.
As a result, debt-buyers often take a scattershot approach to collections. It doesn’t matter so much if the information is accurate and complete when they’re paying 4 cents on the dollar. They can afford to take the risk of attempting to collect an unverifiable debts, debts past the statute of limitations, or debts previously disputed by consumers. The real loser is the consumer who is forced to spend significant time and resources (not counting the stress of the situation) in order to prove that the claims of the collection company are inaccurate. In some cases then, consumers are paying off debts that they do not actually owe and which the debt-buyers cannot verify.
The Lesson: Defend Yourself
One of the overarching lessons of this new FTC report is the need for consumers not to take the claims made by these companies without response. Considering the myriad of mistakes often made, it is absolutely critical for consumers to demand actual documentation from the company. One of the best first steps when contacted by one of these companies is to request information about the original creditor, the account number, the date of the last payment, and similar details. And, we encourage you to visit the Debt & Credit pages of our website for more information on unfair collection tactics and what you can do to dispute debts that you don’t owe.
The FTC’s report should also be of interest to consumer bankruptcy attorneys faced with undocumented proofs of claim filed by debt-buyers. Although courts in many jurisdictions recognize that the burden of proving a claim rests square on the shoulders of the creditor asserting the claim, other courts still subscribe to the belief that it is the debtor’s burden to prove that the claim is defective. In light of recent changes to the bankruptcy rules requiring more documentation to substantiate claims, we will be watching to see if that translates into more than a screen shot of a debt-buyer’s database. .
Professional help in dealing with these companies can ensure that your legal rights are respected every step of the way. Consider contacting the attorneys at Armstrong Kellett Bartholow P.C. to learn more.