Debt-collection tactics under scrutiny
At issue: Coercing debtors into waiving rights they don't know they have.
Debt collector Antangela Pauldo had heard every excuse for why people couldn't pay their auto loans. And like most in her line of work, she instinctively had a skeptical view of every sob story.Skip to next paragraph
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Today, however, Ms. Pauldo has a new appreciation for the depths to which some in her profession will go to collect debts, especially ones that are no longer legally owed – or were never owed in the first place.
A nearly 10-year-old credit-card account she claims wasn't hers popped up out of nowhere and led to verbal harassment and voice-mail runarounds. Finally, $900 was garnished from her bank account by a Georgia law firm. The firm is now being investigated by the state Office for Consumer Affairs.
"It's made me look at my job differently," says Pauldo, who complained to the Georgia Better Business Bureau. "There are [debt] issues that people bring up that are legitimate, and it's my job to help them – not criticize them."
The story of the debt collector who got burned by her own industry is part of a widening debate about "zombie debt," or debt that never dies. At issue: the tactics used by third-party debt collectors to coerce Americans into waiving a US common-law right: debt forgiveness.
On the heels of a credit-card reform movement in Washington, the Federal Trade Commission (FTC) is now joining a growing number of states to strengthen consumer protections and shed more light on the shadowy tactics of junk debt collectors.
The question, experts say, is whether Congress and regulators have the fortitude to stand up to a $100 billion industry that represents the underbelly of America's recent addiction to easy credit.
"Nobody thought there'd ever be such a thing as a debt industry," says Robert Manning, director of the Center for Consumer Financial Services in Rochester, N.Y. "Now we're seeing a set of issues emerge about American insolvency laws, entrepreneurship, and the whole social and moral underpinnings of who gets loans, and why.
"This is the bottom of the food chain," he adds. "They have power to freeze accounts, create collateral damage, and see who responds."
Hundreds of such "junk debt" firms – ranging from mom-and-pop operations to multinational companies with 100 employees or more – buy millions of discharged accounts from lenders each year. (These are bad loans that a bank has written off as a loss for tax purposes.)
They then run computerized "skip traces" that use Social Security numbers to locate debtors, then cajole them into waiving the statute of limitations on old debts and paying up.
Junk debt companies can legally try to collect. Thirty-year-old consumer protection laws give consumers certain rights, but they don't guarantee that debt collectors must inform people of those rights – creating what the FTC's Julie Bush calls a "gray area" that can be exploited by collectors.
"There's no requirement that [debt collectors] indicate that the debt is older than the statute of limitations," says Ms. Bush.