Debt collectors: Why are they so abusive?

Debt collectors have few restrictions and perverse incentives to use extreme measures on debtors. Here are five of the worst abuses by debt collectors.

When a story emerges about egregious behavior in a profession, it’s always important to ask: “Is this an isolated case or widespread practice? In the case of the debt-collection industry, the verdict is in: A tsunami of abusive practices is hitting thousands and sometimes millions of Americans and there’s no sign of a let-up.

I should know.

Hounded by predatory debt-collection agencies after the failure of our oil-related business, my wife, Kathy, and I created a debt-collection company to do things differently. For starters, we treat people with respect even if they are going through hard times. That’s why it pains me to see my industry continue to abuse people when there’s a much better way. Here’s a look at five dimensions of that abuse and why the problem is so massive:

1. “Scorched earth” threats

These cases go way beyond what’s needed to prod someone to pay their debts, like the one involving a Belleville, Ill., woman who was behind on a debt around the time that her daughter died. A debt collector called to say that she better pay up, or he would dig up her dead daughter and hang her from a tree. In another case, a 10-year-old girl from Osceola County, Fla., answered the phone and a debt collector identified himself as an “officer.” He said: “You better kiss your daddy good-bye. He’s going to be arrested tomorrow or the next day.”

Not only are these threats obscene, they’re common: The Federal Trade Commission received more than 164,000 complaints in 2011 about debt collectors. That doesn’t count complaints to other agencies at the federal and state levels, or the much larger group that is too afraid or embarrassed to complain.

2. Convicted felons in a position of power and access

As consumers, we’re warned to be careful with our financial information because of identity theft. But what if criminals have access to confidential financial data all day long? One debt-collection company in Minnesota reportedly had at least 81 employees with felony or gross misdemeanor convictions between 2005 to 2010. In another case, a convicted felon was hired as a debt collector and—surprise!—she stole credit-card data and went on a buying spree.

Sometimes criminals hit the jackpot and get to wear badges. In Massachusetts, many debts are collected by state-appointed constables, who carry badges and batons and can literally knock on a citizen’s door at midnight, demanding payment. A 2006 review of records by the Boston Globe indicated that 87 constables had criminal arrest records.

3. Record-keeping that’s somewhere between negligent and criminal

When you pay off a debt, you’d think that fact might be recorded somewhere. In the debt-collection business, such details apparently are optional. A Minnesota woman paid off her $260 debt but the collection company couldn’t be bothered to record that fact after they cashed her check. Over the next decade she battled other collection agencies to which her account had been sold and her original $260 grew with interest to $5,818 before she finally prevailed. In 2008, a bankruptcy trustee in Massachusetts accused one debt collector of trying 5,600 times to collect on debts that had already been wiped out through bankruptcy proceedings.  

The record-keeping problem is widespread enough that it prompted Minnesota Attorney General Lori Swanson to file suit against Midland Funding, a debt collector. She said: “This company has a history of targeting people and assuming they owe them money until the citizen can show they don’t owe the money…. It really flips the process on its head because a debt collector or debt buyer shouldn’t be targeting anybody for payment of a bill unless they substantiate that a person actually owes the money.”

4. Extracting money from grieving relatives

What are the right words to say to a person who’s just suffered the loss of a spouse? If you’re a debt collector, it’s simple: “You can pay by check or money order.” A Florida woman was struggling with the loss of her husband when the debt collector called. Even though she was not legally obligated to pay her husband’s bill, that did not prevent the collector from hounding her up to 10 times a day. One consumer-rights attorney, William Howard, observed: “Collectors are starting to realize just how much money you can get from someone when they are at their most vulnerable.”

5. The profitable, perverted lawsuit mills

Remember the “robo-signing” scandal, where some mortgage lenders were signing as many as 10,000 documents a month, claiming to know the circumstances of the borrowers? That’s child’s play compared to debt collectors, some of whom sign 4,000 lawsuit documents per day. It’s only the first step in a brilliant, ruthless system to get courts to do the dirty work for debt collectors. For as little as $40, collectors can take those robo-signed documents and file suit electronically. Then they often send a plain letter by first-class mail, notifying people that they’re being sued. In some areas, as many as 94 percent of defendants don’t show up in court, either because they didn’t realize they were being sued, or they’re too scared. Of the ones who do appear, sometimes only 1 in 100 brings a lawyer.

The result? The gavel drops and a “default judgment” is issued. Now the debt collector can sit back and grin, because the court now sees to it that the collector is paid, using threats of wage garnishment, arrest, strip searches, and jail. In New York City, a study found that debt collectors filed more than 500,000 debt-related suits between January 2006 and July 2008.

Debt collectors use these extreme methods because they’re expedient. Instead of generating six- to seven-figure revenues by working with debtors over several years, they salivate at the prospect of eight-figure revenues they can bank immediately by intimidating and harassing debtors. Until these five areas of abuse are eliminated by regulators and our elected officials, debt collectors will continue to hold their premier position in the hall of shame.

– Bill Bartmann is CEO of CFS II, a debt-collection company in Tulsa, Okla., and has helped to settle the debts of more than 4.5 million people without ever filing suit against a customer.