Earlier this year, the Federal Trade Commission (FTC) released a report on the debt buying industry. Much of the information in the report will be unsurprising to consumer bankruptcy attorneys, since the findings are largely consistent with our experiences and those reported by our clients in increasing numbers over the past several years.
The FTC receives more complaints about debt collectors (including debt buyers) than about any other individual industry. And, while we all know that the debt collection industry as a whole is deeply flawed, the report specifically noted that “As the debt buyer industry has expanded, the Commission has also seen a significant rise in the number of debt collection complaints it received directly from consumers.”
An earlier report released in 2009 indicated that five of the six largest credit card issuers sold at least some delinquent debt to debt buyers. In fact, bank sales of credit card debt directly to debt buyers accounted for at least 75% of all debt sold. Debts are sold in portfolios that are generally grouped by a common factor such as age of the debt, credit score of the debtor or state. One such factor is bankruptcy status. Although Chapter 13 debt is worth more than Chapter 7 debt, debt included in Chapter 7 bankruptcies is routinely sold.
While the Commission found that only about 12% of the debt sold by originators to debt buyers was more than six years old (and thus, in the parameters of their study, likely time-barred), many of the accounts sold to debt buyers are sold again and again. Separate data indicates that a much higher percentage of debt transferred from one debt buyer to another is more than six years old.
Buyers paid an average of 4.0 cents on the dollar for this debt, with fresher debt typically priced higher than older debt. The average sale price was similar regardless of whether the sale was from the originator to the initial debt buyer or from one debt buyer to another.
The Disputed Debt Problem
Consumers disputed at least 3.2% of debt that the initial debt buyers studied attempted to collect themselves. The report’s author cautions that this may well under-report the actual disputes, since only written and “some” verbal disputes were noted. Additionally, many consumers never dispute debts they believe to be invalid, or aren’t aware that the debt may be time-barred or otherwise uncollectible.
Nonetheless, approximately one million debts in the pool studied were disputed, and the debt buyers’ own records indicated that barely more than half of those were verified. While most of the debt that was disputed and unverified had not been resold at the time of the study, the Commission did find thousands of disputed, unverified debts that had been resold.
Although the Fair Debt Collection Practices Act (FDCPA) prohibits the debt buyer (or other third party collector) from pursuing payment of disputed debts that have not been verified, there is no such prohibition on resale. And, the new debt buyer is not prohibited from making collection efforts, so the consumer may have to go through the dispute process repeatedly as the account is bounced from one debt buyer to another.
Lack of Information
The Commission found that the portfolios received by debt buyers generally did not include supporting documents. In addition, dept buyers typically did not receive a dispute history, information about whether disputed debt had been verified or information that would allow them to break out principal, interest and fees for the debtor. Furthermore, sellers frequently disclaim any representation of accuracy.
In the event that a debt buyer were to make a good faith effort to provide detailed information to the consumer, that ability would be greatly limited by the fact that contracts routinely limit the purchaser’s access to documents and information by imposing time limits and charges if the buyer requests documentation for more than a small percentage of accounts. And, even assuming the debt buyer makes a timely request and is willing to pay, availability of documents is not guaranteed.
Even without delving into the litigation practices of debt buyers, the Commission concluded that “… the sufficiency and accuracy of the information used in the collection of debts remains a significant consumer protection concern.” And, it’s important to note that the data assessed by the Commission was provided directly by debt buyers, and that only debts purchased directly from the original creditors were included in the study.
Even with those limitations, the study uncovered problems with accuracy and availability of information, sale of discharged debt, resale of disputed and unverified debt. Consumer complaints reveal both pursuit of the wrong parties and incorrect balances.
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