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-based 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.There's Big Bucks in Bad Debts by Steve Rhode