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Debt Collection Reforms Are Past Due

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In 2010, Marie from Crescent City, Calif., got a phone call from a bill collector who claimed she owed $500 for a purchase made on the Home Shopping Network (HSN) eight years earlier. The debt collection company told her that it had purchased the debt from HSN and demanded that she pay the full amount. But Marie disputed the debt because she had already paid it off.

This wasn't the first time Marie had been harassed about the alleged debt. In 2008, a different bill collector contacted her with a similar claim. Neither bill collector could provide Marie with any details about what she had purchased or about the payments she had made. When Marie contacted HSN to get to the bottom of the matter, she was told that the records about her purchase were no longer available.

The problems Marie experienced happen all too often, according to a new report on the debt buying industry by the Federal Trade Commission. The FTC analyzed over 5,000 portfolios of consumer debt owned by nine of the largest debt buyers in the nation. It found that consumers disputed an estimated one million debts each year but that debt buyers were only able to verify 500,000 of those disputed debts.

Buying and selling debt has become a big business in the U.S. The FTC found that debt buyers typically purchase portfolios of debt for only four cents on the dollar, on average, and then collect on those debts for the full face value -- which nets them a huge profit.

As the debt-buying industry has grown, so have debt collection abuses. In 2012, the FTC reported that it handled over 180,000 consumer complaints about debt collectors in the previous year, more than any other industry.

The FTC report noted that "[f]or most portfolios, buyers did not receive any documents at the time of purchase. Only a small percentage of portfolios included documents, such as account statements or the terms and conditions of credit." Incredibly, only 13 percent of the sold accounts reviewed by the FTC were accompanied by any account documents.

Consumers Union, the advocacy and policy arm of Consumer Reports, issued its own report on the debt buying industry in 2011, which highlighted many of the same issues. The report, published with the East Bay Community Law Center, detailed how debt collectors are filing an increasing number of lawsuits against consumers even though many times they don't have proof to back up their claims. Of course, without proper documentation debt collectors may sue on invalid debts, including those that have been paid already. To make matters worse, consumers often don't receive timely notice that they have been sued or may no longer have good records to show whether the debt is owed or the amount claimed is correct because it is so old.

The FTC report called on states to strengthen their debt collection laws. The Consumer Financial Protection Bureau intends to use its authority to exercise federal oversight over the largest debt collectors, and we believe Congress should crack down on debt collection abuses as well.

The time is long overdue to enact some common sense reforms. Consumers Union has urged state and federal policymakers to adopt a number of protections for consumers, including:

  • End robo-signing and attempts to collect without proper documentation: Debt collectors should be required to document that they are attempting to collect from the right person, for the right amount, and on a debt that they can lawfully recover.
  • Establish a sell by date for all debt: It should be illegal to sell or attempt to collect debt that is more than seven years old, which is too old to be reported on a credit report under the federal Fair Credit Reporting Act.
  • Require debt collectors to provide more information to consumers: All debt collectors should be required to identify the name of the original creditor and to provide an itemized record of the total principal, interest, fees, and other charges that have been added to the debt, and to provide detailed records about the debt to consumers within five days after the first notification.
  • Require debt collectors to submit more detailed information when filing suit: Debt collectors should be required to submit basic information about the debt, including the name of the original creditor and an itemized record of the total principal, interest, fees, and other charges that have been added to the debt, when they sue over a debt, so that the consumer can see if it is his or her debt, and in the right amount.
  • Increase oversight to ensure consumers are properly notified of lawsuits: Courts should be required to provide supplemental notice of all filed debt collection lawsuits to debtors and default judgments should be prohibited if the notice is returned to the court as undeliverable.

For advice on what to do if you're being harassed by debt collectors, see the FTC's Debt Collection Tips.