February 2, 2011
SAN FRANCISCO, CA – An increasing number of consumers are being hounded by debt collectors for unsubstantiated debt, according to a new report issued today by Consumers Union and the East Bay Community Law Center. The groups are calling on state lawmakers and federal regulators to enact new restrictions on debt buying and to put in place other safeguards to protect consumers.
As more debt is bought and sold, debt collectors are filing an increasing number of lawsuits against consumers even though often they don’t have proof to back up their claims. Without the proof, debt collectors may sue on invalid debts, such as those that have already been paid. The problem is made worse when consumers don’t receive timely notice that they have been sued on the debt or when the debt is so old that the consumer does not have good records to show whether the debt is owed or the amount claimed is correct.
“The debt collection system is in dire need of reform,” said Gail Hillebrand, Director of Consumers Union’s Defend Your Dollars campaign (www.DefendYourDollars.org) “Current law fails to address rampant debt collection abuses and leaves consumers vulnerable to being harassed for debt that has been paid off or that they don’t even owe.”
The report highlights the experiences of a number of consumers from the San Francisco Bay Area who have been unfairly targeted by debt collectors. The groups can connect reporters to consumers who have suffered from debt collection abuses who are willing to be interviewed by the media.
The sale of debt portfolios has taken off in recent decades. Industry estimates indicate that debt buyers purchased debt portfolios valued at $110 billion in 2005 – up from just $6 billion in 1993. Debt buyers purchase large portfolios of consumer debt from the original creditor or secondary debt buyers for pennies on the dollar. The buyers hope to make a profit by collecting a small percentage of those accounts and then resell the portfolio to another debt buyer who then restarts efforts to collect.
The rapid growth of the debt buying industry has fueled an explosion in debt collection lawsuits. Using automated software, some debt collection agencies have filed thousands of cookie-cutter lawsuits each month. For example, Encore Capital Group, the largest publicly-traded debt buyer in the country, filed 245,000 lawsuits in 2009. To keep up with the huge number of lawsuits, some debt buyers reportedly employ “robo-signers” who sign affidavits swearing that they have personally reviewed and verified debtors’ records, when they have only looked at basic account information on a computer screen.
Debt collection lawsuits often target people who do not know their rights and do not have an attorney. In many cases, debt collectors have no proof that the debt even existed, let alone that the person they are suing was responsible for it. That’s because very little historical information about the accounts contained in debt portfolios is required to be passed from debt sellers to debt buyers.
In 2009, the FTC received more complaints from consumers about debt collectors than about any other industry. In nearly half of those complaints, consumers reported that debt buyers sought to collect debts that were not owed, amounts over what was owed, debts that had been discharged in bankruptcy, or impermissible fees, interests or expenses.
According to the Federal Trade Commission, the vast majority of consumers — as high as 95 percent — do not respond to lawsuits. In many cases, consumers simply never receive notice about lawsuits and therefore fail to appear in court. Obtaining a default judgment against a consumer frequently requires little more than the name, address, and alleged balance of the consumer.
“Buying and selling debt is essentially an unregulated industry,” said Megan Ryan, Supervising Attorney at the East Bay Community Law Center (www.ebclc.org). “Debt collectors have taken advantage of that lack of oversight by aggressively targeting consumers without any back-up information to substantiate the debt. It’s time to enact common sense reforms that protect consumers from unfair debt collection practices.”
To address widespread debt collection and debt buying abuses, Consumers Union and the East Bay Community Law Center recommended a number of reforms, 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 the time period after which debt is barred from being reported on a credit report under the federal Fair Credit Reporting Act.
Require debt collectors to provide more information to consumers: All debt collectors, including debt buyers, 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.
Michael McCauley (Consumers Union): 415-431-6747, ext 126 or
Megan Ryan (East Bay Community Law Center): 510-548-4064