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The problem with the debt-collection industry

Business is booming, and so are the related problems consumers face

Published: February 2013

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 Home Shopping Network (HSN) eight years earlier. The debt-collection company, which had bought the debt from HSN, demanded that she pay the full amount. 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.

Marie’s problems happen all too often, according to “The Structure and Practices of the Debt Buying Industry” (PDF), a new Federal Trade Commission report on the debt-buying industry. In analyzing more than 5,000 portfolios of consumer debt owned by nine of the country’s largest debt buyers, the FTC found that consumers disputed an estimated 1 million debts each year but that debt buyers were able to verify only 500,000 of those disputed debts.

Buying and selling debt has become a big, lucrative business. The FTC found that debt buyers typically purchase portfolios of debt for only 4 cents on the dollar, on average, and then collect on those debts for the full face value, netting them a huge profit.

As the debt-buying industry has grown, so have debt-collection abuses. Last year, the FTC reported that it handled more than 180,000 consumer complaints about debt collectors in 2011, more than any other industry.

Buying and selling debt has become a big, lucrative business.

We issued our own report on the debt-buying industry (PDF) in 2011, which highlighted many of the same issues. The report 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. 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 and the Consumer Financial Protection Bureau intends to use its authority to exercise federal oversight over the largest debt collectors.

Consumers Union also believes Congress should crack down on debt-collection abuses as well by implementing long overdue, commonsense reforms. We’re urging state and federal policymakers to adopt a number of protections for consumers, including:

  • Ending robo-signing and attempts to collect without proper documentation:
  • Establishing 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.
  • Requiring debt collectors 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 of the first notification.
  • Requiring debt collectors, when they sue over a debt, 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.
  • Increasing 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 debt collectors are harassing you, read the FTC's Debt Collection Tips.

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