Althoughcollection agenciesand the lenders and debt buyers that hire themare steppingup their efforts to recover old debt from credit card holders, they may not beautomatically entitled to that money.
Unfortunately,few in-debt consumers realize that Wisconsinconsumer protection laws are on their side.
It’sterribly difficult and sometimes impossible or illegal for credit cardcompanies and collection agencies to recover their money. But that doesn’t stopthese companies from trying to collect. In fact, they count on consumers’ lackof awareness of the laws so that they’ll pay up in full.
ABig Business in Overdue Accounts
Debt buyinghas become big business in recent years as lenders discovered that the old debtthey carried on their bookseven if that old debt was discharged duringbankruptcy proceedingsmight be worth something to someone.
“There’s alot of money to be made in squeezing the consumer,” said Milwaukee attorney Michael Mack, whospecializes in consumer debt settlement.
Much likethe exploitation that occurred in the subprime lending industry, this seeminglyworthless debt is sold to debt buyers, many of which are owned by hedge funds.Some are even traded publicly on the stock exchange. Billions of theseseemingly worthless debts have been sold.
Debt buyerspurchase a lender’s delinquent accounts for pennies on the dollar. Typically,the buyer receives names of delinquent account holders, account numbers, andamounts overdue.
Theseaccounts are so cheap to purchase that a debt buyer could collect on only someof the debt and still make a tidy profiteven if they have to hire collectionagencies and attorneys to do so. That’s when the phone calls and letters kickin.
O. MaxGardner III, a North Carolina-based consumer bankruptcy attorney, said the debtbuyers’ business model is based on consumers’ unwillingness to fight the claimin court. That gives the debt buyer a default judgment, meaning the consumer ison the hook. Merely settling with a debt buyer for a fraction of the debt providesthem with a profit.
“Even if youcollect 20 or 30 cents on the dollar, that’s 10 or 15 times what you paid forthe account,” Gardnersaid. “And all they’re buying is electronic data. They’re buying the name, theaccount number and the balance. They’re not buying any of the original loandocuments, the bill statements or correspondence. So if you challenge any ofthese cases, they can’t prove anything.”
KnowYour Rights
The catchfor debt buyers is that consumers still have some rights. Unfortunately, manyconsumers aren’t aware that they have significant protections in court. Theywind up receiving harassing phone calls and letters, seeing their credit ratingreduced to shreds and eventually settling their claims with the collectionagency.
Little do theyknow that the burden of proof is on the credit card company or debt buyer.Under the Wisconsin Consumer Act, lenders and collection agencies must providecomplete documentation of the borrower’s delinquent account. Without thecomplete documentation, they do not have a legal claim.
According toattorney Mack, that means the collection agency must show everythingfrom theborrower’s application for the credit card, to all of the statements, and eventhe notices of changes in policy. In essence, the court won’t take the mostrecent account statement as proof of the outstanding balance. The lender mustshow how it arrived at that amount.
“We seenothing absurd about requiring the banks [who brought the complaint] to retainthe records of charges for which they wish to collect payment,” appeals courtjudges concluded in a 2007 challenge to the Wisconsin Consumer Act.
Consumerattorney Mack said that requiring the lender to provide all of the account’sdocumentation is imperative, because the balance could have been incorrectlycalculated.%uFFFD
“Theconsumer can dispute those records,” Mack said. “Credit card companies makemistakes all the time.”
What’s more,the attorney representing the lender must do some due diligence to ensure thathe or she isn’t filing a frivolous claim. If there are no supporting documents,Mack says, the attorney shouldn’t be filing the claim at all.
RobertPotrzebowski Jr., managing partner at the Kohn Law Firm in Milwaukee, which specializes in debtcollection and litigation for debt buyers, declined to answer specificquestions about the services his firm provides and whether his firm files allsupporting documents with its complaints.
BankruptcyProtection
There’sanother area of consumer debt in which debt buyers are running amok andengaging in illegal activity: trying to collect on debt that’s been written offor “discharged” during bankruptcy proceedings.
“It’samazing to see documents filed with the Securities and Exchange Commissionwhere one of the big debt buyers has made an agreement to buy Chapter 7charge-off debt, and it’s absolutely worthless,” attorney Gardner said.
Oftentimes,the old, forgiven debt will remain on the consumer’s credit report because theoriginal lender hasn’t updated its records with the major credit bureaus.
“There are anumber of class actions that have been filed, mainly in California, againstExperian, TransUnion and Equifax, based on their failure to monitor with propersoftware programs individual consumers’ credit reports to make sure that thisis not happening,” Gardner said. “One thing that the credit reporting agenciesalways reported was bankruptcy. They always reported the discharge.”
Debt buyerswho purchase these discharged accounts are allowed to report the debt in thename of the original lender.
“Obviously,a credit report that shows an outstanding debt to Chase, for example, on acredit card, is going to have more impact than one to a collection agency,”Gardner said.
Gardner said that a consumer typically isn’t awareof the “zombie debt,” or debt that comes back from the dead, until he or she isapplying for a new loan for a car or refinancing a mortgage.
“You’re in akind of coercive situation where you’ve made plans to proceed with atransaction and at the last minute you’re told about this $900 credit carddebt, and that’s got to be repaid so they can rescore your FICO and pay off theloan you didn’t know you had,” Gardnersaid. “That’s like in The Godfather,the offer-you-can’t-refuse situation.”
What You Can Do About Old Debt
- Whenreceiving a call from a collection agency, Mack suggests the following:
- Get the caller’sname, company and phone number, and the debt that’s being collected
- Ask forverification of the debt in writing
- Don’t argue withthe caller
- Once you receivethe letter, decide whether settling the claim, fighting it or filing forbankruptcy is your best optioneach individual’s situation is unique. You maywant to consult with an attorney
- Communicate inwriting with the agency
- Remember that youdo have some rights, even if the collection agency is putting pressure on youto pay in full
- Monitor your creditreport to ensure that “zombie debt” has been erased
