'Buyers' give old debts new life
Uncollected debts used to die away, victims of time and creditors' ability to write them off. But with a new breed of debt buyers, the past may haunt you.
By SCOTT BARANCIK
Published June 4, 2006
Used to be, banks didn't waste much time chasing credit card deadbeats.
Their staffs would hound debtors by phone for six or seven months, then invite outside collection agencies to take a crack. Few debtors were sued. Those who hunkered down long enough could escape without paying.
Not anymore. In the brave new world of debt, unpaid bills never die. Today speculators are buying thousands of these aging accounts at a time and extracting payments the original lenders could not.
Some debt buyers are hauling consumers into court and getting permission to garnishee their wages, empty their bank accounts or even seize their cars. Others are convincing debtors to pay down old bills that are no longer legally enforceable.
The amount of written-off credit card debt sold to debt buyers in 2004 - $63-billion worth, according to the Nilson Report - was 100 times the amount sold in 1993. This year, a Las Vegas convention hosted by the Debt Buyers' Association trade group drew 1,400 debt buyers, sellers, brokers, resellers and lawyers.
Other credit issuers are selling their unpaid bills, too, including such retailers as Radio Shack, Wal-Mart and Bally Total Fitness, and hospitals, auto lenders and utilities.
Asset Acceptance, one of five publicly traded debt buyers, operates a 52,000-square-foot collections center in Riverview. In 2000, the Michigan company sued 25 debtors across Pinellas, Hillsborough, Pasco, Hernando and Citrus counties. Last year, it sued 3,855.
Over the same period, the types of lawsuits debt buyers usually file - small-claims breach of contract, monies due or accounts suits - rose 56 percent across Pinellas, Hillsborough and Pasco counties.
A morning cattle call at the Tampa courthouse shows why.
Hillsborough County Judge Charlotte Anderson reviews small-claims lawsuits every Wednesday. This morning's docket allots 150 minutes for 165 pretrial hearings, more than half involving debt buyers.
In every case, the debt buyer has a lawyer. Not a single accused debtor does. Only two put up a fight.
Sandra A. Thompson, accused of stopping payment on a $2,003 credit card debt in 2001, tells the judge the debt was erased in bankruptcy court. The plaintiff agrees to dismiss Thompson's case on the spot.
Michael A. Johnson says he has "no recollection" of a 2001 credit card debt totaling $2,118. The answer earns him a trip to mediation.
Everyone else goes down without a punch. Each admits owing all or some of his alleged debt. Dozens more automatically lose because they didn't bother coming.
Debt buyers say landslides like this January morning's prove their account records are accurate. But critics like Bud Hibbs, a consumer advocate in Texas who calls debt buyers "scavengers," says more than 90 percent of all defendants would prevail if they could afford to hire a competent lawyer. Tampa lawyer Don Golden says many accused debtors would be better off filing for bankruptcy anyway, which can slay multiple debts at once for a fraction of the legal fees.
The consequences of losing in court are steep. A successful plaintiff in Florida is entitled to tap a debtor's wages and assets for up to 20 years, with interest.
Athena Funding Group, a Tampa debt buyer, successfully sued Allen Pankow in 2004 over a $924 credit card debt. When Pankow, then a 51-year-old Largo resident, ignored several court orders to disclose his income sources and assets, Athena asked that he be jailed for contempt, court records show.
He was. After his $500 bail was posted, Athena obtained the court's permission to snag it.
"Some people are only motivated by the stick," said Carol Freeland, who chairs the Asset Buyers Division at ACA International, a collections industry trade group.
Filing suit isn't for everybody.
Freeland, a partner at PRM Financial Services in Texas, says her company primarily buys accounts that are near or beyond the statute of limitations three to 15 years, depending on the state. PRM offers to discount the amount owed and transfer the balance to a new credit card.
With regular payments, the debtor can improve his credit rating and eventually use the card for limited new purchases. Despite the 18.9 percent interest rate, Freeland says, many debtors are grateful.
What most debtors don't realize is that a person is not legally obligated to repay a debt whose statute of limitations has expired. But transferring the balance to a new credit card resets the clock to zero.
Debt buying: the science
Companies pay just pennies on the dollar for unpaid debts. Last year, for example, Asset Acceptance paid $102-million for $4.2-billion of consumer debt, about 2.5 cents per $1.
The discount is steep because the debts are difficult to collect. Half the accounts Asset bought in 2005 stymied at least three prior collectors. Even after spending several cents more per $1 on legal fees or other collection costs, most buyers would be happy to recover 20 or 25 cents per $1.
"The vast majority of what they buy never gets collected," says Charles Trafton, an industry analyst with America's Growth Capital in Boston. "It's old, they haven't had payments in a long time, (and) oftentimes you don't get great addresses, known places of employment."
"We're buying somebody else's discarded accounts," said Jeffrey Bovarnick, a principal at Asset Recovery Management in Needham, Mass. "We take huge risks, and we're entitled to make a return on our investment if we abide by the law."
That's why there's a science to buying bad debt.
Debt buyers kick a portfolio's tires before bidding on it. They obtain partial account data from the seller and dump the stats into a software program designed to assess value.
Key variables include the average account balance, length of delinquency, number of years remaining under the statute of limitations, number of previous collection attempts, whether Social Security numbers are available, and debtor characteristics such as ZIP code and credit score, according to ACA International's Buying Receivables.
Historical patterns show that middle-aged people and those living in more affluent ZIP codes are more likely to repay a debt.
A buyer who has had success collecting on auto loans may pay more for them at auction than someone skilled at medical collections. A buyer who expects to file many lawsuits may pay more for a portfolio that offers original account documentation.
After submitting the winning bid, a buyer typically scrubs his new portfolio of debtors who have died or otherwise are not worth chasing, such as those whose debts were erased in bankruptcy. The buyer informs the remaining debtors by mail that their accounts have been purchased and that they have certain legal rights, such as to end routine collection calls and letters. Most debt buyers piggyback a settlement offer onto the notice.
The next step is to assign each account a collection strategy. Every buyer handles this differently.
At Asset Recovery Management, the first priority is to quickly sue any debtor whose statute of limitations is nearly up. Others are given roughly six months to respond to the company's initial letter and make a deal, most likely a monthly repayment plan. Those who don't may be sued, too, though cost is an issue.
"That's not my preferred course of action," Bovarnick says.
It's what they do
What makes debt buyers better collectors?
A gentle touch, says Barbara Sinsley, legal compliance chief at Asset Acceptance, where debtors are called "customers" and 36 percent of all collections come via the courts.
"Our mantra is 'Just be nice,' " says Sinsley, who works at Asset's Riverview office. "I mean, frankly, if you're not working with a customer, they're less likely to pay."
Debt buyers can afford to be patient. Unlike creditors, most aren't subject to accounting rules that require them to quickly write off defaulted loans as a loss. Some are willing to wait as long as 10 years for a debtor to recover from the drug habit, gambling problem, illness, divorce, job loss or jail sentence that knocked him off his financial feet.
Because of their anonymity, debt buyers are freer to customize repayment plans.
"Citibank doesn't want to be known for settling with debtors for 10 cents on the dollar, because then everybody would try to settle with them for 10 cents on the dollar," says Gobind Sahney, chairman of Receivables Acquisition & Management Corp. in New York.
Debt buyers also are freer to turn the screws. A creditor, such as a retail chain, might soften its tactics for fear that an angry debtor will cease shopping at its stores and bad-mouth it. But the debt buyer's primary constraint is the law, including the federal Fair Debt Collection Practices Act and Fair Credit Reporting Act.
In short, the lender's core business is to lend. The debt buyer's is to collect.
Who's the bad guy?
Debt buyers don't appreciate being portrayed as heartless corporations sucking the marrow of innocents, whose only crime was getting sick, fired or divorced.
Freeland is still steaming over a recent episode of the television show Boston Legal in which a law firm employee complains she owes her credit card lender $50,000. After shattering the bank's window in frustration, the employee whines about the card's high fees and interest rate. Her boss, a lawyer, responds with a blowy tirade that scares the bank's attorney into erasing the debt. Never addressed is the fact that no one held a gun to the employee's head when she ran up her bill.
"Everyone's against the idea that we would have the gall to ask someone to pay their bills," says Michael Weinard, president of Tampa company Athena Funding.
Debt buyers are in business to make money, of course, but they say the debtor benefits as well - with flexible repayment terms, an improved credit rating, even relief from a guilty conscience. The debtor may be able to borrow money more cheaply in the future, too.
But forgive a debt? Out of the question.
"This business isn't for sissies," Freeland says. "We can't become so sympathetic that we just say, 'Oh, this is so awful, we can't collect this.' "
She harks back to the era of her grandfather, a banker, when "people jumped off roofs or shot themselves" rather than live with the shame of financial ruin.
"Now, people go to a cocktail party and they say, 'By the way, who's your bankruptcy attorney? I need one.' "
Consumer advocates aren't buying it. Mark Tischhauser, a Tampa lawyer who has sued several debt buyers for allegedly violating debtor-protection laws, says such companies naturally resort to abusive tactics because their old, overworked accounts are so hard to crack.
Tischhauser worries about the unlevel playing field in court, where few debtors can afford an attorney and most are unaware of their rights. How many debtors know there is a statutory time limit on most debts - as little as four years in Florida? How many know that the only way to stop a buyer from getting a judgment on a time-expired debt is to raise the issue themselves in court?
Of the 90 people called to face a debt buyer in Courtroom 306 that January morning, only two apparently understood the value of a good legal defense. And one of them, Michael Johnson, couldn't get a lawyer to return his calls.
Left to his own devices, Johnson sought legal advice on the Internet, where the "I don't recall" defense strategy is often recommended.
Debt-buyer attorneys decry such tactics, which they consider disingenuous. That Johnson purchased a $112,500 Tampa home in 2003, two years after he allegedly stopped paying off a credit card debt, would only stoke their ire.
Johnson says he suspects that a former acquaintance or his ex-wife may have run up the charges on his credit card. He makes no apologies for being skeptical about lawsuits.
"I had a paternity suit when I was 18 years old," Johnson says. "At that time I was very religious and still a virgin. I'd never even kissed a girl. They just subpoenaed every Michael Johnson they had."
Times staff writer Matthew Waite and staff researcher Angie Drobnic Holan contributed to this report. Scott Barancik can be reached at email@example.com or (727) 893-8751.
Lawsuits suit them
Debt buyers say they are no more likely than lenders to sue a borrower. But in three Tampa Bay area counties* between 2000 and 2005, the types of small-claims lawsuits debt buyers and other collectors typically file - breach of contract, monies due and accounts suits - have gone up sharply.
WHEN A DEBT BUYER CONTACTS YOU
If a debt buyer purchases your unpaid bills, it usually will notify you by mail. There are several ways to respond.
Do you really owe the money? Consumer advocates recommend you write back within 30 days and ask for proof.
There are four reasons why you might not owe the money: identity theft, identity confusion, clerical error or the passage of time. In Florida, a debt is not legally enforceable if it has been more than five years (sometimes four) since the debt became delinquent, your last payment was made or you promised in writing to repay it.
Be careful not to restart an expired debt. The statute-of-limitations clock resets if you make a payment, transfer a debt balance to a new credit card or declare in writing that you will repay the debt.
Many debt buyers will offer a discount if you agree to settle right away. If you can pay off a debt within five years, request a long-term payment plan. If you can pay it all at once, your discount may be higher.
A collector might let you get away with ignoring your debt if it appears you have no money or property that can be legally seized. But ignoring a debt won't keep it off your credit report or guarantee you won't be sued.
FILE FOR BANKRUPTCY
If you have multiple overdue bills and can't repay them within five years, consider filing for bankruptcy court protection. Doing so can eliminate or reduce most of your credit card, medical or other unsecured debts. A bankruptcy lawyer costs about $1,000.
WHEN A DEBT BUYER SUES YOU
If you owe the money, contact the collector and try to settle (see above). As long as you stick with the payments, the lawsuit will be mothballed.
If the debt is inaccurate or not yours, consider hiring a lawyer. Note: In debt cases, most lawyers will want their legal fee up front.
Whatever you do, don't ignore a lawsuit. You automatically lose if you don't respond or show up at your hearing. That may entitle the debt buyer to garnish your pay, seize your bank accounts or even take your car.
FOR MORE INFORMATION
Federal Trade Commission: Offers free consumer brochures, including Credit and Your Consumer Rights, Fair Debt Collection and Fair Credit Reporting Act. For copies, visit www.ftc.gov/credit or call toll-free 1-877-382-4357.
American Bankruptcy Institute: Lists lawyers the organization has certified as consumer bankruptcy specialists. Visit www.abiworld.org and click on "Consumer Education Center."
Florida Bar: Manages a lawyer referral service. Participating lawyers offer an initial, 30-minute consultation for $25. Visit www.flabar.org and click on "Public Information," or call toll-free 1-800-342-8011.
Florida Legal Services: Helps lower-income Floridians find free local legal help. Visit FloridaLawHelp.org and click on "Legal Services Directory," or call (850) 385-7900.
Asset Acceptance LLC
Background: A bit player here until recently, the Michigan company sued more west-central Florida consumers in 2005 than any other debt buyer - 36 percent of its nationwide collections dollars come via the courts.
Florida chops: Asset has purchased 1,587,115 debtor accounts in the state since 1995. It opened its Riverview office in 2001.
Motto: "Taking you from the red to the black."