There has been a lot of talk about zombie debt recently, and it prompted us to dig a little deeper into the debt collection industry. As it turns out, zombie debt is just one type of monster in this dark and frightening industry. We want you to know what’s lurking around the corner and how to protect yourself. Take a look at these 5 secrets about debt collection agencies—these are things that collectors don’t want you to know.
1. Debt is Sold to the Highest Bidder
Did you know your debt is bought and sold, sometimes in a recurring cycle? Some debt collection agencies participate in debt buying, which means they buy portfolios from creditors or even other debt buyers who are reselling. What’s in the portfolios? Groups of debts based on similar characteristics such as debt type, location of the debtor, etc.
The selling process goes like this:
- Step 1 The debt seller provides information (data files) and opens the bidding
- Step 2 Debt buyers place competing bids toward the portfolio(s)
- Step 3 The highest bidder is selected and notified
- Step 4 The debt buyer and seller form a contract
[Related: More about the debt buying process]
2. Debt Sells for Cheap
Debt is bought for an average of 4.0 cents per dollar of face value. The price depends on the age and type of the debt.
Age of Account, price sold
- Less than three years, 7.9 cents/dollar
- Between six and fifteen years, 2.2 cents/dollar
And debt older than 15 years is practically given away for free. Also, medical debts and utility debts are typically worth less than average, while mortgages debts usually go for more.
3. Your Debt is Being Sold in Online Ads
A debt seller may be the “original creditor,” such as a bank, or a debt buyer who has decided to resell. Either way, the seller packages the portfolio(s) and then uses marketing tactics to find a buyer. Common forms of marketing include:
- Direct mail
- Web ads
- Promotional email
In fact, we searched the internet for online postings of debt portfolios. Take a look at what we found:
4. Some Debt Collectors don’t Care about Statutes of Limitations
In a recent study, the FTC noted that debt collectors continue to pursue legal action against consumers even after the statute of limitations has passed. The statute of limitations (which varies by state) is designed to protect consumers from debt collection after a certain length of time has passed. The statute of limitation is usually between three and six years, and the longest is 15 years. After this time has passed, the debt is considered to be “time-barred.”
Collectors are not supposed to threaten legal action on time-barred debts and are not supposed to make deceitful implications when talking to consumers. The FTC found that consumers are being tricked by the following tactics:
- Debt collectors threaten to sue consumers over “time-barred” debt, which leads to consumers making a payment that resets their statute of limitations.
- Debt collectors encourage consumers to make a payment and imply that this will be a one-time payment. Instead, this payment resets the statute of limitations.
- Debt collectors take consumers to court. Even though the debt is time-barred, a consumer who fails to show up in court can have his or her statute of limitations reset. The FTC reports that 90% of consumers do not show up to court in these cases.
5. Smaller Debt Collection Agencies are Even Scarier
The FTC’s recent study looked primarily at debt buyers who purchased debt from original creditors. These agencies were nine of the largest debt buying companies in America, and 80% of the debt was bought from original creditors. The FTC raised concerns that smaller debt companies might be more dangerous. Why? It’s about the age of the debt. Of the 80% that was bought from original creditors:
- 19.3% was between three and six years old
- 11.3% was between six and fifteen years old of the remaining debt (which was bought from other debt collectors or debt buyers)
- 32.1% was three to six years old
- 27.5% was between six and fifteen years old
See the difference? As debt changes hands and trickles down to smaller debt buying agencies, the situation becomes more dangerous. Older debt is more likely to be time-barred, and the FTC wants consumers to be protected in cases of time-barred accounts. In fact, the FTC warns that small debt buyers and debt buyers that purchase most of their debt from other debt buyers (instead of directly from issuers) “are likely to be a source of significant consumer protection problems.”
Have you had any experiences with debt collection agencies? Or, do you have any questions about the collection process? Let us know in the comments below. Also, if you want to learn more about how we can help, sign up to work with a counselor for free.