Your Guide to Debt Buyers and Debt Collection Agencies

If you have been in debt, chances are that you have had an encounter with debt buyers or debt collection agencies. It’s also likely that at some point you were confused about your rights and about the collection process in general. We have attempted to compile useful information here regarding the debt collection process, from the time a consumer opens an account to the time he or she is taken to court for failure to pay. We will review some key terms and hope to give you a greater understanding of this process. We will also review a 2013 study by the Federal Trade Commission concerning the Debt Buying Industry. Did you know that your personal debt can be sold to the highest bidder in a portfolio with other past due accounts? If that sounds scary, keep reading to learn how you can best protect yourself.

The Time-line of a Credit Account
Charged-off Accounts
What happens next?
Third Party Debt Collectors and Debt Buyers
Creditors Choose Between Debt Collectors and Debt Buyers
What if the creditor keeps the account to collect on it?

Consumer Protection
The Fair Debt Collection Practices Act
VIDEO: How to Protect Yourself from Collection Agencies

The Debt Buying Industry
Debt Buying: Introduction
The Debt Buying Process
Marketing
The Sale of Debt
Resale
The Price of Debt
VIDEO: How to Negotiate with Debt Collectors
Debt Buyers May Not Have Accurate Information
Limitations to Debt Buying Contracts
Verification of Disputed Debts

Statute of Limitations and Consumer Rights
Statue of Limitations

For Further Reading
Additional Resources
Sources

Charged-off Accounts

Your credit account begins with the “original creditor.” This company, a bank for example, extends credit to you under certain terms and conditions, which are basically the equivalent of a legal contract. If you fail to meet these terms and conditions, including by failing to pay, the creditor will take action and attempt to collect from you. If this is unsuccessful, the original creditor will eventually declare a “charge-off.” This declaration is the creditor’s way of saying “We don’t think this person will repay the debt.” There are federal regulations for when creditors must do this:

  • Installment loans – must be charged-off after 120 days of delinquency
  • Revolving credit accounts – must be charged-off after 180 days of delinquency

What happens next?

This is where things get interesting and confusion begins. The original creditor has several options. It can continue to attempt collection using its own staff (internal collections), can hire a third-party debt collection agency, can sell your debt to a “debt buyer,” or can initiate a lawsuit or settlement.

You might be wondering about the differences between a third-party debt collection agency and a debt buyer. Let’s explain :

Third-party debt collection agencies are hired to collect debt on behalf of another entity, like a creditor.

Debt buyers pay creditors for debt portfolios, giving the debt buyer ownership of the account(s). The debt buyer may then act as a debt collection agency and attempt to collect. On the other hand, it may use a third-party debt collector to collect on its behalf, or it may just sell the debt again to another debt buyer.

*Many creditors choose to use a third-party debt collection agency because they do not have an adequate infrastructure to collect on their own.

From a creditor’s perspective, here are the pros and cons of each system:

Using debt collection agencies:

Pros

  • Allows for greater control and supervision of the collection process
  • Working with debt collection agencies can protect the reputation of the creditor, if the collection agency is abiding by the law and treating consumers fairly.

Cons

  • Collection can be a long and drawn out process, delaying when the creditor can receive its money.

Using debt buyers:

Pros

  • Using a debt buyer allows for a quick sale of the debt, which brings an immediate and guaranteed amount of money to the creditor.
  • Can save on some costs associated with third-party debt collection

Cons

  • Less control and supervision over the process
  • Potential reputational harm if there is a long cycle of reselling the debt

What if the creditor keeps the account to collect on it?

Before an account is charged-off and sent to collections or a debt buyer, it remains in the hands of the original creditor. In some cases, the original creditor may choose to continue to collect after the charge-off, depending on the infrastructure in place at the particular company. The key difference is that original creditors are not covered under the Fair Debt Collection Practices Act. This means that original creditors are allowed to use tactics that are off limits to collection agencies and debt buyers. Some states have laws in place to regulate the tactics used by original creditors, so be sure to check with your state. If your state does not have regulations in place, you should report unfair practices to the FTC for further investigation. Also, keep in mind that original creditors are typically much more likely to work with you. Take action at this stage if at all possible. Communicate with the original creditor and be active and honest about your situation.

The Fair Debt Collection Practices Act

This Act prohibits debt collectors and debt buyers from using certain “abusive and deceptive” actions while trying to collect debt from consumers.


Some of the basics:

  • Collectors cannot contact consumers before 8am or after 9pm.
  • Collectors cannot intentionally make repeated phone calls to abuse, harass, or annoy.
  • Collectors cannot call a debtor at his/her place of employment after being told by the employer that this is prohibited.
  • Collectors cannot use profanity or abusive language and cannot make deceitful threats regarding arrest or legal action.

There are also regulations that say collectors must:

  • Identify themselves as a debt collector and notify the consumer that any information given will be used toward the collection of the debt
  • Provide at least the name and address of the original creditor
  • Inform the consumer of the right to dispute debt
  • Verify the debt upon request
  • Cease communication after receiving a written request from the consumer. Exceptions: to notify the consumer that collections have stopped or that the agency plans to take legal action.

*This is not a comprehensive list. See the additional resources below for more information. Also, keep in mind that these rules may not apply to original creditors (depending on the regulations in your state). If you feel that your rights have been violated, you should contact the FTC about the incident, and you may be able to pursue legal action against the collector.

Debt Buying: Introduction

Now that you understand the basics of the process, we want to take a look at an aspect of the credit industry that does not get a lot of attention—debt buying. A lot of people talk about debt collection, and many have experienced it, but very few people know about the transactions that take place behind the scenes. The FTC released a study in January 2013 that gives insight into the debt buying industry. There are numerous “red flags” and dangerous activities taking place in the debt buying industry, and we want you to be aware of your rights.
First, here are a few basics about the debt buying industry :

  • Debt buying came on the scene in the 1980’s and has evolved into today’s industry.
  • 75 percent of purchased debt is credit card debt (according to the 2013 study from the FTC).
  • Credit card companies have recently undergone structural changes to allow for increased buying and selling of debt.
  • As of 2009, five of the six largest credit card issuers were selling debt to debt buyers.
  • The debt buying industry has exploded as revolving debt (primarily credit card debt) and personal debt like student loans have increased.

The Debt Buying Process

When the decision has been made to sell off debt, creditors create portfolios, which they then market to potential buyers. The portfolios are collections of debts with similar qualities such as type of debt, location of debtor, etc. These portfolios are then classified by age and the number of collectors who have already attempted to collect:

  • Fresh debts – around six months old; no attempt to collect has been made outside of the original creditor
  • Primary debts – up to 12 months old; one third-party debt collector has attempted to recover the account
  • Secondary and tertiary debts – up to 18 months and 30 months, respectively; multiple third-party debt collectors have attempted to recover the debt

Marketing

Sellers (including original creditors and resellers) then market these portfolios to potential buyers. Forms of marketing include:

  • Direct mail
  • Clearinghouses
  • Telephone
  • Web ads
  • Promotional email
  • Direct contact and contract offers to buyers with an established professional relationship

The Sale of Debt

With the exception of working with an established contact, sellers usually “bid out” the debt portfolios. They provide initial information to the bidders, open the bidding, select the highest bidder, notify the selected bidder, and form a contract.

Resale

Sometimes, a debt buyer decides to resell a portfolio(s). Here are common circumstances for resale:

  • As is – it sells the portfolio(s) in the same condition as purchased from the creditor
  • Repackaged – in many cases debt buyers repackage portfolios according to the specifications given to them by another debt buyer
  • After collection – a debt buyer may make initial attempts to collect debt and can then sell the portion of the portfolio it could not recover

The Price of Debt

The FTC found that debt is sold for an average of “4.0 cents per dollar of debt face value.” It’s no surprise that the price was largely dependent upon the age of the debt. Take a look:

Age of Account, price sold

  • Less than three years, 7.9 cents/dollar
  • Between six and fifteen years, 2.2 cents/dollar

And, if you’re wondering, debts older than fifteen years were sold for next to nothing. Also, mortgage debt tended to be worth more, while medical debts and utility debt were worth less. It’s important for consumers to understand that debt is bought and sold, because this affects the consumer in several ways:

  • First of all, consumers may have to do some research when they receive calls from a debt collection agency. Even if the name of the collection group doesn’t sound familiar, you might still owe the debt. Your debt could have been bought by this new company, so be sure to do your homework and validate the account.
  • Secondly, errors and missing information are more likely, since the debt has been sold (maybe multiple times).
  • Third (a piece of good news here), when debt is sold for such a small amount, the negotiation process is easier. Let’s say that you can’t afford to make the full repayment, but your debt collector is willing to negotiate. Because the debt buyer paid so little for your debt, it will likely make significant profit even if it compromises and negotiates with you. Just keep in mind the tax implications of negotiation. Counselor Bruce McClary gives some tips on how to negotiate repayment with a debt collector:

Debt Buyers May Not Have Accurate Information

When a debt buyer receives your account from a debt seller, it is not always given correct information. The FTC found that:

  • Debt buyers typically do not receive dispute histories. This means that they do not have a record of previous disputes consumers may have made about the accounts, potentially creating more hassle for consumers.
  • Debt buyers also are rarely given the breakdown of accounts. They may have a total but do not know the breakdown into principal interest and fees.
  • In many cases, debt buyers are not given documents relating to the account. Missing documents include statements and information about the credit terms and conditions.

By not having this information, debt buyers make it more difficult for consumers to confirm or deny whether a debt belongs to them and if the amount is accurate.

Limitations to Debt Buying Contracts

As we explained, debts are often sold with contracts. Within these contracts are often stipulations that have negative effects on consumers. Here are a few problems with contracts, according to the FTC:

  • Limitations are often placed on the buyer’s access to documents associated with the debt.
  • Restrictions are put in place that limit a consumer’s ability to learn the debt had been sold.
  • Some contracts explicitly prohibit the use of the original creditor’s name in the subject line of communication with the debtor.
  • Contracts often prohibit debt buyers from giving consumers the contact information for the original creditor or previous sellers. Only the name and address of the creditor are required by the FDCPA to be provided.

Verification of Disputed Debts

Debt verification is the process by which debt collectors make sure their information is accurate. If you dispute a debt, the collection agency will attempt to verify your accounts to make sure you are the person who owes and that the correct amount is listed.

The FTC found that consumers disputed about one million debts, claiming to not owe them. Of this total, only 51% were verified by the collection agencies. That leaves 500,000 unverified debts. The FTC cites this as “a significant consumer protection concern.”

Statute of Limitations

The FTC study found that some collection agencies were still collecting on debt that was older than the statute of limitations. This is likely due to consumers not being informed about their rights and potential errors that can occur when debt is resold. Also, the study admits that it did not look at smaller debt buying agencies, which means that this practice could be more prevalent. The FTC study seemed to suggest that smaller debt buying agencies were more likely to pursue older debt accounts (presumably because they are cheaper).

Debts beyond the statute of limitations are called “time-barred,” and the FTC is particularly concerned with consumers’ rights in cases of time-barred accounts. In many states, the statute of limitations is between three and six years. Fifteen years is the longest statute of limitations. In this study, 19.3% of debt purchased was between three and six years old. This probably includes a significant amount of time-barred debt. 11.3% of debt was between six and fifteen years old; an even higher percentage of this is likely “time-barred.”

The purchased debt in this study was purchased primarily from original creditors (80%). Debt purchased from original creditors is less likely to be time-barred than debt that has been resold by previous debt buyers. When the FTC looked at the other 20%, which was bought from other debt buyers, it found alarming results. 32.1% of this debt was three to six years old and 27.5% was between six and fifteen years old. This could be a sign that older debt is resold more often, potentially making it more difficult to verify. It’s also a sign that smaller debt collection agencies could pose an even bigger risk to consumers. According to the FTC, 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.”

The primary concern with time-barred debt is that collection agencies may take legal action against consumers. Laws regarding statute of limitations often require vigilance and action on the part of the consumer. It can be easy for debt collectors to take advantage of consumers who are not informed about the rules surrounding time-barred debts.The FTC is currently recommending tougher regulations at the state level to prevent debt collectors from threatening to sue consumers for “time-barred accounts.” In fact, over 90% of consumers who are sued for time-barred accounts fail to show up in court, which can cause the statute of limitations to reset. the FTC had this to say:

As the Commission has noted, because 90% or more of consumers sued in these actions do not appear in court to defend, filing these actions creates a risk that consumers will be subject to a default judgment on a time-barred debt. To decrease this risk, the FTC has recommended that states change their laws to require collectors to prove that debts are not time barred, rather than placing on consumers the burden of raising the defense of the running of the statute of limitations.

The FTC is also concerned that collectors may be misleading consumers to make payments on these accounts. The FTC is concerned that people will be tricked into thinking they can make a small one-time payment, but this will actually reset the statute. Another concerning tactic is the threat of legal action for a time-barred debt. The FTC explains:

The report stated that “most consumers do not know or understand their legal rights with respect to the collection of time-barred debt,” so attempts to collect on stale debt in many circumstances may create a misleading impression that the consumer could be sued, violating Section 5 of the FTC Act and Section 807 of the FDCPA.196

Additional Resources

More Information about “Zombie Debt”
The Fair Debt Collection Practices Act
2009 Government Accountability Office Study on Credit Cards
Statute of Limitations by State

Sources

The Structure and Practices of the Debt Buying Industry (FTC, 2013)

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