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Consumers and regulators should act now, before things get ugly, to keep abusive and dishonest collectors under control during a bad economy.
By Liz Pulliam Weston
 he math in recessions is simple: More folks are unemployed; more folks fall behind; fewer folks are able to pay their debts once they get behind.
This time, many people can't even borrow against their home equity to pay the bills, as I wrote in "Lenders cut off the home-equity tap."
It's tough conditions like these that tempt collectors to get rough with consumers. Given that the debt-collection industry has trouble restraining itself during good times, you can imagine how bad this could get. Consider:
- Complaints about collection agencies quadrupled between 2001 and 2007, the latest data available from the Federal Trade Commission. One in five complaints received by the federal agency concerned collectors, and the total of 70,951 exceeded that of any other industry.
- Consumers most commonly complained that collectors misrepresented the character, amount or legal status of a debt -- demanding far more than was owed, insisting the consumer owed a debt that he or she did not, or claiming a debt was legally enforceable when the statute of limitations had long since expired. Other common complaints: that collectors violated laws against harassing consumers and using obscene language, that they falsely threatened dire consequences, such as jail time, and that they contacted consumers at work.
- You no longer have to be a debtor to wind up the target of a collector's harassment. As I wrote in "Sleazy new debt-collector tactics," a booming market in old and often poorly documented debts means that in some cases collectors are going after the wrong people with a vengeance.
- The industry itself realizes it has a public-relations problem that's likely to get worse. ACA International, a trade group that represents collectors, unanimously approved a first-ever code of ethics last year, and the head of one of the country's largest collection agencies has warned his colleagues that a public backlash could spoil the coming boom.
Vikas Kapoor, the chief executive of call-center company IQor, told a gathering of collection-agency executives in November that the industry needed to better comply with existing laws and improve the public's perception of collectors, according to insideARM, a newsletter that covers the industry.
In particular, Kapoor said, collection agencies should stop buying debt that hasn't been properly documented -- the kind of debt that triggers a lot of consumer complaints and lawsuits -- and should find a way to punish individual collection-agency employees who repeatedly violate fair-debt-collection laws.
These are fine ideas, but I'm not sure we can count on collectors to get their act together as the recession rolls through the economy. There's too much money involved and too little oversight to expect that collection agencies won't cut corners.
The boom has already begun. Sales of overdue credit card debts, already more than a $100 billion industry, are on the rise, and prices are dropping, reflecting both the increase in supply and the growing difficulty of getting borrowers to pay up in a worsening economy.
Federal law prohibits abusive calls from debt collectors, but consumer-rights advocates say those heavy-handed Mafia-like tactics remain in use because they work.
The price of "fresh," or recently charged-off, credit card debts has dropped between 10% and 30% in the past year to 9 to 12 cents on the dollar, according to Mark Russell, a director at collection-industry consulting company Kaulkin Ginsberg.
Older debts, for which two or more collection attempts have been made, have slid between 25% and 40%, Russell said, to 3 cents to 5 cents on the dollar.
Meanwhile, collectors are gearing up to go after these debts. The debt-collection industry has added 100,000 jobs in the past year, according to Kaulkin Ginsberg, bringing employment to more than half a million positions. The growth rate is expected to continue: The U.S. Bureau of Labor Statistics predicts employment in this industry to grow 23% between 2006 and 2016.
So now is the time to act. I have five suggestions for regulators and five for ordinary people dealing with collectors.
Continued: Five suggestions
Regulators should: Require each collection agency to have an ombudsman to handle and resolve consumer complaints. This is pretty basic, but some agencies have only one place for consumer concerns: the round file. If you're being screamed at by an abusive collector or chased for a debt you don't owe, there should be someone at the company to listen to your complaint and take it seriously.
Forbid lawsuits on expired debts. Every state has a statute of limitations on debts that's meant to specify the period in which creditors can sue a debtor over a bill. But some less ethical collection agencies file lawsuits after a limitation has expired, hoping debtors won't show up to assert their rights. This loophole needs to be closed.
Create a blacklist of rogue collectors. A collector who gets fired for abusing consumers or otherwise breaking fair-debt-collection laws can easily get a job with another agency, even one that's trying to obey the law, because the collection industry doesn't have a centralized disciplinary system or database.
End collections on debts due to identity theft. Collectors aren't supposed to pursue you for debts that aren't yours, and that includes debts created by identity theft. Providing an affidavit or a police report should be enough to stop the calls, but too often victims complain about endless harassment. Regulators need to crack down on this issue hard, as identity theft isn't going away.
End sales of poorly documented or disputed debts. Sometimes the "debts" that collection agencies buy are little more than a name, a dollar amount and the name of a creditor. If a consumer is savvy enough to demand that a collector "validate" a debt -- in essence, provide proof such as an account application showing the consumer owes the debt -- the collector may not have the required documentation. But there's nothing preventing the collector from selling this "debt" to another agency, which can start collection activity all over again. (This is also how ID-theft victims get targeted over and over: They clear up the issue with one collector only to face calls from the next agency that buys the debt.)
If a debt is going to be sold, the seller should be required to provide full documentation and should be prevented from selling any debt that's been successfully challenged.
In the meantime, if you're contacted by collection agencies, you should:
Know your rights. Whether or not you owe money, debt collectors are required to treat you civilly and to obey debt-collection laws. The FTC has information on the Fair Debt Collection Practices Act, and the Privacy Rights Clearinghouse has prepared a fact sheet for consumers dealing with third-party debt collectors. Abusive language, threats to have you arrested and repeated calls are clear violations of debt collection laws; you can report them to the FTC, sue the offenders in small claims court, or both.
Understand the statute of limitations in your state. Your biggest risk if you owe a debt is that a collector will sue you, win a judgment against you (which damages your credit) and succeed in garnisheeing your wages. Your state's statute of limitations is supposed to prevent such lawsuits after a certain number of years (usually three to six years, but in some states it's longer). If the collector files a lawsuit after the statute has expired, you still need to show up in court to point that out.
Stop the calls. Whether or not you owe a debt, you want a paper trail to preserve your legal rights. In your initial contact with a collector, get the company's name, its address and a telephone number. If you're willing to pay the bill, tell the collector you want the company to send you the required proof that you owe the debt. If you're not the debtor, send a certified letter, return receipt requested, telling the collector it has the wrong party and to stop contacting you. (Sending such a letter if you do owe the debt can sometimes trigger a lawsuit, so tread carefully here.)
Collectors' strong-armed tactics
Federal law prohibits abusive calls from debt collectors, but consumer-rights advocates say those heavy-handed Mafia-like tactics remain in use because they work.
Keep an eye on your credit reports. You can get free annual peeks at all three of your credit bureau reports at AnnualCreditReport.com. (Make sure you go to the right site; other sites offer credit reports for a fee or as an inducement to sign up for credit monitoring.) Dispute any bogus collection accounts immediately and include any proof you have, such as police reports of identity theft or copies of letters you sent to the collection agencies. Get help. If a collector continues to call, seek help. The best place to turn may be an attorney who is familiar with debt-collection laws. The National Association of Consumer Advocates can provide referrals. No money for a lawyer? Try your state attorney general's office.
The FTC takes complaints but usually doesn't intervene on behalf of individuals.
Liz Pulliam Weston's new book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
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