In 2003, Americans were carrying 1.46 billion credit cards, for an average of five credit cards person.[1] By 2009, outstanding consumer loans exceeded $2.5 trillion, of which debt from credit cards and other revolving credit card debt was nearly $1 trillion at its peak, with subprime credit cards constituting more than a quarter of the credit card market.[2] As of June 2012, credit card debt has decreased to a whopping to $864.4 billion, down significantly from the record high of 2009.[3]
As mortgage foreclosures across the country decrease and the American consumer claws his way out of the financial abyss related to the mortgage foreclosure crisis, there is another financial calamity looming. Debt collection attorneys, third party debt buyers, original creditors, and other people directly involved in the debt collection industry are aware of the quiet storm brewing. How aware is the American consumer? Let me tell you.
Though consumer credit card debt has decreased, the American economy though better has not completely recovered. The national unemployment rate hovers around 8.1%. Many Americans rely on their credit cards, in some cases, for survival. What happens when these people can’t pay this debt. Original creditors, attempt to collect, however when they deem this debt, uncollectible, they charge off the debt.
“Charge-Off” is an accounting term that allows the creditor to remove the debt as an asset on the company’s books. For tax and accounting purposes, federal law requires a creditor to charge off an installment loan such as a car loan after 180 days and to charge off revolving credit card loans after 120 days. A creditor could deem a debt uncollectible prior to the 120 and 180 rules, and charge off a debt sooner. This means that the debt is no longer carried as an asset on the company’s books and anyone assessing the value of the company gets a clearer picture of the company’s worth.[4] Just because a debt is charged off, does not mean the debtor is no longer responsible for the debt.
In many instances once debt is charged off, the original creditor bundles the charged off debt with other charged off debt, and sells this bundled debt to third party debt buyers for significantly less than the actual debt. These third party debt buyers initiate their own collection procedures. If their collection tactics aren’t successful, they file a lawsuit against the debtor. There is little original paper work attached to this bundled debt, thus it is virtually impossible for the third party debt buyer to be able to confirm:
- the actual amount due;
- whether the statute of limitation has run in order to collect the debt in court;
- whether they are suing the correct person;
- the terms and conditions of the original contract.
The prior statement assumes the debt collector wants to have accuracy and clarity concerning this bundled debt. In reality, the business model for third party debt collection is not based on clarity and accuracy. Instead the business model is based on volume, expediency, and financial success for investors.
The debt buyer industry has skyrocketed in the past ten years. By 2005, debt buyers were purchasing more than $110 billion in debt annually, with charged-off credit card debt accounting for 91% of this amount.[5] Third party debt collectors recovered approximately $54.9 billion in total debt in 2010, on which they earned $10.3 billion in commissions.[6] Twenty percent of this debt collected is credit card debt.[7] Much of the multi-billion dollar debt collection process is based on lawsuits where the debt collector would not have prevailed but for:
- the debtor not showing up to court and a default judgment is entered;
- or the debtor comes to court and agrees to a pay, unaware of applicable affirmative defenses.
While the plight of the unsophisticated debtor is bleak, the future for the third party debt buyer is luminous. This unsavory picture will continue in courts all across the country, unless we demand change through the legislative process. There are a few states including Maryland that recognize the inherent unfairness to consumers in third party debt collection cases and have initiated reforms. As of January 2012, Maryland requires additional documentation from third party debt collectors including confirmation of debt ownership, proof that the collection agency is licensed in Maryland, additional information surrounding the terms and conditions of the original contracted debt, and the amount owned. Despite these efforts, the consumer has a long way to go before he is on an equal playing field with the multi-billion dollar debt collection industry.
[1] See Peter A. Holland, The One Hundred Billion Dollar Problem in Small Claims Court: Robo-Signing and Lack of Proof in Debt Buyer Cases, Journal of Business & Technology, 264 (2011).
[3] See Kimberly Amadeo, June Credit Card Debt Shrank as Gas Prices Dropped, available at https://useconomy.aboutcom/b/2012/8/9.
[4] See National Consumer Law Center, Fair Debt Collection Vol. 1, Section 1.5.12, (7th ed. 2011)(Charge-Offs, Debtor’s Income Taxes, and IRS Cancellation of Debt Form 1099-C).
[5] See Peter A. Holland, supra note 1, at 265.
[6] See Ernst & Young, The Impact of Third-Party Debt Collection on the National and State Economies, 2 (February 2012), available at https://www.acainternational.org/impact.