Junk debt collectors buy information about closed accounts from banks and retailers. These accounts, charged off by the institutions or through bankruptcies, no longer exist in accounting terms but they constitute a grey area under the law.
When your bank charges off a debt they are saying to the government that they will no longer attempt to collect payment from you, and that they want to deduct the uncollectible portion of that debt as a business expense against their taxes. This procedure is very common in accounting and on the books it makes the debt go away with just a few entries. As far as your former creditor is concerned the debt no longer exists.
But these companies often sell charge off lists to junk debt collectors, companies that may pay as little as 1% of the uncollected debt’s former book value for your name, address, telephone number, and the amount of the original debt. They rarely obtain any documentation about how the debt was incurred or how much of it you paid back. These junk debt collectors then begin pursuing you for payment of the full debt, sometimes tacking on additional fees and interest.
In any other context this would constitute fraud because it is tantamount to creating a false indebtedness. In fact, some courts have recognized in their opinions that at most the junk debt collectors probably are only entitled to recover whatever they paid for the charged off debts and nothing more. Unfortunately the burden of disproving these claims falls on the consumer.
The process of fighting off these junk debt collectors can be nightmarish because their tactics are designed to very carefully comply with the letter of the law but to violate its spirit. Every once in a while someone is lucky enough to catch one of these predatory companies explicitly violating the law. For example, a woman living in Kansas City was wrongfully pursued for a debt she did not ever owe by Portfolio Recovery Associates, LLC. After the company refused to leave her alone she took them to court and proved that they were chasing the wrong person. The court awarded $82 million in punitive damages, a figure will may be reduced on appeal.
The lesson to be learned from this episode is that consumers must be alert to the correct way to handle unverified debt collection.
First, you must respond to any attempt to collect a debt by demanding in writing verification of the debt. You should keep a record of your correspondence.
Second, you should also notify any debt collectors who cannot verify the debt that they are not to contact you any more. Do this in writing as well.
Third, monitor your credit reports because these junk debt buyers will post negative information about you at the credit bureaus. Credit bureaus do a terrible job of verifying debts and often ruin people’s credit through a lack of due diligence. They have also arranged for protection by law against consumer litigation for reporting false debts.
Junk debt buyers will typically hound consumers for up to seven-to-ten years by falsely updating the account open/close dates on credit records. They also cycle through secondary collection agencies and law firms to get around the Fair Debt Collection Practices Act, thus ensuring that you will be barraged by collection notices despite never verifying the debt with you.
Some consumers report having to send letters to as many as 30 debt collection agencies and law firms.
Your charged-off debts will remain on your credit record for seven years. They should drop off after that time, but some junk debt buyers have figured out ways to trick the credit bureaus into freshening the dates on junk debts. The credit bureaus are only obligated under the law to allow you to contest the debt in their records and to ask the creditors to affirm that they are attempting to collect debts. Credit bureaus will make no effort to remove junk debts from your credit record.
You can help yourself by speaking with a qualified attorney who understands how to defend against junk debt collection in court. If you do not accept or respond to a summons you will be found in default by the court and the debt is legitimized.
You should also report these junk debt buyers to your state’s Attorney General. States sometimes take aggressive action against these companies to protect their citizens. For example, in 2012 Maryland won a massive battle with LVNV Funding (aka the Sherman Companies and Resurgent Capital Services). Hundreds of thousands, perhaps millions of consumer credit records were repaired when LVNV Funding failed to prove it could legally collect these kinds of debts in Maryland.
The one thing you must never do is agree to make payments on any unverified, illegitimate debt. The moment you start making payments on the junk debt you start the clock over and the seven year waiting period can only begin again after you stop making payments. These fake creditors have no legal right to collect this money from you in the first place but because consumer protection laws are inadequate they use loopholes to trick or persuade you into giving them money to which they are not entitled.
When a debt is honestly and legitimately “sold” by one company to another, the debt seller provides the debt purchaser with sufficient documentation to prove that the debt has been transferred. Although the debt may be sold at a discount in such a transaction, the discount will not be more than 50% in standard practice. You have the right to ask how much the debt purchaser paid for the debt and to negotiate with them for compensation on the basis of what they paid for it. The debt purchaser is not required under the law to tell you how much it paid for the debt.
You should never threaten a debt collector. And above all else, never tell them how much you know about the law. Do not give away your advantage in knowledge. Some debt collectors will try to wear you down. Some even make the mistake of threatening legal action that is never forthcoming (that is against the law; if a debt collector says it will sue you, it MUST follow through).
Document every communication from a debt collector.
Here is a video from an attorney, John Skiba, who explains why you should never enter into a long-term debt repayment plan with a junk debt collector.