The debt collections industry in the U.S. is so under-regulated these days that even debt collectors are getting scammed by debt collectors, as the New York Times Magazine illustrated in a lengthy feature this past weekend.
When a debt is left unpaid, it’s common practice for lenders — banks, credit card companies, cell phone providers, hospitals, car dealers — to sell the debt to companies (debt buyers) willing to chase after the borrowers. The amount owed could be $2,000 or $20. For a debt buyer, it’s a heck of a bargain. Charged-off debts sell for an average of 4 cents on the dollar, according to a Federal Trade Commission study, and debts older than 15 years can cost practically nothing. Buyers of that debt then pass off the borrower’s information to a debt collector, who tries to collect the debt. If they succeed, it can prove to be a lucrative investment. In the same FTC study, researchers found the top nine debt buyers in the U.S. held debts with a face value of $143 billion, which they purchased for just $6.5 billion.
But rogue debt buyers are encroaching on some legitimate debt buyers’ territory. All a company has to do is get their hands on a list of debtors’ names, addresses and phone numbers and they can easily collect on past due debts before consumers — or the debt buyers who rightfully own their old debts — ever realize they’ve been duped. It’s not clear how they do it — either by hacking into a collectors’ databases or by buying them off of disgruntled employees — but the end result is the same.
Scams like these can cripple a legitimate debt buyer’s business, and consumers suffer just as much, if not more. You may think you have finally settled your debt, only to get a call from another collector months later demanding the payment all over again. By law, you still owe the original debt, even if you made a payment to an illegitimate collector.
“You have to pay the same debt twice, once to a thief and again if you owe to [a lender],” says Bob Hobbs, deputy director of the National Consumer Law Center.
The best way to protect yourself from fraudulent debt collectors is to understand your rights. The Fair Debt Collections Practices Act, established in 1996, is the most powerful tool consumers have to assert their rights against shady debt collectors.
Here’s how to tell when you’re dealing with a scammer or the real deal:
A scammer will threaten to sue you for debt that’s over a decade old:
Depending on the type of debt owed and your state’s laws, there’s a cutoff date when you can no longer be sued for past due debts. Typically, debts have to be more than 15 to 20 years old. Always check to see if the statute of limitations has passed before making payments on old debts. You can do so by asking a consumer law attorney or by checking with your your State Attorney General's Office. If a debt collector threatens to sue for a debt you know is too old, file a complaint with the FTC or your state’s attorney general. Note: Even though a debt may be too old to warrant a lawsuit, debt collectors and lenders are still legally able to call and write letters to you to collect what you owe.
A scammer will refuse to tell you where the debt originated.
One of the most common scams collectors run is picking people with generic names — John Williams, Mary White, etc. — and trying to extract payment for a debt that doesn’t belong to them. If you’ve been contacted by a debt collector for a debt you don’t think you owe, ask them to send you a letter to verify the debt is yours. If they aren’t legitimate, they likely won’t have any information about who the original creditor was or the date of your last payment. If they keep pressing, use this sample letter to request that the collector stop contacting you and report them to the CFPB or FTC.
A scammer won’t tell you anything about themselves.
Some states require debt collectors to have a license to operate. If you live in one of those states (here’s an unofficial list of states requiring a license) and a collector refuses to give you their license number, don’t even think about writing them a check. “If it’s a fraudulent debt collector, they’re not likely to have gone through the trouble of getting a license,” Hobbs says.
Another red flag is a company that won’t give you their address or phone number when asked. When you request a letter to validate your debt, this information should all be included.
How to defend yourself
If a debt collector slaps you with a lawsuit, it can cost between $700 and $1,000 to hire an attorney to defend you, Hobbs says. Fees can get even higher for attorneys who ask to take a cut of any damages won (typically 25%-30%). There aren’t many attorneys who specialize in debt collections, but you can find a list at the National Association of Consumer Advocates (www.naca.net).
Before you wind up in court, however, try to keep debt collectors at bay with these tips:
Get proof that your debt has been paid from your original lender. If the debt collector tells you where your loan originated from, you should contact your original creditor to double check. They should be able to verify that they have (or haven’t) sold the debt to the collector who contacted you.
If your debt has been re-sold several times, which is quite common, you may be out of luck. As it stands, creditors — the banks, credit card companies and hospitals that sell our debts to debt buyers in the first place — only have to keep track of who buys your debt the first time around. If the debt buyer winds up selling it to another buyer or debt collector, it's very unlikely your original creditor will know who they are. The FTC has proposed new regulations that would require creditors to track debts as they are sold (and sold and sold again), but they have yet to be implemented.
If the creditor tells you your debt has been settled already, ask them to send you a letter verifying that your account was left in good standing and present it to the collector.
Whatever you do, keep a careful paper trail. The more information you have, the stronger your case will be when you’re ready to defend yourself.
Join us for a LIVE CHAT on Yahoo Finance’s Facebook page and ask our experts your Social Security questions.
When: Wednesday, Aug. 20 at 2 PM Eastern
Who: Panel experts will include Tony Drake, CFP, of Drake & Associates, Jean Setzfand of AARP, and Jim Blankenship, CFP, of Blankenship Financial Planning.
Where: Yahoo Finance’s Facebook page
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