April 12, 2014
“Zombie” debt, unlike its namesake, is truly scary
Do you owe some institution money from a long time ago? “Zombie” debt is debt that has come back from the dead to haunt you. Collection groups find and buy old debt in bulk from credit card companies, gyms, public utilities, cellphone providers and other creditors, and the business is growing steadily. Those collection grounds can be very aggressive.
The downturn in the economy in the recent past expanded what was once primarily an industry seeking to collect credit card debt to one that now targets delinquent mortgages, auto loans and medical debts.
Despite that the organization you owed “wrote off” your indebtedness, there is a good chance another organization will purchase the debt and try to collect from you. Typically a collection agency will pay the original creditor a few cents on the dollar for millions, or billions of dollars in bad debts, hoping to cash in on just more than it paid. At some point, if the collection effort is unsuccessful, the collection company may give up and sell the debt to another collection company, recouping the original investment, making it a “no loss” endeavor that has an accompanying lack of financial incentive to play by the rules.
“Very old debt can haunt consumers for a long time,” says Ira Rheingold, the executive director of the National Association of Consumer Advocates, an organization containing more than 1,500 consumer attorneys. “It’s a debt that never dies — it just keeps coming back in many different forms with different owners, and you can’t kill it.”
Zombie debt can even strike the wrong person. With the advent of identity theft and the similarity of many names, often collection companies’ efforts are misdirected.
Many collection companies go beyond sending letters and making telephone calls demanding payment. They are actually filing lawsuits. These lawsuits pose troubling issues for both attorneys and judges because documentation issues abound.
A collection lawsuit requires proper documentation. Many of the collection lawsuits brought by second or third generation buyers of these debts lack this documentation. Typically the original loan agreement is missing; it contains important and required details about the loan, including term, interest rates, and possible attorney’s fees. Ethically, how can an attorney file a lawsuit knowing that this type of vital information, or proof is lacking?
Collection attorneys say they follow court rules. They present affidavits ostensibly setting out all of the needed information, but where did the information come from? Judgments are sought on the strength of the allegations in the affidavit. The debtor has the right to challenge the affidavit and demand to see the original documents. Most of the time however, the debtor is not in court, and no challenge is made.
Should judges, who appreciate the tenuous nature of the process, grant a judgment against the debtor when the debtor is not in the courtroom and no objections are raised to the potentially flimsy affidavit? The ethics issues abound.
Attorneys who regularly practice consumer law argue that it is a violation of federal law to file unsupportable claims knowing that most of them will result in uncontested judgments. Conversely, again, as might be expected, the attorneys for the collection groups offer that they are following the rules.
One debtor in Virginia recently was sued by Midland Funding, LLC, a subsidiary of Encore Capital Group, Inc. Review of a filing with the Securities and Exchange Commission reveals that in 2013 Encore purchased $84.9 billion in “face value” debt for $1.2 billion, or approximately 1.4 cents on the dollar. The portfolio was mostly charged off credit card debt. In the SEC report, Encore said “We generate a significant portion of our revenue by collecting on judgments that are granted by courts in lawsuits filed against consumers.”
When the debtor sued by Encore challenged the affidavit, Encore voluntarily dismissed their suit.
In another case, in January 2012, the U.S. Department of Justice sued one of the biggest debt buyers in the country, Asset Acceptance, claiming it violated the federal Fair Debt Collection Practices Act and other laws. According to the lawsuit, the debt -buyer made deceptive statements to consumers, gave false reports to credit-reporting agencies and committed other violations. In response, Asset Acceptance agreed to pay a $2.5 million civil fine.
What is a consumer to do if contacted by a collection group demanding payment?
If contacted by telephone, do not provide any information and do not acknowledge any debt. Rather, ask for the company’s mailing address and hang up. If the first contact is by letter, the address is obviously provided.
Send a letter by certified mail, return receipt requested, within 30 days, notifying the collector that the debt is disputed. The collector then must provide the consumer with a verification of the debt or a copy of the judgment. The time involved will allow the consumer to determine if the debt is real, or still enforceable in court.
The statute of limitations under the Fair Debt Collection Practices Act and the Fair Credit Reporting Act provides that a consumer may not be sued after six years or have any debt reported on his or credit report after seven years. Statutes of limitations vary state by state and may extend the period suits may be allowed: Chart of State SOL’s.
Never acknowledge a debt on the telephone or in writing to any collection group. Acknowledging a debt “revives” it and the statute of limitations then starts anew. If a lawsuit is filed, even if bogus, an attorney should be retained.
Do not fall for false promises, such as promise to wipe off bad marks on a credit report. Consumers should not fall for scare tactics or tricks such as threatening lawsuits, ruining credit or promising to leave you alone for a small one-time payment.
Always ask for proof, in writing, that the debt is owed, including copies of agreements that were signed and account history. Without these, the collector does not have the requisite proof to prevail in a courtroom.
Zombies: good for the movies. Old debts: not so much.
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