The Federal Trade Commission (FTC) released their report (PDF) yesterday on the "Structures and Practices of the Debt Buying Industry". This rather lengthy report brings into focus the industry -- debt collection and debt buying -- that is responsible for more consumer complaints than any other industry.
"Debt buying" is the practice of purchasing debts from creditors. A creditor may decide that it is unlikely the debtor will repay a debt and as a result may sell the rights to collect the debt for a fraction -- on average four percent according to the report -- of the total debt owed. The debt buyer can then collect on the debt -- through direct contact with the debtor, litigation, or otherwise -- and realize a profit if the debt is payed.
The report studied over 5,000 portfolios of purchased debt that held claims on across 90 million consumer accounts. The average debt per consumer account amounted to almost $1,600. Of the accounts in the sample, approximately 61% were the result of a creditor "charging-off" the debt -- the creditor believes the debt is unlikely to be collected -- and the remaining 39% were a result of bankruptcy. The vast majority of the charged-off debt was credit card based, but the largest debt category by average face value was a result of charged-off mortgages. The amount debt buyers paid for this debt varied significantly depending on the performance of the underlying mortgage -- from over 75% for performing loans to less than 1% for loans on foreclosed properties.
The report finds that although debt buyers "typically received additional information that could make validation notices more useful, [debt buyers] usually did not provide it to consumers." In addition, debt buyers are usually given limited information at the time of sale and the information is given on an "as is" basis with no guarantees to accuracy. For example, while virtually all debt bought included information such as account number and current balance, few were given information about the breakdown of the debt into principal, interest and fees. Less than half of the debt bought even had information about the original creditor.
That this industry faces a large number of consumer complaints is not surprising given the sparse and questionable quality of the data used by this industry. According to the report, "consumers disputed 3.2% of debts that buyers attempted to collect themselves." There are a number of steps consumers can take to protect themselves from collectors with incorrect data concerning their debts.
- Verify the information concerning the debtor to insure that the collector is not mistakenly contacting the wrong person.
- Ask for all information pertaining to the debt, including the account number, original creditor, breakdown of debt into principal, interest and fees. Debt buyers often have limited access to the documentation and obtaining such documentation could eat into their profits and discourage the continued collection attempts.
- Obtain the age of the debt being collected and determine whether or not the debt is past your state's statute of limitations on the type of debt (sometimes as low as three years for credit card debt according to the report).
- If all else fails, dispute the debt in writing in accordance with Section 809(b) of the Fair Debt Collections Practices Act.