Someone Else's Debt Could Ruin Your Credit Rating

Debt collectors are pursuing one in seven Americans—and often screwing up

by David Dayen | March 31, 2014

photo credit: Gabriel Bouys-Pool/Getty Images

Last month, Amrit Singh, an adjunct professor at Hostos Community College in the South Bronx, received a letter from the New York City Marshal, advising him that he owed $10,000, due within 20 days. If Singh did not pay, the letter said, money would be garnished from his paycheck. “It got me worried, because I knew I didn’t owe this amount of money,” Singh said.

Singh called the Marshal’s office, and they told him Atlantic Credit, a debt collection agency, secured a judgment against him for the $10,000. Singh had never heard of Atlantic Credit and had no contact with them in the preceding months. He was also told that the original debt came from HSBC Bank, for accumulated fees and interest on an account dating back to 2008. “This was more suspicious, because I had never opened an account with HSBC, neither me nor my wife,” Singh said. His credit report showed no record of him owing money to the bank, or any other credit incident matching this level of debt.

A colleague of Singh’s, hearing the story, had a theory. “He said, they probably told an intern, ‘Amrit Singh owes this money, go look up a name.’ And the intern found me.”

That’s not far from the truth. According to statistics from the Federal Reserve, one in seven Americans is being pursued by a debt collector, up from one in 12 just ten years ago. And substantial numbers of these Americans report being hounded for debts they do not owe. A new report from the Consumer Financial Protection Bureau logged tens of thousands of complaints claiming just this—that the debt in question is simply not theirs.

Can the debt collection industry be so careless as to continually harass the wrong individuals? The more you learn about how debt collection works, the more you’re surprised that they ever find the right target in the first place.

When a consumer sustains a debt, the creditor can either attempt to personally collect it, or sell the debt to one of America’s 4,500 collection agencies. That auction process is completely broken, producing the ultimate in caveat emptor.

“Creditors provide debt buyers with almost no data, no original contract, no backup information,” said Ira Rheingold, executive director of the National Association of Consumer Attorneys. “The records are so poor that sometimes the amount of the debt is wrong too.” In a world of big data, the debt buyer market operates like it’s still the 1970s, where the commodity is merely a spreadsheet full of hints and leads, instead of reliable information about debts. The creditors, frequently big banks, try to indemnify themselves through the purchase agreement, in which they make no warranties about the legitimacy of the account information.

Debt collectors pay miniscule amounts—between four and seven cents on the dollar—for the vague information they get, so they have little incentive to ask for a more legitimate product that might cost more. They simply turn around and try to collect, making guesses based on the names and account numbers given. “We see everything. They go after people with similar names, the same name, fathers and sons getting called on each other’s debts,” said Carolyn Coffey, a Supervising Attorney at MFY Legal Services, a non-profit law firm in New York City. “They figure they bought this for so cheap, as long as they get a few positive hits, they’re going to make money.”

Because debt collectors don’t get full information, they sometimes try to collect on debt that has already been paid or discharged in bankruptcy, or cases where the consumer fell victim to identity theft and already reported the activity to their creditor. Sometimes the same debt gets sold to two different collection agencies. Nobody has an incentive to get anything right, so inaccuracies abound. “There’s a built-in sloppiness to this industry,” Carolyn Coffey said.

Debt collectors often use aggressive and in some cases illegal communication tactics to target consumers, making repeated phone calls, using profane and abusive language, even threatening arrests or asset seizures. In one celebrated case, the debt collector Unicredit decorated an office to look like a courtroom and held fake court proceedings designed to intimidate consumers into paying non-existent debts.

Slightly more scrupulous debt collectors file actual legal cases in bulk, seeking judgments like the one obtained against Amrit Singh, so they can have local authorities use wage garnishment or other options to collect payment. Debt collectors often don’t inform the debtor about these cases, and even if they do, the case is in the debt collector’s name, which confuses consumers who have never heard of these companies to whom they allegedly owe money. Ninety-eight percent of the time, the defendant in the case is either absent, or has no legal representation.

The court cases habitually include mocked-up evidence and false affidavits to prove the legitimacy of the debt, similar to how mortgage servicers would fabricate documents in foreclosure proceedings. “We’ll see collectors produce statements that were sent in a particular year to the consumer, and they’ll have information on them from the wrong year,” attorney Carolyn Coffey said. “They’ve been recreated. They’ll include something for an iPad that didn’t exist at the time.”

If the consumer seeks legal representation and actually shows up to court, almost every time the debt collector will simply drop the case, as the expense of legal filings and a trial doesn’t make financial sense for them. But it doesn’t end there. “The debt just gets sold to another party,” says Ira Rheingold of NACA. “It keeps getting revolved and winding up on credit reports.” Credit reports showing phantom debts can make it difficult to obtain employment.

The hardship of contesting inaccurate debt collections becomes a tax on people’s time. In Amrit Singh’s case, he had to contact a lawyer, prepare documents and travel from his home in Queens to a court in the Bronx to dispute the debt. “It takes so much time from you plus it makes you worried,” Singh said. “$10,000 is a lot of money.” Singh’s case was dismissed, but he’s concerned that the debt will get sold and this will crop up again.

The federal Fair Debt Collection Practices Act governs the debt collection process, with restrictions on unfair practices and abusive treatment of consumers, false representations about imprisonment or asset seizure, impersonations of government officials, even what times of day debt collectors can call. Individuals can sue under the FDCPA, but most people don’t know their rights, and the penalties are relatively low, offering little deterrent.

The Federal Trade Commission has made some notable progress in shutting down the worst debt collectors, but they can only enforce rather than make rules for the industry to follow. The Consumer Financial Protection Bureau was given both enforcement and rulemaking authority for the FDCPA in the Dodd-Frank law, and it is currently gathering data to inform a regulatory response. The problem is that the industry can be slippery. “You shut them down, and they open up the next day as something else,” Ira Rheingold said.

Rheingold believes banking regulators could offer more help by standardizing the sale of debt, and what kinds of records must be kept. Bank regulators ordered JPMorgan Chase last year to return $300 million to consumers and clean up their individual debt collection practices, and state Attorneys General have filed a number of lawsuits as well. But the market for debt, from where so many problems originate, remains largely unregulated.

For his part, Amrit Singh would welcome some action. “They should find a way to avoid such situations from reoccurring because I’m scared now,” he said. “It seems so random, it could happen to anyone.”

Image via Shutterstock.

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