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In 2005, our reader who goes by the screen name “frustrated in California” stopped paying on one of his credit cards. Now, nearly 10 years later, a collection agency is suing him and claims he made a payment of $200 in October 2010. He wrote:

I know I did not make any payment, and under pressure, (the card issuer) stated that there were several attempts to make a charge that was rejected by my bank (as I did not authorize any outside payments/automatic payments to anyone for any reason). The suing company states that they do not have this information on just whose bank account this $200 was taken out of as well. I went to (my) bank, and got my statements from 2010, and there is not a single $200 payment to (the card issuer), or anybody else for that amount.

It’s crucial to determine whether or not that payment was made, because in California the statute of limitations is four years. If it has expired, the debtor can simply show up in court and explain that the statute of limitations expired, and the case will be dismissed. If he made a payment, the collector may be able to sue him before the four years is up. If the collection agency gets a judgment against him, they can potentially garnish his wages and go after his bank accounts.

Is it a mistake? If so, how could such a serious error happen? And why can’t the collector — or creditor — prove the payment was made?

This scenario would be no surprise to Jake Halpern, who spent approximately four years investigating the seedier side of debt collection, a modern day Wild West where sensitive information about debtors and the money they owe may be stolen, sold and resold to the highest bidder. He shares these stories in his fascinating new book, “Bad Paper: Chasing Debt From Wall Street to the Underworld.”

Your Debt Is For Sale

Larry was an artist — and ex-con — who turned to debt collection to pay the bills. Halpern met Larry in Buffalo, N.Y. (Some collection agencies won’t buy debts that have been worked in Buffalo, such is the reputation it has developed.)

For a time after he got out of jail, Larry worked as a debt collector, but then turned to buying and selling debt as a less stressful way to earn a living. Except it wasn’t, exactly. The problem, he discovered, was that some debt portfolios he brokered were not exactly legitimate. Some didn’t have a accurate chain of title, meaning there was no way to know if the information was factual, or whether the debts had been sold to multiple agencies, all of whom may have tried to collect. In his book, Halpern recounts a conversation from his meeting with Larry:

“I’ve done deals where I met guys down here,” said Larry, pausing to gesture down the street, “right down at the steakhouse down there — done a deal right in the car.” In such cases, the buyer gave Larry cash, and he handed the buyer a thumb drive with a spreadsheet containing the names, addresses, social security numbers, credit-card balances, or loan amounts of several thousand debtors. Sometimes there was an informal one-page contract, but not always. (“Bad Paper”, p. 143)

While the large industry players may make it seem that these problems are outliers, after reading “Bad Paper,” it’s hard to not get the impression the system itself has a rotten core.

Jake Halpern

Jake Halpern

“There is some truth that it has been cleaned up,” said Halpern in a recent interview. “We are past the point of the complete Wild West, but it’s not at all true to think the problems have all miraculously been cured. The original process of how creditors charge this debt off and pass off little to no information — that has not changed,” he said.

He points out a story in the book where a debtor, Julie, did not recognize a debt she was being sued over. Her credit report listed two different debts, one from Chase and one from Washington Mutual, but she hadn’t opened an account with either bank. As it turns out she had held an account with Providian, which was bought by Washington Mutual which was then bought by Chase.

Halpern contacted Chase on Julie’s behalf. After investigating, Chase decided to write the debt off to “fraud,” The reason, it seems, was that the paperwork was nowhere to be found.

Furthermore, Julie was being sued for a debt, but no one knew for sure how much she owed. “It was really kind of chilling,” said Halpern. “This woman is being sued over this debt. Her wages could be garnished. But when you go back to the bank and ask them for the most basic evidence that establishes this debt, they don’t have it.”

Even more astonishing, he shares that when the Federal Trade Commission shut down the collection agency Rincon and sold its debts, it too, could not or would not guarantee the accuracy of the debt it was selling. If the main government agency charged with protecting consumers against unfair debt collection practices can sell debts that may or may not be accurate, imagine what happens in the marketplace. 

Halpern compares it to someone who wants to sell their car and tells a potential buyer, “’See that Red Toyota there? I’ll sell it to you. There’s no VIN number and I don’t have a chain of title. Trust me.’ A buyer would say, ‘Wait, you can’t do business like that. It’s crazy.’” That’s what happens in the debt buying business. But in the case of selling debt portfolios, “What hangs in the balance is consumer’s ability to get credit, to buy a home to live in, and to live my life normally,” he says.

Don’t Believe It

What does this all mean for debtors? Halpern offers this advice to consumers who are being contacted by creditors:

Get your credit reports. “Ultimately we are talking about protecting your credit,” he said. (You can get your free credit report from all three major credit reporting agencies and you can also get your totally free credit score from Credit.com.)

Try to find out who has the debt now. Halpern suggests you review your credit reports to see which collection account is most recent. Before reaching out to that agency, go to the Better Business Bureau website and check them out to see what kind of complaints they get. If you discover, for example, there are complaints from consumers who say they paid off these debts but never received any proof that they had paid them in full, proceed with caution.

Request validation of the debt. This is one of your rights under the federal Fair Debt Collection Practices Act. Here is a guide to your top ten debt collection rights.

Bargain. Agencies often buy these debts for very little money. Older debts in particular may be sold for less than pennies on the dollar. “Even if you pay them half, they are still doing well,” Halpern said.

Update your own credit reports. Once you pay the debt, “be on them right away to get a paid-in-full letter,” he suggested. “I would send it personally to all three credit reporting agencies. I would not count on them to do that.”

Think twice about paying old debts. Halpern recommended taking a careful look at how old the debt is. If it is outside the state statute of limitations and close to coming off your credit reports (collection accounts may only be reported for seven years plus 180 days from the date you fell behind with the original creditor), it may not make sense to pay it, especially if you are still experiencing financial problems. “It’s triage,” he said.

I’ll add one more tip: Read “Bad Paper.” Not only is it a great read, but it should give consumers — especially those dealing with aggressive collectors trying to collect old debts or payday loans — some confidence to fight back if they believe a collector is engaging in unlawful collection activity.

Many of the collectors Halpern interviewed want to see the system cleaned up. They want to know the debts they buy contain accurate information. “This is not a creditor versus debtors issue,” he told me. “We all benefit by having a system that is clear, accurate and transparent.”

More on Managing Debt:

Images courtesy Jake Halpern

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  • Klepto Crat

    Negotiating for pennies on the dollar only works if the debt was purchased. Most bank debt is purchased but local retail and commercial debt for the most part is not purchased and the possibility of the debt being written down for settlement is not probable. Debtors need to ask straight out if the agency is the purchaser or the agent for the original creditor. The reason why, is as a purchaser in most jurisdictions the terms and conditions of the contract do not transfer to the purchaser ie interest and collection fees, unlike the agency who is an assignor ie power of attorney, then all the terms and conditions of the contract are in effect.

    In closing, as an owner of a professional commercial debt collection agency and former corporate credit manager, I think the practice of buying and selling debt should be shunned. It just invites bad behavior driven by greed and all common decency is thrown out the window. All 3rd party collection should be done on an assignment basis and after the 1st agency is unsuccessful then write it off instead of assigning it to another, then another, then another.

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