Creditors and Collectors Reselling Old Debts
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Creditors often sell old debts to collection agencies for a profit, with debt collectors then trying to collect on all outstanding amounts owed. Debt collectors often receive negative publicity and have a reputation as predatory figures who prey on vulnerable families and individuals. It’s a cut-throat business, and having personally worked in that field for over ten years, we can tell you that every day, we witness violations, harassment, and intimidation.
Repeatedly buying and selling old debts
Sometimes the original lender of a debt will sell it to a collection agency or debt buyer for collection purposes. That entity then attempts to recover your owed amount from you if successful; otherwise, they may resell it and continue this cycle over and over. This process could continue for years before finally stopping.
Debt buyers specialize in purchasing large portfolios of old debts at a fraction of their original face value, usually those overdue by one year or more and for which creditors have stopped trying to collect payment from customers. As part of a deal with these debt buyers, creditors will profit from these sales and gain money they otherwise wouldn't.
However, when debts are sold multiple times, mistakes and improper collection become all too possible. Some people have reported seeing one debt resold several times for several years by different creditors.
When selling debt, collection agencies or debt purchasers typically purchase only an electronic file that provides basic information about it—usually, just the name, amount owed, and date of last missed payment are often provided—often leading to errors being present within these files and further discrediting debt buyers legally attempting to collect old (or zombie) debt.
As debt changes hands, its original delinquency date can sometimes get lost or forgotten, leading to some citizens pursuing debt they paid off years ago.
The Fair Debt Collection Practices Act prohibits debt collectors from using abusive or deceptive tactics when trying to collect on your debt, such as contacting you before 8 a.m. or after 9 p.m., calling your workplace when prohibited, and threatening to take money directly out of wages or bank accounts.
If you feel any debt collector is acting unlawfully in their collection efforts, filing a complaint with the Consumer Financial Protection Bureau could help resolve this matter quickly and fairly.
The Nightmare for consumers caught in the Debt-buying Cycle
Debt buying can be lucrative for companies looking to quickly access cash by selling off past-due accounts, but it can also be a nightmare for consumers who find themselves harassed over debts they may not even owe.
Today, the Consumer Financial Protection Bureau released its ongoing Debt Deception Investigation to showcase some horror stories of debt collection practices. Specifically, Portfolio Recovery Associates was hit with more than $24 million for repeatedly practicing illegal debt collection practices and credit report violations.
“After getting caught red-handed in 2015, Portfolio Recovery Associates continued violating the law through intimidation, deception, and illegal debt collection tactics and lawsuits,” said CFPB Director Rohit Chopra. “CFPB orders are not suggestions, and companies cannot ignore them simply because they are large or dominant in the market.”
In the initial order, the company was told to adhere to the following specifically:
The 2015 order required Portfolio Recovery Associates to adhere to provisions, including prohibitions on:
Collecting debts without a reasonable basis
Selling debt
Threatening or filing collection lawsuits without an intent to prove the debt
Filing false or misleading affidavits in debt-collection actions
Making false or deceptive representations, and
Collecting or suing on debt that was outside the statute of limitations.
When consumers receive calls from debt collectors, it's important to remember that these firms likely bought the debt at a bargain-basement price and intend to collect as much of it from debtors as possible.
Debt collection agencies can contact debtors via phone, text, email, or letter. Although laws prohibit debt collectors from engaging in abusive language and making false threats of arrest or legal action, unfortunately, this practice remains too prevalent, and as we see from the 2015 order and the latest penalty to Portfolio Recovery, it’s all too common.
New debt buyers may not be aware of disputes already filed by consumers or may have lost information over time. Under the Consumer Financial Protection Bureau's proposal, debt collectors would need to keep records of disputes and wait to sell off portfolios of unpaid debts until they are confident the debts are valid.
Be mindful that debts are frequently sold off, which restarts their statute of limitations and could pose problems for consumers who receive contact about old dues, making proving that such claims do not exceed time-barred obligations difficult in court.
Today's proposal only addresses third-party debt collectors; banks or credit card companies remain exempt. A separate CFPB proposal will address collection actions undertaken on their behalf, thus helping protect millions of consumers targeted by aggressive debt collectors for debts they don't owe.
Buying debts for pennies on the dollar
As soon as a debt becomes uncollectible, its creditors often sell it off to collectors at pennies on the dollar in an attempt to collect all amounts owed and turn a profit - this practice is known as debt buying or "debt scavenging," using various tactics designed to convince consumers they owe debts that don't belong to them legally.
Debt-buying companies flourished during the savings and loan crisis of the 1980s. Many lenders sold off debts for collection as they saw limited or no opportunity for recovery based on the terms of their financing agreements.
Creditors often package large groups of delinquent accounts into portfolios and sell them off to debt collectors at a fraction of their original value, often for pennies on the dollar. Once purchased, these debt buyers hire collection agencies or resell portions to other debt buyers.
Certain debt buyers can be particularly aggressive in pursuing money they're owed. They cast a wide net in searching out individuals owing them money, yet don't always accurately verify these debts before collecting on them - often harassing innocent parties or going after old (time-barred) debts that have passed the statute of limitations (which varies by state).
Individuals often become distressed as multiple debt buyers pursue them for one debt, often for several years at a time. Multiple buyers could buy and resell that same debt again and again, often called zombie debts.
Consumers who receive notice that a debt has been sold should contact the original lender immediately and request proof. Creditors must provide validation to any debt buyer in a timely fashion.
Debt buyers typically require at least partial payments from consumers in order to recoup their initial investments, so they will often negotiate settlements for less than what was owed and make sure it appears on your credit report as evidence that you did not settle in full.
The impact on your credit report
Once a creditor stops trying to collect on an outstanding debt, they often sell it off to a collection agency (or debt buyer), which then attempts to recover all or part of what you still owe them. They may also report it to credit reporting agencies as "re-aged"” which could have lasting ramifications on your credit score and ability to obtain future credit.
The law dictates that debt collectors do not violate the Fair Credit Reporting Act ("FCRA") if they provide written notification of the sale and specific additional details of the amount owed and to whom. Furthermore, debt collectors must send you an official debt validation letter within five days after first contact, allowing you to verify if the debt is valid, accurate, and not older than seven years as per state statutes of limitation.
Notably, even when settling an account that has entered collections for less than the original balance owed, its negative mark can remain on your credit report for up to seven years from when it first became delinquent. Over time, however, its impact should lessen with good communication with creditors to prevent future accounts from entering collections.
When you struggle to pay your debts, creditors who understand may offer alternative arrangements or payment plans, including lowering interest rates, waiving late fees, or settling the debt for less. Negotiate these terms as soon as you suspect that you might fall behind to ensure more flexibility from them, rather than waiting until it turns into collections account status. If the account has already been sent to collections, be sure to validate the debt prior to paying or making any promises to pay.
