Debt Settlement: Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers

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Sure, we can settle your debts!

As consumer debt has risen to historic levels, a growing number of for-profit debt settlement companies have emerged. These companies say they will negotiate with consumers' creditors to accept a lump sum settlement for 40 to 60 cents on the dollar for amounts owed on credit cards and other unsecured debt. However, there have been allegations that some debt settlement companies engage in fraudulent, abusive, or deceptive practices that leave consumers in worse financial condition. For example, it has been alleged that they commonly charge fees in advance of settling debts or without providing any services at all, a practice on which the Federal Trade Commission (FTC) recently announced a proposed ban due to its harm to consumers. The Committee asked for an investigation of these issues. As a result, GAO attempted to (1) determine through covert testing whether these allegations are accurate; and, if so, (2) determine whether they are widespread, citing specific closed cases. To achieve these objectives, GAO conducted covert testing by calling 20 companies while posing as fictitious consumers; made overt, unannounced site visits to several companies called; interviewed industry stakeholders; and reviewed information on federal and state legal actions. GAO did not use the services of the companies it called or attempt to verify the facts regarding all of the allegations it found.


GAO's investigation found that some debt settlement companies engage in fraudulent, deceptive, and abusive practices that pose a risk to consumers. Seventeen of the 20 companies GAO called while posing as fictitious consumers say they collect fees before settling consumer debts--a practice FTC has labeled as harmful and proposed banning--while only 1 company said it collects most fees after it successfully settles consumer debt. (GAO was unable to obtain fee information from 2 companies.) In several cases, companies stated that monthly payments would go entirely to fees for up to 4 months before any money would be reserved to settle consumer debt. Nearly all of the companies advised GAO's fictitious consumers to stop paying their creditors, including accounts that were still current. GAO also found that some debt settlement companies provided fraudulent, deceptive, or questionable information to its fictitious consumers, such as claiming unusually high success rates for their programs--as high as 100 percent. FTC and state investigations have typically found that less than 10 percent of consumers successfully complete these programs.

Other companies made claims linking their services to government programs and offering to pay $100 to consumers if they could not get them out of debt in 24 hours. GAO found the experiences of its fictitious consumers to be consistent with widespread complaints and charges made by federal and state investigators on behalf of real consumers against debt settlement companies engaged in fraudulent, abusive, or deceptive practices. Allegations identified by GAO involve hundreds of thousands of consumers across the country.

 Federal and state agencies have taken a growing number of legal actions against these companies in recent years. From these legal actions, GAO identified consumers who experienced tremendous financial damage from entering into a debt settlement program. For example, a North Carolina woman and her husband fell deeper into debt, filed for bankruptcy in an attempt to save their home from foreclosure, and took second jobs as janitors after paying $11,000 to two Florida companies for debt settlement services they never delivered. Another couple, from New York, was counted as a success story by an Arizona company even though the fees it charged plus the settled balance actually totaled more than 140 percent of what they originally owed.

Applicability of the FDCPA – It matters if the listing is from the original creditor or collection agency

 

Technorati Tags: Consumer Protection Laws,Fair Debt Collections Practices Act,Collection agency,Credit card,Creditor,Debt buyer,Debt validation,Fair Debt Collection Practices Act,FDCPA,United States.

The FDCPA does not cover collection tactics employed by original creditors (like credit card companies who issue credit cards). It only governs the actions of a debt collector (collection agency). Let’s look at the definition of these two groups as defined by the FDCPA.

TITLE VIII – DEBT COLLECTION PRACTICES [Fair Debt Collection Practices Act]
§ 803. Definitions [15 USC 1692a]
As used in this title –
(4) The term “creditor” means any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.

What does that mean? It means that, as far as the FDCPA is concerned, a creditor is the original entity which loaned money to a consumer. It is not a collection agency. The definition of a debt collector is as follows:

TITLE VIII – DEBT COLLECTION PRACTICES [Fair Debt Collection Practices Act]
§ 803. Definitions [15 USC 1692a]
As used in this title –
(6) The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

So when a collection agency is assigned, or has purchased, your debt, they are NOT the creditor. They are the debt collector and the actions they take are all governed by the FDCPA.

What if “Bob” is a lawyer?

Under the FDCPA, even if Joe hires a lawyer or law firm to collect a debt from you, the lawyer or law firm is still considered a collector and must adhere to the FDCPA.

What does a debt collector need to provide as debt validation?

• Proof that the collection company owns the debt/or has been assigned the debt. (Bob is legally entitled to collect this particular debt from you.) This is basic contract law. It is very difficult to get a judgment without a direct contract between collection agency and the original creditor.
• At a minimum, some account statements from the original creditor. If you really want to get sticky, you can pin them down on the amount of the debt by requiring complete payment history, starting with the original creditor. (How the heck did Bob calculate this debt? What fees/interest Bob has tacked on to this debt and how he determined these fees?) This requirement was established by the case Fields v. Wilber Law Firm, Donald L. Wilber and Kenneth Wilber, USCA-02-C-0072, 7th Circuit Court, Sept 2004..
• Copy of the original signed loan agreement or credit card application. (Your contract with Joe establishing the debt between you.) However, account statements from the original can fulfill these requirements.

What Bob gets out of the deal

It use to be that in most cases, creditors assigned, not sold, its debts to a collection agency. But not any more.

Creditors hire collection companies (like Bob) to collect debts for them, because they simply don’t have the time or resources to chase down all of their severely overdue accounts. Collection agencies have cheap labor and a streamlined system to pursue such accounts. When a creditor hires a collection agency, the debt has been assigned to the collection agency. If a collection agency is successful at collecting the money on the account, they usually keep a percentage of what is collected as payment for services.

Original creditors sometimes sell debts in large portfolios to collection agencies. This is starting to be the norm, and several of these companies, called Junk Debt Buyers (JDBs), are now being traded on Wall Street. The companies do not spend much money at all for these debts, sometimes paying less than 1 cent on the dollar. Even if the debt is not a large debt, they often hire attorney to send out mass form-letters to debtors in the hopes of collecting. As you can see, even if they get a small percentage of the debtor to pay, profits are enormous. For more on JDBs, you can read our article here.

Assigned or purchased debt (How do you know Bob is the right guy to pay?)

Why should you care if a debt is purchased or assigned? In an assignment, the collection agency does not own the debt, and therefore you do not technically owe them any money. There is no way for a collection agency to prove that you owe them money because there is only an assignment of the debt and not a contract between you and the creditor.

One loophole: Some contracts have the wording “debtor agrees to be responsible for payment of this debt to creditor OR ITS ASSIGNS.” This IS a contract between you and the debt collector as well as the creditor and if they can provide you with a copy of a contract that states this (with your signature!), you are pretty much stuck and need to negotiate.

What if the collection agency (Bob) proves they purchased the debt? Is he now the original creditor and no longer subject to the FDCPA?

If they do purchase the debt, this does not make them the original creditor. They are still a debt collector and covered by the FDCPA.

Continue to treat any collection agency, junk debt buyer or law firm who says they own the debt as a collection agency subject to the FDCPA. You can still request validation and proof of the purchase, because if they can’t validate it, the collection agency can’t prove you owe the debt. Often a JDB will tell a consumer that since they purchased the debt, they are not subject the the FDCPA. It’s simply not true

The Right to Validate Your Debt

Under the FDCPA, you are allowed to validate this debt, and the creditor (in this case, the collection agency) must show you proof that you owe the debt to the collection agency (not to the original creditor.)

The specific section of the FDCPA:

FDCPA Section 809. Validation of debts [15 USC 1692g](b) If the consumer notifies the debt collector in writing within the thirty-day period described in subsection (a) that the debt, or any portion thereof, is disputed, or that the consumer requests the name and address of the original creditor, the debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or any copy of a judgment, or the name and address of the original creditor, and a copy of such verification or judgment, or name and address of the original creditor, is mailed to the consumer by the debt collector.

Plus, they must show proof positive that you owe them this debt. It’s not enough to send you a computer-generated printout of the debt. There is an opinion letter from the FTC to back this up:

http://www.ftc.gov/os/statutes/fdcpa/letters/wollman.htm

Nor can they ask you to pay for digging up records of your debt:

http://www.ftc.gov/os/statutes/fdcpa/letters/krisor2.htm

So, if a creditor can’t verify a debt:

• They are not allowed to collect the debt,
• They are not allowed to contact you about the debt, and
• They are also not allowed to report it under the Fair Credit Reporting Act (FCRA). Doing so is a violation of the FCRA, and the FCRA states that you can sue for $1,000 in damages for any violation of the Act.

The opinion letter from the FTC which clearly spells out that a collection agency CANNOT report a debt to the credit bureaus which has not been validated:

http://www.ftc.gov/os/statutes/fdcpa/letters/cass.htm

It also states that you can sue in federal or state court. So if you have them on a violation, then you have damages of $1,000 for the incident plus damages. Small claims court, anyone?

When a collection agency responds to your request for validation with a summons to appear (meaning they are trying to get a judgment against you)

1/17/2002: These sneaky collection agencies are starting to catch on to the debt validation concept. (No doubt there is some kind of collection agency newsletter going around telling these folks about the whole process.) I’ve heard from my readers that some collection agencies are starting to respond to validation requests with summons to appear in court. There is precedent which says that a collection agency cannot even file suit against you if they haven’t validated the debt within the initial 30 day period. If this happens to you, you may cite the case:

Spears vs. Brennan

The appeals court determined:

“Brennan (plaintiff collection agency attorney) violated 15 U.S.C. § 1692g(b) when he obtained a default judgment against Spears (defendant) after Spears had notified Brennan in writing that the debt was being disputed and before Brennan had mailed verification of the debt to Spears.”

This means that you have an absolute defense in court to deny them judgment if they still have not validated the debt. Once you get your FDCPA dispute letter in, the collector cannot even get a judgment until they satisfy the FDCPA law. The appeals court overturned the default summary judgment in part because the collection agency lawyer did not meet the rules of the FDCPA.

This could be grounds for getting a default judgment vacated. It’s also another violation of the FDCPA and you can collect $1,000 from them.

The Debt Validation Strategy

It might be helpful to look at our illustration of the process before you get started. You might also want to read this, sort of our own “validation” of the process given here.

1. Send a letter requesting validation to the collection agency (our buddy Bob in the preceding example).
2. If you don’t know the address of the collection agency, here is a tip to help you find it.
3. Dispute the collection with the credit bureaus.
4. Wait 30 days to hear back from the collection agency. Most likely they will not respond or they will respond saying that they received your letter. Only a letter which includes:

o Proof that the collection company owns the debt/or has been assigned the debt,

o Complete payment history, starting with the original creditor, and

o Copy of the original signed loan agreement or credit card application

is satisfactory.

5. If they haven’t sent you satisfactory proof, send a copy of your receipt for your registered mail, a copy of the first letter you sent and a statement that they have not complied with the FDCPA and are now in violation of the Act. Tell them they need to immediately remove the collection listing from your credit report or you are going to file a lawsuit because they are in violation of the FDCPA, section 809 (b).

6. Wait 15-20 days to hear back after this second letter to the collection agency. They will either remove it or not respond.

7. If they do provide a contract with a signature from the original creditor showing that you owe the debt, there is one more thing you can try: see if they are legally licensed to collect the debt in your state. Here is a good site to begin your search.

Not all states require licensing, however. Here’s a little cheat sheet (Word Doc) to see what the collection licensing laws in your state are. It’s got other handy dandy state law information as well.

If you believe that they are not licensed, and licensing is required in your state, write them another letter and tell them they are in violation of your state’s collection laws and are subject to prosecution and fines. Cite your state’s fines and procedures in the letter. This is a last ditch effort, but has worked in some cases.

8. Typically, your work will stop here, as most collection agencies will bow down to your demands and send you a letter agreeing to remove the listing. Now all you have to do is send a copy of the letter to the CRAs.
If the collection agency did not agree to remove the listing, then you need to continue to the next steps.

9. File a lawsuit in small claims court against the collection agency on the basis of violating the FDCPA.

10. Have the papers served to the collection agency. (You can find a paper server on the internet for about $25). Here is a good link. And here is another: http://www.1-800-serve-em.com/servicemap.html

11. In the meantime, in a parallel effort with your lawsuit against the collection agency:

12. If the collection comes back as “verified” from the credit bureaus, you now have proof of further collection activity from the collection agency. (The assumption is that the credit bureau contacted the collection agency to verify the debt.) Since the collection agency did not validate the debt, further collection activity is a violation of the FDCPA.

13. Contact the credit bureaus, and tell them that the creditors did not verify the debts under the FDCPA, and send copies of your proof. Request the method of verification, which is your right under the FCRA. It is crucial to contact the credit bureaus before filing a lawsuit. Make sure you state that the collection agency did not respond to your request for debt validation.

14. You can try sending them this letter to see if they will budge. They may tell you that the request needs to come from the creditor. This is baloney. If they can’t give you reasonable information on how they verified the information and the collection agency has provided you none, you can conclude there was no reasonable investigation performed. They are teetering on the edge of “willful non-compliance” under the FCRA. Tell them so.

15. File a suit in either small claims, state or federal court. The basis of the lawsuit should be that the credit bureaus could not provide a satisfactory method of verification, or did not conduct a reasonable investigation.

16. Have the papers served. (You can find a paper server on the internet for about $25). Here is a great link where you can search for the local office of the credit bureau near you. http://www.llrx.com/columns/roundup14.htm

17. Notify the bureaus that you are suing them. You can use this letter. The credit bureaus will call the creditors and find out that there is a question about whether the debt is legitimate. They should delete it immediately. If you want more legal ammo, you might also try looking up similar cases to cite. We have a list of online resources here.

I hope these tips have encouraged you. Good luck on pursuing financial freedom!

What is Debt Validation and does it actually work?

Technorati Tags: debt validation,fdcpa section 803

Most people who try to fix their own credit will sooner or later run across information on debt validation. The first mistake people make when trying to validate a debt is to confuse it with debt “verification.” Let’s get this confusion clarified before we actually get into what validation actually is and how it can be used to repair a credit report.

• Debt validation refers to the process of a COLLECTION AGENCY providing a consumer with proof that a debt actually belongs to that consumer.

• Debt verification refers to the process of a CREDIT REPORTING AGENCY verifying with an original creditor or a collection agency that a debt actually belongs to a consumer.

Now that we know who the debt validation process refers to – collection agencies and NOT CRA’s (credit bureaus), we can now find out how the process works with credit repair.

The debt validation process can be found in Section 803 of the Fair Debt Collection Practices Act (FDCPA). It provides:

Section 803 (b) If the consumer notifies the debt collector in writing within the thirty-day period described in subsection (a) that the debt, or any portion thereof, is disputed, or that the consumer requests the name and address of the original creditor, the debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or any copy of a judgment, or the name and address of the original creditor, and a copy of such verification or judgment, or name and address of the original creditor, is mailed to the consumer by the debt collector.

Plus, they must show proof positive that you owe them this debt. It’s not enough to send you a computer-generated printout of the debt. They must prove in writing that they actually purchased the debt from the original credit grantor. In addition to that, they must also foot the bill for the cost of obtaining the information from the original creditor.

One way of looking at it is like this: Suppose you borrowed $50.00 from your best friend Lisa, then her friend Brian came up to you and said he bought your debt from Lisa and you now owe him the money you once owed to Lisa. These might be some of the thoughts you would have:

1. How do you know that Brian is actually collecting for Lisa? What legal documents does Brian have to prove that he is legally authorized to collect?

2. How much is the actual debt? What payments have already been made on the account? Where is the accounting of the debt, including all interest and fees? Are these fees and interest amounts legit?

3. Do you really owe Brian the money? Or was it actually a third party, James? Where is the contract showing that you made a deal with Brian and not James?

4. How do you know if you pay Brian, Lisa won’t come back and ask for the money you originally owed her?

It works the exact same way when a collection agency sends you a letter stating that you owe them a debt you once owed an original creditor. They must prove you owe them the debt. Their word on official looking letter-head or a phone call is not enough. If the collection agency cannot provide legal proof, they are in violation of the FDCPA and can be sued. Further, they cannot continue to report the debt the CRA’s, who in turn cannot continue to list the debt on your credit report. The listing must be immediately deleted. You have this right as a consumer and the law is on your side should you choose to use it.