AS CONSUMERS AND
lenders suffer the harsh consequences of the credit crunch, another industry is experiencing a boom in business: debt collectors.
Just ask Sandy Lubin, owner of the Credit Bureau of San Luis Obispo and Santa Barbara Counties. Based in Grover Beach, Calif., Lubin's 28-employee firm serves as both a credit bureau, selling consumer credit reports to businesses, and as a collection agency, recovering medical and property management debts, such as unpaid rent.
While the credit reporting side of Lubin's business has dropped "fairly substantially," the collection side has seen a 10% increase in new business this year a trend he predicts will accelerate as the weakening economy and rising debt levels take their toll on consumers' finances. "We're fortunate because we have both sides of the business," he notes.
Estimated at between $90 billion to $100 billion, the debt-collection market is huge, says Dennis Moroney, a senior research analyst with TowerGroup. "Plenty of organizations are clamoring to get that debt," he says. And with consumers increasingly falling behind on their debts delinquencies on consumer loans and credit cards jumped to 3.61% in the fourth quarter of 2007, the highest level since the end of 2002, according to the Federal Reserve that market is expected to only get bigger.
Consumers are already fending off more collection calls, according to Bud Hibbs, a Fort Worth, Texas-based consumer advocate who focuses on debt collectors. He says the number of people calling his office to ask for help has gone up 20% since the start of the year. "Between now and summertime, the amount of collection calls are going to set new records and the amount of lawsuits filed [against consumers] will fill the courthouses like never before," he predicts.
Despite the surge in business, however, the collection industry faces a huge setback: As consumers struggle to stretch thinning budgets over swelling debts, no matter how many phone calls a collector logs in, actually getting a payment will be more challenging than ever. Collection agencies are either paid a percentage of the debt they collect (typically 25% to 35%, according to Moroney), or they purchase charged-off debt from creditors upfront, for pennies on the dollar, and keep the proceeds. As a result, collection tactics have become more aggressive.
"We're seeing a weird level of desperation out of the credit and collection industry," says Lance Raphael, an attorney with the Consumer Advocacy Group in Chicago. His firm has seen a spike in reports of abusive practices, including trying to collect on debts without documentation proving the amount of the debt owed, or going after so-called "phantom" debts, which are old enough that the statute of limitations in which they can be collected has expired.
If there's any good news for consumers it's that federal law is on their side. While exercising your rights won't make the debts go away and collectors may sue you if it makes financial sense for them the Fair Debt Collection Practices Act (FDCPA) can ensure, for example, that consumers aren't harassed, called at work or threatened. (Click here
Collection agencies, in fact, typically feel just as threatened by potential lawsuits as consumers feel by abusive collector calls. Joel Lackey, president of National Credit Systems, an Atlanta-based agency specializing in apartment collections, says his employees about 100 get FDCPA training and are regularly tested on the rules. Their calls are monitored and graded, and the grades are part of what determines employees' financial incentives. (Needless to say, agents are also paid a commission on what they collect, which explains why some feel tempted to break the rules.) "I'll be the first to admit that there are some collectors out there who do not follow the FDCPA and need to be reigned in," he says.
In 2006, the latest year for which statistics are available, the Federal Trade Commission received nearly 70,000 complaints against third-party collectors, more than any other industry. While that number may pale in comparison with the millions of collection accounts the industry handles each year, the FTC says that "the number of consumers who complain to the agency represents a relatively small percentage of the total number of consumers who actually encounter problems with debt collectors."
Here are a couple of ways you can protect yourself from abusive collectors.
Know your rightsthird-party>
Collectors aren't allowed to call before 8 a.m. or after 9 p.m., and consumers can request in writing that a collector stop calling at any time. The same is true for calls to your office. Collectors are allowed only one phone call to relatives or friends, solely for the purpose of determining how to contact you. And they're not allowed to mention to others that they're collecting a debt.
More importantly, the typical threats used against consumers, such as taking them to court, are considered abuse unless the collector has a legitimate reason to follow through, says Heck. (Threatening violence, bodily harm or jail is an abusive practice under any circumstance.) Another common abuse is misstating the amount of the debt owed, which is why keeping your old credit card or loan statements is always a smart idea.
Avoid credit damage, if possible
Dodging collector calls will not make the debt go away. So if you know the debts are valid and can afford to pay them, do so before they end up on your credit report.
Collection accounts can kill your credit score, especially if the uncollected debt changes hands. When a debt is sold from one collector to another a common industry practice it is reported on your credit report as a new account, even if it's for the same debt, says John Ulzheimer, president of Credit.com Educational Services. "Once a collection hits your report, the damage has been done," he says.
Keep in mind, however, that while most collectors will tell you that paying off a debt will help your score, this isn't the case, according to Ulzheimer. Another common myth: that collectors can remove an account from your credit report once it's paid off. (Only time seven years, to be precise will make those blemishes disappear.)
If you're taken to court, it will be noted on your credit report and will damage your score even further. More importantly, a judgment will allow collectors to seize your assets or garnish your wages. Whether you actually end up in court is a matter of dollars and cents. "We make the decision to sue based on whether the amount is substantial enough to justify the cost of the lawsuit and if there are assets to be attained through the lawsuits," says Lubin, the credit bureau owner. Processing a lawsuit costs roughly $250 to $300 in California, "so we're not going to sue on a $200 account," he says. But if you owe anything above that amount and have some money in the bank, be warned: You're considered fair game.