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Debt Collectors Cash In On Uninformed Consumers

By Mark Huffman
ConsumerAffairs.com

May 21, 2007
Some consumers across the country are being contacted by a company called Midland Credit Management and told the company has purchased their Citibank USA credit card debt. In some cases, the consumers are being offered a discount to settle the debt.

“Some people will undoubtedly just send them a check. I called the company and asked for the fraud department and stated I was giving them one chance to verify before sending everything to my Attorney General's office,” Richard Gunter, a ConsumerAffairs.com reader, said.

Gunter’s suspicions were aroused because he didn’t have a Citibank USA account, and hadn’t for over two decades.

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After speaking with someone at Midland Credit Management and disputing the charge, he said he was promised the account would be deleted. Indeed, a week or so later Gunter said he received a letter telling him he, in fact, owed no money.

Midland Credit Management is a subsidiary of Encore Capital Group, a publicly traded company. It makes money by approaching banks and credit card companies and purchasing their “charged off” -- or, bad debt -- for pennies on the dollar. Since the credit card company considers the account uncollectible, it's only too happy to get something for it.

Why would Encore Capital and its subsidiaries, like Midland Credit Management, pay good money for bad debt? Because chances are, if consumers are pressured to pay it, many will, even if the creditor is not legally allowed to sue.

For the first three months of 2007, Encore Capital Group reported gross collections of $90.5 million, earning a profit of $5.7 million.

When banks charge off debts, it’s usually because they consider it uncollectible. While the debt remains valid, the legal remedies to collect it have dimished. Often, the statute of limitations has expired. When that happens, the creditor is no longer able to take the borrowers to court, but unless consumers know this when the new bill collector calls, they are likely to quickly fold under heavy collection pressure.

“It’s not illegal to collect debt whose statute of limitations has expired, as long as the debt collector is complying with the law,” said Craig Shapiro, an attorney with Horwitz, Horwitz & Associates in Chicago. “They can’t threaten to sue or threaten to garnish the consumers’ wages, for example, because they don’t have that right.”

What To Do

What should a consumer do when contacted by a debt collector who claims to have purchased the consumer’s debt from another lender?

“The first thing they should do is demand proof that the claim is legitimate,” Shapiro told ConsumerAffairs.com.

“For starters, they should require, in writing, the name and address of the original debt holder, the account number, the date of the last transaction, and the amount of the original debt. As consumers, they have a right to that information.”

If the statute of limitations has expired on a debt, it cannot be entered on the consumer’s credit report. If the new creditor threatens to report non payment to the credit agencies, it is a violation of the Fair Debt Collections Practices Act.

Each state has its own statute of limitations on old credit card debts. The statute of limitations refers to the period after which creditors cannot sue you to collect the debt. The length of time is calculated from your last payment date or last activity date, which is why it is important for consumers to receive that information from the debt collector.

Consumers who pay the debt, no questions asked, are likely paying money they are not legally required to pay. Gunter says a little skepticism is a healthy thing.

“It just looked weird to me because they offered a 25 percent discount for immediate payment,” he said. Anyone with a Citibank card may have paid it thinking they were getting a good deal.”

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