A lot of people owe money these days, and some of the agencies hired to pursue them are resorting to old- school tactics
to collect. Things like calling at all hours, threatening to have debtors jailed or fired, or employing
"They're turning up the pressure," said Indianapolis attorney Steve Halbert, who defends collection lawsuits and sues debt collectors under the Federal Fair Debt Collection Practices Act.
"There are certainly threats of immediate jail time for not paying debts and threats to take away people's houses. All without explaining that there's a certain legal process you have to go through."
As the economy muddles through its weakest run in decades, consumer angst about the tactics employed by third-party debt collectors has risen. The number of complaints logged by the Indiana Attorney General's Office alleging overly aggressive collectors has increased from 9.7 per week in 2005, to 11 per week in 2008, to 12.4 per week so far in 2009, said Dave Paetzmann, chief counsel for consumer litigation.
"The vast majority involve harassment-type activities—repeated calls, calls at work, those sorts of things," Paetzmann said. "There seems to be an increase in the number of what I would characterize as 'stale' debts being collected. Debts that may be several years old, as opposed to something within the last couple of years."
Increasingly, debtors are fighting back in court, though the number of lawsuits filed remains relatively small. Last year saw 81 cases, or 6.75 per month, filed under the Fair Debt Collection Practices Act in the U.S. District Court for the Southern District of Indiana. The average this year is more than 10 per month.
In one recently filed case similar to many others, Lisa White of Avon sued Indiana Loss Mitigation Inc., alleging she was being harassed over a $249 medical bill racked up at Avon Urgent Care after her daughter broke her foot.
She said the debt lingered while she and her ex-husband squabbled over how much he should pay. White then reached agreement with ILM to pay in three installments. Nonetheless, the suit said, the firm then ratcheted up collection tactics. It sent letters with "ridiculous threats and rants," sent e-mails to a work account her colleagues also could access, and sued her in the wrong venue, according to the suit. ILM has not filed a response to the case.
Nearly all the defendants in the suits are third-party agencies—debt collectors brought in after the original creditor tires of the chase. The industry (which employs 200,000 people at 5,500 firms nationally) is booming, as everyone from banks to hospitals tries to wring every possible dime out of accounts receivables.
Blood from turnip
Trouble is, you can't get blood from a turnip. And these days, there's a bumper crop of turnips.
"There's a lot of people to go after, but the people you're going after have less money," said attorney Fred Pfenninger, who works in the area of collections and creditors' rights. "So that's made it more difficult to collect."
At the same time, some of the debtors have become more crafty, he said. For example, consumers recognize that as mortgage notes are transferred from one entity to another, it becomes more difficult for a firm contemplating foreclosure to produce the needed paperwork.
"There are more and more cases in which people are saying, 'Show me the documents,'" Pfenninger said. "And many times the creditors are unable to come up with them. In a big case over in Ohio, a federal judge threw out several mortgage foreclosure cases because they were unable to come up with the documents. That got a lot of attention."
But Halbert said debt collectors are becoming more aggressive, too-emboldened, perhaps, by the perception that 2005 changes in bankruptcy laws made bankruptcy less of an option for maxed-out consumers.
However, they can't get too tough if they want to stay on the right side of the law.
Third-party debt collectors face tight strictures on just how hard they can push a private individual for payment. According to the Federal Fair Debt Collection Practices Act, they can't, among many other things, phone consumers other than between 8 a.m. and 9 p.m., local time; reveal or discuss the nature of debts with third parties (such as a debtor's employer); use abusive or threatening language; or threaten arrest or legal action that is either not permitted or not actually contemplated.
Unscrupulous collectors may ignore these rules, however, because most consumers don't even know they exist.
But pushing too hard can have unintended consequences. For instance, collectors who (illegally) threaten their targets with jail time or unemployment sometimes drive their terrified quarry straight into bankruptcy court—and forever beyond their grasp.
"I had a client come in last week, wanting to file bankruptcy for a small amount of debt," Halbert said. "She was so scared that terrible things were going to happen to her. She was going to jail, she was going to lose everything immediately, without any formalities. That's the kind of threats we see."
Indianapolis bankruptcy attorney Rob Lynch added: "Sometimes I'll tell people, 'Do you really want to spend the money [on bankruptcy proceedings], or do you want to just get your phone number changed or quit answering the phone?' It's quite common for people to say they just can't take it anymore."
Lynch said debt collectors seem peculiarly uninterested in heading off bankruptcies—even though such a filing means they likely won't recover a dime. He's gone so far as to write to collection agencies asking if they'll accept a lump-sum payment so his client can avoid Chapter 11. So far, he's had no takers.
Debt collectors are paid on commission. So while the tough economic times have swelled the number of debts they're chasing, collectors also are coming up empty handed more often.
That's partly because battered consumers have more pressing problems than trying to keep their credit scores high.
"They're not worried about things like a hit on their credit report like they might have been three years ago when the housing market was booming and everyone was looking to borrow and get into a house," said Patrick Lumsford, editor of Insight-ARM.com, a publication for the accounts-receivable-management industry.
"If they don't have any money to pay a debt, and it doesn't result in any immediate benefit, they're just not going to do it."
Todd Wolfe, president of Indianapolis-based Premiere Credit, knows all about the blood-from-a-turnip problem.
The third-party collection firm deals mostly with "government-based" debt (such as student loan defaults and back taxes). It's seen its average payment from debtors drop 8 percent from 12 months ago. Which means that if somebody was making a $100 payment last year, it's dropped to $92 today. All this before the recent avalanche of recession-inspired defaults even has reached his market.
"You have to keep in mind that most of the debts we collect are anywhere between three or five years old into default," Wolfe said. "So these people did not default on their debts, in our portfolios, because of the bad economic times we're dealing with right now. They were overextended and they didn't live up to their obligations years ago."
Wolfe said his company relies on supervision and precise company guidelines to make sure its agents are merely "persistent," rather than "relentless."
Nevertheless, the company has been hit with a small number of lawsuits and complaints—something the boss dismisses as largely a product of prickly feelings and the easy availability of Internet information on how to foil creditors.
"In today's information age, if you get mad you can type up an e-mail and shoot it out," he said. "A lot of times, it may be that the collector on our end didn't do anything wrong, as much as it is that the [debtor] is just frustrated with the situation."
Regardless of tactics, debt collectors and the consumers they're chasing never are going to get along well, InsightARM. com's Lumsford said.
"They're going after your money, so it's always going to be highly contentious," Lumsford said. "It's never going to be easy. It's always going to be a pretty nasty relationship."