Debt Police Who Go too Far

Adam Wisniewski manages a department store near Buffalo, N.Y., and earns enough to support himself and his young son without falling behind on his bills. But one day in June, he learned he had been marked as a deadbeat. He swiped his bankcard to pay a cell-phone bill, and the card was rejected, even though he'd just deposited $800. The bank said his account was frozen and gave him the name of the law firm responsible for his problem.

Wisniewski expected to clear up the problem quickly with a call. But the law firm didn't budge, he says. He was told he had to pay $500 to unfreeze the bank account -- a portion of the $3,392 the law firm claimed he owed. And his bank charged him $100 for putting a freeze on the account. "I was supposed to go on vacation," Wisniewski says. "Instead I sat around the house."

The problem ran deeper than he imagined. Without his knowing it, Wisniewski had been summoned to appear in court by a collection agency and been found responsible for an unpaid Citibank Visa card balance back in 2001. The five-year-old judgment lay like an unexploded land mine until a law firm that specializes in collections came after the money.

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Wisniewski denies incurring the debt and says the case against him was weak. Whoever received the hand-delivered notice of the lawsuit in 2000 had blond hair; his is dark brown.

And this: Citibank says it has no record of Wisniewski ever having held one of its Visa cards.

Troubling trend

More and more people like Wisniewski are finding themselves hit with unjustified or even illegal collection actions, according to state regulators. Minnesota Solicitor General Lori Swanson sums up the phenomenon seen across the country: "Companies cross the line by trying to coerce consumers into paying unsubstantiated debts and amounts that weren't even owed in the first place." Complaints to the Federal Trade Commission about collectors have quadrupled since 2001, to 66,627 last year. In fact, the number-one complaint the agency receives about them is that people are getting squeezed for money they don't owe.

Some terrified victims pay even though the debts aren't legitimate, says San Diego Assistant District Attorney Tricia Pummill. Prosecutors in San Diego jailed collector Edward M. Davis for extortion after he admitted that he had posed as a lawyer and threatened to have people arrested unless they paid him for alleged debts. Real prosecutors go after debtors only when there's fraud, Pummill says, and they don't call first. "We like to surprise people."

While Davis posed as an attorney, real lawyers have been caught using similar tactics. John Daniel Lenahan, whose Buffalo-area offices employed scores of collection workers, gave up his law license in March and admitted to a string of criminal charges, including abusive collections and charging illegal fees.

Tales of hardball collectors who demand a pound of flesh are multiplying, but they're hardly new. A longtime practice is for agencies known as third-party collectors to try to collect on accounts that the original creditor has given up on. It's common for them to work on a contingency basis, taking a cut of up to half of what they're able to collect. More recently, collectors have been buying the debt outright, and often pay 10 cents on the dollar. The combination of stubborn debtors and lucrative rewards motivates collectors to squeeze hard for the money. Congress acknowledged this back in 1977, when it passed the Fair Debt Collection Practices Act, which outlaws false threats and harassment. Other rules prohibit collectors from calling before 8 a.m. or after 9 p.m. They can contact neighbors or others to get your address or phone number. But they're not allowed to discuss your debt with them.

Debt for sale

At least, that's how it's supposed to work. But what is new since consumer protections were put in place is a boom in the sale of debts. Collectors buy $100 billion a year in unpaid credit-card charges, and that doesn't include bad checks and other obligations, according to industry analysis firm Kaulkin Ginsberg.

In Wisniewski's case, the collection squeeze came from a company called Accounts Retrievable System LLC. Another firm, Platinum Recovery Services, had gotten a judgment on the debt, then sold it to Accounts Retrievable. Wisniewski's lawyer filed a motion to erase the judgment in court, and Accounts Retrievable backed down, saying it wouldn't contest the motion. So Wisniewski is off the hook. Also, the collection agency will probably pay Wisniewski's legal bills, his lawyer says.

Court cases disputing debt collection are becoming more common. Kenneth Hiller, the lawyer who represents Wisniewski, says it once was rare for a disputed debt to go all the way to court. Now, many bewildered consumers with useless ATM cards are coming to his door. "Sometimes the information collectors have supporting the claim is merely an address, a balance and an account number," he says. Many people, he says, simply pay up rather than hire a lawyer to try to disprove the debt.

When a debt is sold, it's more likely that trouble will find the alleged debtor. For one thing, debts can be difficult to disprove because the paper trail often grows cold, as Wisniewski found. And a collection agency that buys a debt doesn't have the original creditor -- such as a reputation-conscious bank -- looking over its shoulder. When confronted by someone who adamantly denies the debt, a collector can legally resell the account to another collector rather than clear up the mistake and lose its investment. Says Thomas Conway, chief of the Consumer Frauds Bureau at the New York Attorney General's Office: "Companies that go out and buy up old debt for pennies we call bottom-feeders." He says his office has seen an "explosion" of such companies and their bad practices.

Larry Wittkugle, a retired insurance executive in suburban Columbus, Ohio, keeps getting dunned for the same credit-card balance that he settled ten years ago. He sends each new collector a copy of the letter issued by a law firm in 1996 expunging the debt. That works for a while, but before long another collector sends him a stern demand to pay up.

Some people even pay a family member's debts after being prodded by a collector -- although discussing debts with someone other than the debtor is illegal. Seattle-area resident Sally Beckmann paid $5,338 of her sister's credit-card debt after a collector from upstate New York insisted that Beckmann could be held liable. Then she discovered that she'd been misled about her liability as well as approached illegally. "I hadn't had to deal with collectors before -- they sounded like they were really on my side," she says. "I called the credit-card company to try to get something done about it, but it was too late." When her sister took the collector to court and received a settlement, Beckmann later got her money back.

The collection industry's chief trade group says that such consumer gripes stem from a small fraction of collection work, but it acknowledges that it, too, is concerned about the spike in complaints. The group, ACA International (formerly known as the American Collectors Association), has launched a study of FTC records to find out whether a few bad apples are generating more than their share of complaints, says ACA general counsel Rozanne Andersen. ACA is also considering changes in its ethics rules. "The industry wants to improve compliance," she says.

Call for change

Consumer advocates say figuring out why complaints are exploding is simple math. Consumers can only collect up to $1,000 in penalties (and sometimes legal fees). These penalties were set when Congress passed the Fair Debt Collection Practices Act almost 30 years ago. "If you compare the amount collectors pay for lawsuits with what they can collect, it's the cost of doing business," says Hiller.

Some see higher penalties as the solution. The Center for American Progress, a public policy group in Washington, D.C., published a report in August calling for higher penalties and tighter regulation. The report paints a picture of weak regulation: The FTC has launched just ten enforcement actions against collectors in the past six years; in the same time period, it received 305,570 complaints.

The report's call for raising penalties and widening the law's scope would mean reversing a legislative tide in favor of creditors. After tightening bankruptcy rules in 2005, Congress followed up this year with a regulatory-relief bill that creates a new exemption in collection law for agencies that specialize in collecting bad checks. Under the provision, collectors in some cases are exempt from the Fair Debt Act if they work for a prosecutor's office. The measure was passed by the House and is pending in the Senate.

But there are also signs that legislators are sensitive to the rise in bad collection practices. There's bipartisan opposition to the Internal Revenue Service's use of private debt collectors, which began this fall. In June, the House stripped funding for the use of such collectors from the IRS's 2007 fiscal year budget. The measure was passed by the House and the Senate is considering a similar bill.