The Arizona Republic
By: Megan Neighbor and Kiah Haslett
August 8, 2010
Skipped credit-card payments -- from five years ago or two years ago or six months ago -- have a pulse of their own. That debt lives on, generating phone calls, collection notices and unrelenting stress.
Consumers years behind on their bills may find themselves hounded by card companies, collection agencies or lawyers trying to garnishee wages or place liens on property.
If the debt is sold by the original owner, a new company unfamiliar to the consumer might start calling.
The collections process can become a living hell for consumers trying to hide from former liabilities. The effort can take years and span multiple companies, states and courts.
There are notices to appear, lawyers, court fees, property liens. Garnisheed wages disappear out of paychecks.
But for a growing industry of debt-collection and debt-buying companies, unpaid bills can be a business opportunity.
In the end, collectors trump consumers who ignore phone calls, letters and court summons nearly every time.
Third-party collections recovered $40.4 billion for creditors in 2007, according to a study conducted by the ACA, the association of Credit and Collection Professional International.
In Phoenix, debt collection is fueled by consumers who average $26,035 in credit-card debt and auto and personal loans, the fifth highest in the nation, according to a study by the credit bureau Experian.
In December, 1.35 percent of all debts were late by at least 90 days. As a result, Arizonans are less likely to make timely payments on their debts than those living in other states, research by TransUnion, another credit bureau, indicates.
In 2009, Arizona ranked third among the states for delinquent debts, falling short of Nevada and Florida, which had 1.98 and 1.47 percent delinquent debt, respectively.
The national average for outstanding debts in the United States was 1.10 percent.
How a bad debt starts
The dramatic final effort to collect a debt, a debtor's lawsuit, usually results from months or years of ignored calls and letters from banks, collection agencies and debt buyers.
But the beginning is rather innocuous: not paying a bill. Thirty days after a payment is delinquent, the consumer's bill will tack on a late fee and their credit score will take a slight dip.
For every additional 30 days of delinquency, their credit score will take an additional hit and they'll be charged another late fee, until the debt is eventually sent to in-house or third-party collections.
Creditors will often attempt to track down the consumer by phone about 30 days after a bill is due.
Before the recession, creditors called consumers who mismanaged their debt, said credit counselor Ericka Young of Tailor Made Budgets.
That's not the case anymore.
Her clients are primarily people who were considered a good credit risk several years ago but have since lost their jobs, taken a pay cut and depleted their savings to keep up with day-to-day payments.
They have more than one credit card and car payments, usually $50,000 in debt excluding home equity.
"Their issues have become more serious," she said. "There hasn't been an increase (in clients), but the issues are more severe."
Around 60 days after a bill is due on a car, credit card, hospital or water bill, the debt is transferred to an in-house collection agency or a third-party collector.
Collection agencies such as Advanced Recovery Services, LLC, Allstate Recovery Bureau Inc., and Amend Financial LLC, all based out of Phoenix, are licensed through the Arizona Department of Financial Institutions. They are required to follow the Fair Debt Collection Practices Act, enforced by the Federal Trade Commission.
As part of the collections process, consumers are pelted with letters and phone calls. A validation letter that verifies the debt comes five days after the first phone call.
This is usually where the consumer makes the first misstep, credit counselors said.
"Once the phone calls start coming, they tell their kids to stop answering the phone and they start screening their phone calls," said Jennifer Quillin, assistant director at Arizona Saves. "But if you bury your head in the sand, the collection agency will only continue to pursue you."
At 180 days, the account is charged off, a term credit companies use to define a debt that is considered uncollectable. A charge off greatly hurts a consumer's credit report and is visible on credit reports for about seven years.
"A charge-off is one gradation below filing bankruptcy," said Catherine Williams, vice president of financial literacy at Texas-based Money Management International, a non-profit credit-counseling agency.
If the collection agency recoups the full debt it receives a percentage of what's collected. That could range from 15 to 30 percent.
With banks struggling to deal with debt on their books, discounted payments are being negotiated more frequently, said Kevin Gallegos, vice president of Phoenix operations for Freedom Debt Relief, headquartered in San Mateo, Calif.
That's the strategy Phoenix resident Heidi Feldstein used to rid herself of about $45,000 in debt in June. Her debts resulted from broken appliances and an HOA fee that was far more than what she anticipated.
"I had some stock money set aside that I used to pay off three credit cards at 25 percent of what I owed and one at 50 percent of what I owed," Feldstein said.
There are three options for a creditor after a debt has been charged off: transfer the debt to another agency, sell the debt or file a lawsuit against the consumer.
Depending on the company's policy, debts may be transferred to three different collection agencies before other methods are sought, said Dennis Hammond, president of the Debt Marketplace, a consulting firm for creditor and debt buyers based out of Santa Fe Springs, Calif.
Each attempt lasts 180 days, during which collection agencies call and send letters to the consumer, requesting payment.
If traditional attempts are unsuccessful, the creditor may sell thousands of debts, referred to as portfolios, for a discount, to a debt buyer. This transaction occurs anywhere between six months to 10 years after a debt is delinquent.
Portfolios are usually grouped by type - such as credit card, student or medical debts - and age.
Debt-buyers transfer debts to in-house or third party collections to validate a consumer's home address and phone number. Then, the consumer is barraged with more phone calls and letters.
The longer the process continues, the more the debt can become unrecognizable as it is purchased and passed from one collection agency or debt buyer to the next. For example, validation letters sent by debt buyers often don't include the name of the original creditor to whom the debt is owed.
"Some of the people will get very confused when they get a call from one collection agency, don't hear anything for a while, and then all of a sudden they're getting a call from a different collection agency or debt buyer who's inquiring about the same debt," said Patrick Jordan, executive director for Arizona Saves, a non-profit that offers credit education classes. "It's changed hands and the consumer doesn't realize it."
"Some people are afraid to answer the phone or open their mail," he said. "It can really be a paralyzing fear."
Not answering the phone is detrimental because debt buyers are often willing to barter with the consumer, said Barbara Sinsley, counsel to DBA International, a national association of debt buyers based in McLean, Va.
Discounts vary, but can be as much as 50 percent off the original price.
Debt-buying firms include publicly traded companies such as San Diego-based Encore, ASTA Funding, headquartered in Englewood Cliffs, N.J., and Portfolio Recovery Associates Inc., based out of Norfolk, Va.
With $33,047,000 of net income in 2009, Encore is the most profitable of the three, according to SEC filings.
The majority of debt buyers, however, are private companies whose financial impact is relatively unknown because of a lack of industry regulation.
In a worst-case scenario, those who ignore the collection calls, letters and court summons may see their wages garnisheed or liens put on their properties.
Debt holders use lawsuits as a collection tool against consumers who have a substantiated address, are employed and have not cooperated in previous collection attempts. They are filed by a collection agency acting on behalf of the original creditor or a debt buyer and can be filed from six months to six years after a debt is due.
Most lawsuits target debtors who owe between $5,000 and $10,000, but can be filed for debts as small as $500, said Pat Esquivel, collections attorney at Jerold Kaplan Law Office and president of the Arizona Collectors Association, the state office of the America Collectors Association International.
Court records indicate that Phoenix-based credit-card company American Express files suits against individuals who have $2,000 to $6,000 in debt.
To file suit, the collection firm files a complaint and prayer for relief with the court and hand-delivers it to the defendant.
If the consumer doesn't respond to the complaint within 20 days, the firm files for a default judgment, which the judge can grant after 30 days. Approximately 90 percent of all suits end in a default judgment, Esquivel said.
The post-judgment remedy is garnisheeing up to 25 percent of the debtors' paycheck.
That's a difficult pill for consumers to swallow, said Williams, vice president of financial literacy at Money Management International.
"Many people say they are not going to court because they can't afford a lawyer or they're afraid of their wages being garnished," Williams said. "But consistently, if people show up and present their financial snapshot, a judge is going to work with them."
Lawsuits rarely provide the consumer with information about when and where the debt originated.
"So many people are saying, I don't know who is suing," said Veronika Fabian, a consumer lawyer with Choi Rhee and Fabian, PLC in Mesa. "I think that goes to how many defaults are filed. People are saying, 'If I don't know who they are, I can just ignore it.' "
There is a limit to the process, however. In Arizona, a consumer is not required to pay back a contractual debt outside of the six-year statute of limitations.
Yet debt buyers often purchase debts that are seven years or older, in hopes the debtor is unaware of their contractual obligations.
"If we buy paper (debts) outside of the statute of limitation, we will send a letter asking if they want to settle up their account and that is within the law," said Alan Kluger, director of Portfolio Acquisitions at Global Accept Credit Company, a debt-buying company.
Nothing within the Fair Debt Collection Practices Act prevents debt buyers from contacting consumers who have debts beyond contractual obligation.
But if a consumer begins making payments on old debts, the debt buyer often reports it to national credit bureaus, which post the delinquency on the person's credit report.
And the cycle begins again.