Banks routinely sell old debts, that is, debts past the statute of limitations, for about 0.2 cents per dollar. This is probably old news.
But the question that occurs to me, is why do we allow such sales? Just as we don't allow markets to sell expired milk, no matter what the discount, it would seem that allowing sales of debts that can only be enforced by trick is unlikely to be socially useful or something that our banking regulators should condone.
Timothy McCollough freely admits that he stopped making payments on his Chase Manhattan credit card in 1999. He says he did not have the means to pay after he was disabled by a head injury that cost him his job as a school security guard.
But more than a decade later, Mr. McCollough, who is 52 and lives in Laurel, Mont., is still haunted by the unpaid balance, which was originally about $3,000.
In 2007, he was sued a second time over the debt, and this time the suit contended that he owed significantly more: $3,816 in credit card debt, plus $5,536 in interest and $481 in legal fees. As he did the first time, Mr. McCollough sent a handwritten note to the court explaining that the statute of limitations on the debt had passed.
“I have had no dealing with any credit card in 8 1/2 years,” he wrote to the court. “The pain they caused is worth more than the money they want.”
Mr. McCollough is not the only borrower being pursued for a balance that has expired. Such claims are routinely sold on debt collection Web sites, where out-of-statute debt is for sale for a penny or less on the dollar.
In most states, it is legal for collectors to pursue out-of-statute debt, as long as they do not file a lawsuit or threaten to do so.
But some lawsuits are filed anyway, and consumer groups and even some industry consultants argue that collectors routinely harass debtors for unpaid balances that have exceeded the statute of limitations. In some cases, collectors have unlawfully added fees and interest.
“It’s so cheap, if you can work it smart, you don’t need to collect that much,” said John Pratt, a consultant to the debt-buying industry and an author of “Debt Purchasing: An Investor’s Guide to Buying Debt” (Morris Publishing, 2005). He said investors in old debt generally hoped to recoup two and half times what they paid for a group of claims.
Because collectors cannot sue on old debt, he said, they are more likely to resort to abusive tactics. “Time-barred debt is where the worst abuse has occurred towards the debtor,” he said.
In a report issued July 12, the Federal Trade Commission called for “significant reforms” in the debt collection industry and recommended that states change the murky laws that govern out-of-statute debt.
The statute of limitations for debt varies by state, generally from three to 10 years. In many states, collectors can restart the clock if they can persuade the consumer to make even a tiny payment toward the old debt. Debt collectors generally do not tell consumers that making a payment will revive the debt so it can be legally pursued.
“The point of the payments is not so much to get the money” as it is to restart the clock, said Daniel Schlanger, a New York lawyer who represents consumers in cases against debt collectors.
The F.T.C., in its report, recommends that states make sure the statute of limitations for outstanding debt is clear and that collectors filing a lawsuit be required to prove that the debt is not out of statute.
In addition, the agency recommends that states require collectors to tell consumers that they are not entitled to sue on out-of-statute debt and that making a partial payment revives the entire liability.
Rozanne Andersen, chief executive of ACA International, an association of debt collection companies, said she did not believe that old consumer debt should expire at all. The money is owed whether the debt is a month old or 10 years old, she said.
Ms. Andersen says her association opposes filing lawsuits against out-of-statute debt or using trickery to get consumers to pay. But she says she sees nothing wrong with debt collectors pursuing legitimate debts, even if that might spur the borrower to restart the statute of limitations.
In addition, she said it was ridiculous to expect debt collectors to warn consumers that their debts had expired.
“It suggests that if a consumer can avoid paying for a certain period of time, The debt collection industry has undergone a transformation in the last decade. Credit card issuers, health care providers and cellphone companies now routinely sell debt that they deem uncollectible to debt buyers, who then either try to collect it themselves, turn it over to a collections law firm or sell it again.
The price of secondhand debt depends on factors like the age of the debt, average balance, how much documentation is available to prove the debt and where the debtors are located.
Out-of-statute debt is readily available on various Web sites that cater to the collections industry. For instance, a Chaska, Minn., company called Credit Card Reseller is offering an $8 million portfolio of Bank of America credit card accounts, which on average have a balance of $4,981 and were written off by the bank in 2003.
The expected asking price is $16,000, or two-tenths of a cent for every dollar owed.
While collectors are not supposed to file lawsuits to pursue out-of-statute debt, some consumer lawyers say it happens routinely. In California, for instance, Victoria Byers of Los Angeles was sued last year for $1,708 over an old AT&T cellphone bill that she disputed. Her last payment was made in 2005.
Last month, Ms. Byers, who is 50, filed her own suit contending that the debt collector, Professional Collection Consultants, and its lawyer, Scott Wu, violated the Fair Debt Collection Practices Act. Her suit asserts that the collection firm and Mr. Wu routinely file lawsuits on stale debt in the hopes of obtaining default judgments.
Ms. Byers’s lawyer, Michael Stone, said he based the accusation on the high volume of lawsuits filed by Mr. Wu and on the “reckless” manner in which they treated Ms. Byers.
Clark Garen, a lawyer for Professional Collection Consultants, denied that his firm purposely set out to collect expired debt. As a result of the accusations in the Byers lawsuit, he said the firm reviewed its record of filing lawsuits and found a small number of instances in which lawsuits were filed against debt in which the statute of limitations had expired.
Of the 11,946 lawsuits that it filed over the last four years in California, 73 involved debt in which the statute of limitation had expired, Mr. Garen said. Professional Collection Consultants is dropping the lawsuits in which a judgment has not been entered and refunding $44,710.82 to consumers in 29 of the cases in which some money was collected, he said.
Mr. McCollough, the man who was pursued for his old Chase credit card debt, also ended up countersuing the collection law firm that sued him, Johnson Rodenburg & Lauinger of Bismarck, N.D. Last year, a Montana jury awarded him $311,000 in damages, primarily for emotional distress. The decision is being appealed.
Fred Simpson, a Missoula, Mont., lawyer representing Johnson Rodenburg, declined to comment and pointed instead to his appellate brief, in which cites an “accumulation of errors” by the district court.
In his closing arguments at the trial, Mr. Simpson pointed out that Mr. McCollough still owed the balance on his Chase card.
“The money was green and he spent it,” Mr. Simpson said. “If Mr. McCollough paid his credit card bill to Chase Manhattan, we wouldn’t be here this morning.”will enjoy a windfall,” she said, adding later, “People are obligated to pay their debts, whether the statute of limitations period has run or not.”