Debt Collection Eye-Opener

I loved every bit of this morning's Daily Circuit show about aggressive collections of credit card debt. I especially admire that it was inspired by another segment just a week ago, during which a consumer protection lawyer named Mark Heaney called in to explain how screwed up collection practices are. Keri Miller said then that they should have him on the show to talk more about it, and sure enough, they did it a week later.

They paired Heaney with Jeff Horwitz, an investigative reporter for American Banker, who has been looking into collections practices. Horwitz brought not only a journalistic but also a business-side perspective -- he wouldn't let anyone say that the big banks that handle consumer credit cards were crooked or even lax about tracking billing information on the front end. But he did explain that on the back end -- particularly consumer payments and then collections for nonpayment -- their systems are not as reliable. He said that they are less automated, and therefore more subject to human error.

Then there's the next problem. The banks try to collect what's owed them (including all of the finance charges they attach), but when they can't they sell their debt to third parties. These companies pay the classic "pennies on the dollar" for the right to collect these debts. According to Horwitz and Heaney, often the collections companies are given as little as a spreadsheet that contains a name, Social Security number, address, and dollar amount. No proof that the amount is owed except that it appears on the sheet -- no detail of how it was accrued, what part of it was actually charged by the consumer, or which part was finance charges or interest.

The collection companies then try to harvest the money and their primary method is to file a civil suit against the consumer right off the bat. Supposedly they serve the person with papers, but the vast majority of people don't show up in court. Imagine if you received a summons from a company you'd never heard of telling you that you owed them money. In this day and age, it's not unlikely that some people think it's a scam.

With that uncontested judgment in hand, the collection company can garnish wages or put liens on property. As the Star Tribune showed in its excellent 2011 series "Hounded," people have been sent to jail for failure to appear: a return, in effect, to debtor's prisons.

Several people who called into the show recounted stories of having paid off a debt, only to be hounded by a second or even third company, still after the money. And it was obvious that there is no control of the collections companies; they could be adding charges onto amounts owed, and no one would ever know.

Heaney urged anyone in this situation to ask for documentation of the amount owed. He referred to the federal law that sets limits on collection agencies, and also to the new Consumer Financial Protection Bureau. He cited Elizabeth Warren's research (before she went to Washington) on how people get into debt in the first place, and credited Minnesota's attorney general, Lori Swanson, with being strong on consumer protection.

It was a great, great show. Eye-opening and well worth a listen.