St.
Petersburg Times
‘Buyers’
give old debts new life
Uncollected debts used to die away,
victims of time and creditors’ ability
to write them off. But with a new breed
of debt buyers, the past may haunt you.
By SCOTT BARANCIK, Times
Staff Writer
Published June 3, 2006
Used to be, banks didn’t waste much
time chasing credit card deadbeats.
Their staffs would hound debtors by phone
for six or seven months, then invite outside
collection agencies to take a crack. Few
debtors were sued. Those who hunkered down
long enough could escape without paying.
Not anymore. In the brave new world of
debt, unpaid bills never die. Today speculators
are buying thousands of these aging accounts
at a time and extracting payments the original
lenders could not.
Some debt buyers are hauling consumers
into court and getting permission to garnish
their wages, empty their bank accounts or
even seize their cars. Others are convincing
debtors to pay down old bills that are no
longer legally enforceable.
The amount of written-off credit card
debt sold to debt buyers in 2004 $63-billion
worth, according to the Nilson Report was
100 times the amount sold in 1993. This
year, a Las Vegas convention hosted by the
Debt Buyers’ Association trade group
drew 1,400 debt buyers, sellers, brokers,
resellers and lawyers.
Other credit issuers are selling their
unpaid bills, too, including such retailers
as Radio Shack, Wal-Mart and Bally Total
Fitness, and hospitals, auto lenders and
utilities.
Asset Acceptance, one of five publicly
traded debt buyers, operates a 52,000-square-fbot
collections center in Riverview. In 2000,
the Michigan company sued 25 debtors across
Pinellas, Hillsborough, Pasco, Hernando
and Citrus counties. Last year, it sued
3,855.
Over the same period, the types of lawsuits
debt buyers usually file small-claims breach
of contract, monies due or accounts suits
—— rose 56 percent across Pinellas,
Hillsborough and Pasco counties.
A morning cattle call at the Tampa courthouse
shows why.
Courtroom 306
Hillsborough County Judge Charlotte Anderson
reviews small-claims lawsuits every Wednesday.
This morning’s docket allots 150 minutes
for 165 pretrial hearings, more than half
involving debt buyers.
In every case, the debt buyer has a lawyer.
Not a single accused debtor does. Only two
put up a fight. Sandra A. Thompson, accused
of stopping payment on a $2,003 credit-card
debt in 2001, tells the judge the debt was
erased in bankruptcy court. The plaintiff
agrees to dismiss Thompson’s case
on the spot.
Michael A. Johnson says he has “no
recollection” of a 2001 credit card
debt totaling $2,118. The answer earns him
a trip to mediation.
Everyone else goes down without a punch.
Each admits owing all or some of his alleged
debt. Dozens more automatically lose because
they didn’t bother coming.
Debt buyers say landslides like this January
mornings prove their account records are
accurate. But critics like Bud Hibbs, a
consumer advocate in Texas who calls debt
buyers “scavengers,” says more
than 90 percent of all defendants would
prevail if they could afford to hire a competent
lawyer. Tampa lawyer Don Golden says many
accused debtors would be better off filing
for bankruptcy anyway, which can slay multiple
debts at once for a fraction of the legal
fees.
The consequences of losing in court are
steep. A successful plaintiff in Florida
is entitled to tap a debtor’s wages
and assets for up to 20 years, with interest.
Athena Funding Group, a Tampa debt buyer,
successfully sued Allen Pankow in 2004 over
a $924 credit-card debt. When Pankow, then
a 51-year-old Largo resident, ignored several
court orders to disclose his income sources
and assets, Athena asked that he be jailed
for contempt, court records show.
He was. After his $500 bail was posted,
Athena obtained the court’s permission
to snag it.
“Some people arc only motivated by
the stick” said Carol Freeland, who
chairs the Asset Buyers Division at ACA
International, a collections industry trade
group.
Filing suit isn’t for everybody.
Freeland, a partner at PRM Financial Services
in Texas, says her company primarily buys
accounts that are near or beyond the statute
of limitations (three to 15 years, depending
on the state). PRM offers to discount the
amount owed and transfer the balance to
a new credit card.
With regular payments, the debtor can
improve his credit rating and eventually
use the card for limited new purchases.
Despite the 18.9 percent interest rate,
Freeland says, many debtors arc grateful.
What most debtors don’t realize
is that a person is not legally obligated
to repay a debt whose statute of limitations
has expired. But transferring the balance
to a new credit card resets the clock to
zero.
Debt buying: the science
Companies pay just pennies on the dollar
for unpaid debts. Last year, for example,
Asset Acceptance paid $102-million for $4.2-billion
of consumer debt, about 2.5 cents per $1.
The discount is steep because the debts
are difficult to collect. Half the accounts
Asset bought in 2005 stymied at least three
prior collectors. Even after spending several
cents more per $1 on legal fees or other
collection costs, most buyers would be happy
to recover 20 or 25 cents per $1.
“The vast majority of what they
buy never gets collected,” says Charles
Trafton, an industry analyst with America’s
Growth Capital in Boston. “It’s
old, they haven’t had payments in
a long time, (and) and oftentimes you don’t
get great addresses, known places of employment.”
“We’re buying somebody else’s
discarded accounts,” said Jeffrey
Bovarnick, a principal at Asset Recovery
Management in Needham, Mass. “We take
huge risks, and we’re entitled to
make a return on our investment if we abide
by the law.”
That’s why there’s a science
to buying bad debt.
Debt buyers kick a portfolio’s tires
before bidding on it. They obtain partial
account data from the seller and dump the
stats into a software program designed to
assess value.
Key variables include the average account
balance, length of delinquency, number of
years remaining under the statute of limitations,
number of previous collection attempts,
whether Social Security numbers are available,
and debtor characteristics such as ZIP code
and credit score, according to ACA International’s
Buying Receivables. Historical patterns
show that middle-aged people and those living
in more affluent ZIP codes are more likely
to repay a debt.
A buyer who has had success collecting
on auto loans may pay more for them at auction
than someone skilled at medical collections.
A buyer who expects to file many lawsuits
may pay more for a portfolio that offers
original account documentation.
After submitting the winning bid, a buyer
typically scrubs his new portfolio of debtors
who have died or otherwise are not worth
chasing, such as those whose debts were
erased in bankruptcy. The buyer informs
the remaining debtors by mail that their
account has been purchased and that they
have certain legal rights, such as to end
routine collection calls and letters. Most
debt buyers piggyback a settlement offer
onto the notice.
The next step is to assign each account
a collection strategy. Every buyer handles
this differently.
At Asset Recovery Management, the first
priority is to quickly sue any debtor whose
statute of limitations is nearly up. Others
are given roughly six months to respond
to the company’s initial letter and
make a deal, most likely a monthly repayment
plan. Those who don’t may be sued,
too, though cost is an issue.
“That’s not my preferred course
of action,” Bovarnick says
It’s what
they do
What makes debt buyers better collectors?
A gentle touch, says Barbara Sinsley,
legal compliance chief at Asset Acceptance,
where debtors are called “customers”
and 36 percent of all collections come via
the courts.
“Our mantra is ‘Just be nice.”’
says Sinsley, who works at Asset’s
Riverview office. “I mean, frankly,
if you’re not working with a customer,
they’re less likely to pay.”
Debt buyers can afford to be patient.
Unlike creditors, most aren’t subject
to accounting rules that require them to
quickly write off defaulted loans as a loss.
Some are willing to wait as long as 10 years
for a debtor to recover from the drug habit,
gambling problem, illness, divorce, job
loss or jail sentence that knocked him off
his financial feet. Because of their anonymity,
debt buyers are freer to customize repayment
plans.
“Citibank doesn’t want to
he known for settling with debtors for 10
cents on the dollar, because then everybody
would try to settle with them for 10 cents
on the dollar,” says Gobind Sahney,
chairman of Receivables Acquisition &
Management Corp. in New York.
Debt buyers also are freer to turn the
screws. A creditor, such as a retail chain,
might soften its tactics for fear that an
angry debtor will cease shopping at its
stores and bad-mouth it. But the debt buyer’s
primary constraint is the law, including
the federal Fair Debt Collection Practices
Act and Fair Credit Reporting Act.
In short, the lender’s core business
is to lend. The debt buyer’s is to
collect.
Times staff writer Matthew Waite
and staff researcher Angie Drobnic Holan
contributed to this report. Scott Barancik
can be reached at barancik@sptimes.com or
(727) 893-8751.
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