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Debt Buyers Reveal Just How Far They’re Willing to Go to Settle Unpaid Debts

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Tens of millions of Americans are pursued by debt buyers, speculators who buy the rights to collect their overdue bills. Yet few consumers realize this growing segment of the collection industry may offer them a chance to slash their delinquent debts by as much as 75%.

A MagnifyMoney investigation examined the business practices of debt buyers as detailed in disclosures to their investors. Here’s how the game is played:

  • Buyers purchase massive bundles of unpaid consumer debts with face values that often total billions of dollars. Those are the bills that banks, credit card companies, and other creditors give up trying to collect.
  • Those debts are bought at deeply discounted prices, averaging roughly 8 cents on the dollar.
  • The buyers only expect to recover a fraction of the original amounts owed. Their target is to recover from 2 to 3 times more than they paid.

The bottom line: Debt buyers can turn profits that meet their goals by collecting merely 16% to 24% of the original face values. That knowledge can be useful to savvy debtors who choose to negotiate a settlement for less.

Debt buyers “absolutely” have more flexibility in negotiating with consumers, says Sheryl Wright, senior vice president of Encore Capital Group, the nation’s largest debt buyer. Encore offers most debtors a 40% discount to settle, according to the company’s website.

“There could be an advantage in terms of negotiating a favorable settlement,” says Lisa Stifler of the Center for Responsible Lending, a nonprofit consumer advocate. “Debt buyers are willing to – and generally do – accept lower amounts.”

Stifler warned that debtors should be cautious in all interactions with debt buyers and collectors. (See “Tips to fight back against debt buyers and debt collectors” later in this article.)

In the world of debt buying, the numbers can vary. The price of bad debt portfolios ranged from 5 to 15 cents on the dollar during the past two years, according to corporate disclosures of debt buyers. The variables include the age of debt, size of account, type of loan, previous collection attempts, geographic location, and data about debtors – plus shifts of supply and demand in the bad debt marketplace.

What remains constant is the debt buyers’ goal of recovering 2 to 3 times more than the purchase price they pay for the accounts.

It is a different business model than that of traditional debt collection agencies, contractors that pursue bills for a percentage of what they recover. In contrast, debt buyers may often be more willing to wheel and deal to settle accounts with consumers.

Debt buyers raked in $3.6 billion in revenue last year – about one-third of the nation’s debt collections, according to the Consumer Financial Protection Bureau’s latest annual report.

Information is scarce on the inner workings of hundreds of debt buyers who operate in the U.S. An accurate count is not available since only 17 states require buyers to be licensed.

Of the more than 575 debt buyers that belong to the industry’s trade association, only three are publicly traded entities required to file disclosures last year with the federal Securities and Exchange Commission. MagnifyMoney looked into reports from two of those companies and found telling insights into an industry typically secretive about its practices.

An “Encore” of unpaid bills

Encore owns nearly 36 million open accounts of consumer debt in the U.S. through its subsidiaries Midland Credit Management, Midland Funding, Asset Acceptance, and Atlantic Credit & Finance.

During 2016, Encore invested $900 million to buy debt with a face value of $9.8 billion – or 9 cents per dollar. On average, the corporation recovers 2.5 times more than it pays for debt portfolios – the equivalent of 22.5 cents per dollar owed, according to its annual report to the SEC.

In that disclosure, the San Diego-based operation details how it tries to get debtors to pay.

Encore boasts that its proprietary “decision science” enables it “to predict a consumer’s willingness and ability to repay his or her debt.” It obtains “detailed information” about debtors’ “credit, savings or payment behavior,” then analyzes “demographic data, account characteristics and economic variables.”

“We pursue collection activities on only a fraction of the accounts we purchase,” stated Encore. “Consumers who we believe are financially incapable of making any payments … are excluded from our collection process.”

The rest of the debtors can expect to hear from Encore’s collectors. But the company knows most won’t respond.

“Only a small number of consumers who we contact choose to engage with us,” Encore explained. “Those who do are often offered discounts on their obligations or are presented with payment plans that are intended to suit their needs.”

While the company offers most debtors discounts of 40% to settle, relatively few take advantage of that opportunity.

“The majority of consumers we contact do not respond to our calls and letters, and we must then make the decision about whether to pursue collection through legal action,” Encore stated. In its annual report, the company disclosed it spent $200 million for legal costs last year.

In a written response to questions from MagnifyMoney, Encore refused to reveal the number of lawsuits it has filed or the amount of money it has recovered as a result of that litigation.

“We ultimately take legal action in less than 5% of all of our accounts,” says Wright. If Encore has sued 5% of its 36 million domestic open accounts, the total would be roughly 1.8 million court cases.

Portfolio Recovery Associates has acquired a total of 43 million consumer debts in the U.S. during the past 20 years. Behind Encore, it ranks as the nation’s second-largest debt buyer.

Its parent company, PRA Group Inc. of Norfolk, Va., paid $900 million last year to buy debts with a face value of $10.5 billion – or 8 cents on the dollar, according to its 2016 annual report. Its target is to collect a multiple of 2 to 3 times what it paid.

It is a high-stakes investment. The company must satisfy its own creditors since it borrows hundreds of millions of dollars to buy other people’s unpaid debts. PRA Group reported $1.8 billion in corporate indebtedness last year.

PRA Group declined an opportunity to respond to questions from MagnifyMoney. In lieu of an interview, spokeswoman Nancy Porter requested written questions. But the company then chose not to provide answers.

Asta Funding Inc., the only other publicly traded debt buyer, did not respond to interview requests from MagnifyMoney.

Tips to fight back against debt buyers and debt collectors

All types of bill collectors have a common weakness: They often know little about the accounts they chase. And that’s a primary reason for many of the 860,000 consumer complaints against collectors last year, according to a database kept by the Federal Trade Commission.

Be sure the debt is legitimate first

In dealing with collectors, you should begin by questioning whether the debt is legitimate and accurate. You can also ask who owns the debt and how they obtained the right to collect it.

In 2015, Portfolio agreed to pay $19 million in consumer relief and $8 million in civil penalties as a result of an action by the CFPB.

“Portfolio bought debts that were potentially inaccurate, lacking documentation or unenforceable,” stated the CFPB. “Without verifying the debt, the company collected payments by pressuring consumers with false statements and churning out lawsuits using robo-signed court documents.”

One unemployed 51-year-old mother in Kansas City, Mo. fought back and won a big judgment in court.

Portfolio mistakenly sued Maria Guadalujpe Mejia for a $1,100 credit card debt owed by a man with a similar sounding name. Despite evidence it was pursuing the wrong person, the company refused to drop the lawsuit.

Mejia countersued Portfolio. Outraged by the company’s bullying tactics, a court awarded her $83 million in damages. In February, the company agreed to settled the case for an undisclosed amount.

Challenge the debt in writing

Within 30 days of first contact by a collector, you have the right to challenge the debt in writing. The collector is not allowed to contact you again until it sends a written verification of what it believes you owe.

Negotiate a settlement

If the bill is correct, you can attempt to negotiate a settlement for less, a sometimes lengthy process that could take months or years. By starting with low offers, you may leave more room to bargain.

Communicate with collectors in writing and keep copies of everything. On its website, the CFPB offers sample letters of how to correspond with collectors.

As previously noted, debt buyers generally have more leeway to negotiate settlements since they actually own the accounts. A partial list of debt buyers can be found online at DBA International.

In contrast, collection agencies working on contingency may be more restricted in what they can offer. They need to collect enough to satisfy the expectations of creditors plus cover their own fee.

As part of a settlement, the debt buyer or collector may offer a discount, a payment plan allowing the consumer to pay over time, or a combination of the two.

“Through this process, we use a variety of options, not just one approach or another, to create unique solutions that help consumers work toward long-term financial well-being and improve their quality of life,” says Encore’s Wright.

A settlement doesn’t guarantee the debt will be scrubbed from your credit report

To encourage settlements, Encore recently announced that it would remove negative information from the credit reports of consumers two years after they paid or settled their debts. Traditionally, the negative “tradelines” remain on credit reports for seven years.

“We believe the changes in our credit reporting policy provide a tangible solution to help our consumers move toward a better life,” says Wright.

However, Encore’s new policy does nothing to speed up the removal of any negative information reported by the original creditor from whom the company bought the debt.

Check your state’s statute of limitations on unpaid debts

Before any payment or negotiation, check to see if the statute of limitations has expired on the debt. That is the window of time for when you can be sued; it varies from state to state and generally ranges from three to six years.

If the statute of limitations on your debt has expired, you may legally owe nothing. If the expiration is nearing, you can have extra leverage in negotiating a settlement. But be careful: A partial payment can restart the statute in some states and lengthen the time a black mark remains on your credit record.

Respond promptly if the company decides to sue

If you are sued over the debt, be sure to respond by the deadline specified in the court papers. If you answer, the collector will have to prove you owe the money.

If you don’t timely answer the complaint, the burden of proof may switch to you. A judge may enter a default judgment against you – or even sign a court order to garnish your paycheck.

Seek help from a lawyer or legal aid service if you have questions, but be careful of where you turn for help. The CFPB warns consumers to be wary of debt collection services that charge money in advance to negotiate on your behalf. They often promise more than they can deliver and get paid no matter what happens.

Mark Lagerkvist
Mark Lagerkvist |

Mark Lagerkvist is a writer at MagnifyMoney. You can email Mark here

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6 Lies Debt Collectors Might Tell You

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6 Lies Debt Collectors Might Tell You

Don’t feel guilty for being suspicious if you’ve been contacted by a debt collector. You should be. Debt collection agencies are notorious for using aggressive practices to get debtors to pay up. Sometimes those tactics can be illegal, and consumers may not know when they are not getting a fair shake. That is why you need to stay on your toes when dealing with collectors.

Debt collection agencies are third parties that have bought debt from the original creditor after the debtor is unable to pay for a certain amount of time. The companies buy past-due debt for a fraction of its value, then assign collectors to pester you to pay as much of the original debt as possible to make a profit.

Many debt collectors are legitimate businesses collecting past-due debts that consumers have not paid. But the list of complaints against debt collectors is growing. Since the Consumer Financial Protection Bureau (CFPB) began accepting complaints about debt collection in July 2013, debt collections became the most common source of complaints in 2015, outstripping credit reporting and mortgages.

Debt collectors use illegal practices even though they are illegal “because they can get away with it,” says Christine Hines, a legislative director at National Association of Consumer Advocates. That’s because consumers often don’t know their rights and do not file complaints. “If a consumer is faced with these aggressive tactics, sometimes they will choose trying to pay the debt instead of paying for food,” Hines added.

If you are like 77 million Americans who have a debt in collections today, chances are you’ll come in contact with a collection agency sooner rather than later. If you arm yourself with knowledge of your rights beforehand, you can potentially save yourself from a lot of undue stress, both financially and mentally.

Here are a few common lies that collectors will tell you to get to your money:

6 Lies Debt Collectors Tell

“You owe us X amount of money.”

Admittedly, this statement isn’t always a lie, but you should immediately be skeptical of whatever a debt collector says you owe. Because collection agencies constantly buy and sell debt, there’s no telling if the debt a collector is asking you to pay hasn’t been sold or if the company actually owns that debt at all.

“A big tell [for a scam] is if the person doesn’t even recognize the debt or if the debt collector doesn’t give any information about themselves or the company,” said Hines.

You may potentially owe some part of the debt the collection agency has called you about, but they may have added additional fees. Those fees can include things like commission fees paid to the collector, transaction fees if you use an online service to pay them, fees related to the company’s cost of collection, or interest or other penalties.

Debt collectors have been known not to keep up with paperwork in the purchase and sale of debt, so the collector may have limited or no information about the debt other than your name and the debt balance. But you have a right to know where the debt is from.

Ask for a debt verification letter before you pull out your wallet to pay. Under federal law, consumers are entitled to have a debt validated within 5 days of their first contact with the collector. The notice should have the name of the original creditor and what you should do if you don’t think you owe the money. The CFPB also provides templates of letters to send to a collector if you think you don’t owe the debt or need more information about it here.

“Just make a small payment today, and I’ll get off your back.”

This is a common strategy debt collectors may use if they know that the debt they are pursuing is too old. Each state has a statute of limitations on how long a creditor has to seek legal action against (i.e., sue) a borrower for an unpaid debt. It varies by state but can be from 10 to 20 years. Once that time has passed, you can’t be sued for a debt, and there really isn’t a legal incentive for you to pay the debt off. The damage has been done to your credit already (it may have even already fallen off your report if seven years have passed) and making a payment will not improve your score.

In fact, it could do the opposite. By making even a $1 payment on an old debt, you essentially restart the clock on your statute of limitations. There’s a reason this kind of debt has been nicknamed “zombie debt.” All of the sudden, you have revitalized a dead debt, and you are now vulnerable to lawsuits and other legal actions.

The CFPB is working to crack down on the ability of debt collectors to pursue zombie debts. In a list of proposed rules released this summer, the agency outlined proposals that would require debt collectors to have and provide more details about the debt in the collection process. The rules also require collectors to tell you more specific information about the debt, including if it’s too old for a lawsuit, when applicable.

“I am an investigator.”

Using the title of “investigator” is an intimidation tactic designed to scare you into paying up. Don’t fall for it. In fact, if the collector says they are an investigator or says that they will call the investigator on your case, get out of that call and report them to the CFPB immediately. It’s illegal for collectors to imply or claim outright that they are anyone they aren’t, such as a federal investigator, attorney, or government representative.

It’s easy to see why this is such an effective tactic. Saying that they are an investigator conveys the sentiment that you have committed a crime, or are about to be arrested, both of which are also illegal for a collector to claim.

“Someone is on their way to serve you papers.”

Saying they might sue you could be an empty threat meant to bully you into making a payment.

If you receive any documents that look like a lawsuit, you should check to make sure they are legitimate. That can be as easy as making a quick phone call. The laws vary from state to state, but most debt collection lawsuits are filed in state court. The National Consumer Law Center recommends calling your state clerk’s office to confirm that a case has been filed in that court. In some states, you can go online to see if a case has been filed against you.

It’s against the Fair Debt Collection Practices Act (FDCPA) for collection agencies to indicate that papers they send you are legal forms if they are not or vice versa, so be on the lookout for that.

“If you don’t pay, we will have you arrested or garnish your wages.”

Plain and simple, threatening to arrest you, garnish your wages, or seize your property is illegal under the FDCPA. The law prevents trained debt collectors from saying any of those threats or threatening legal action if they don’t actually intend to sue you. Now, the collection agencies certainly can sue you to collect. And if they win, a judge could allow the agency to garnish your wages. Federal law limits wage garnishment based on your income. If you are sued and the complaint is legitimate, don’t ignore it. If you do, you could forfeit your chance to fight a wage garnishment in court.

“We need your payment TODAY.”

If a debt collection agent is speaking with urgency or trying to get you to pay up right that moment, there is a good chance it’s a scam. Real debt collection agents may insist that you pay them, but likely won’t insist that you do it immediately or issue threats if you don’t agree to fork over funds right away.

If this happens, and it’s a real collection agency, any threats that were made could fall under illegal harassment under the FDCPA. The act states collectors “may not harass, oppress, or abuse you or any third parties they contact.” So, if the collector threatens violence, uses obscene language, or calls you constantly after you’ve asked them to stop, you can and should report them. File a complaint with the CFPB or the Federal Trade Commission.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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