Backers Say Law Creates Uniformity In Lawsuits But Critics Charge It Makes It Easier For Companies To Collect From Consumers
by Bridgit Bowden
Debt that is no longer legally collectible but creditors continue to pursue has been referred to as “zombie debt.” In Wisconsin, some consumer debt is extinguished after six years. Jacob Berchem/Wisconsin Center for Investigative Journalism
Last summer, Sandra Goodwin was sued by Jefferson Capital Systems for $5,562 in overdue debt, but Goodwin had never heard of or done business with the company.
“The paperwork said I was being sued,” said Goodwin, a former Madison resident who now lives in Stoughton. “I mean, I panicked.”
Goodwin sought free legal advice from Stacia Conneely, an attorney at the Madison branch of the nonprofit law firm Legal Action of Wisconsin. Conneely determined Jefferson Capital had purchased Goodwin’s debt — stemming from an online class she signed up for but never took — from LifeWay Credit Union.
Goodwin’s debt is a small part of the multi-billion-dollar debt-buying industry that recently won a legislative victory in Wisconsin. Such companies buy and sell the right to collect debt, but consumer advocates say the result is sometimes a bill that the consumer might not recognize for an amount that can’t be verified from a company they have never heard of.
Wisconsin consumers have filed more than 2,000 complaints over the past four years with the state Department of Financial Institutions against debt collectors, including such debt-buying companies, outstripping complaints against payday lenders and auto loan-title lenders combined, a Wisconsin Public Radio analysis found. Many of these complaints were about threats or other improper telephone behavior, and some were about attempts to collect debt from the wrong person.
When a creditor such as a credit card company decides it cannot collect, the debt can be sold for pennies on the dollar to a third-party debt buyer. Then, debt buyers try to collect through traditional methods, such as phone calls, or they can sue for repayment.
According to a 2013 Federal Trade Commission report, however, 90 percent or more of people sued never show up in court, even if they have a good defense, including that the debt is too old to legally collect.
Unlike most states, some consumer debt in Wisconsin is erased after six years. Nationally, the FTC found that slightly over 12 percent of the debt purchased was more than six years old, which would put it beyond the statute of limitations in Wisconsin.
If a defendant fails to show up for court, the judge often issues a default judgment, allowing the creditor to garnish wages and put liens on real estate or other property, which can tarnish a consumer’s credit rating for years.
Organizations including the FTC, the U.S. Consumer Financial Protection Bureau, the National Consumer Law Center and Human Rights Watch have all called for stronger regulation of debt buyers, especially in court proceedings.
A bill signed into law March 1 by Gov. Scott Walker sends Wisconsin the opposite way, consumer advocates say. The law standardizes but in some cases lowers how much proof debt collectors must present in court at the beginning of a lawsuit.
“It moves in the exact wrong direction,” said Stoughton consumer attorney Mary Fons, who testified against the bill authored by state Rep. Mark Born, R-Beaver Dam.
The law is based on a nearly identical bill from the last legislative session, also sponsored by Born. Representatives from the Wisconsin Creditors’ Rights Association, which pushed the bill, did not respond to requests for comment by Wisconsin Public Radio.
Born also declined comment. In testimony late last year, he said the bill would help “both merchants and debtors save time and money associated with litigation.” He added that the change would make “credit markets function more efficiently, which benefits us all.”
Born’s 2013 proposal marked one of the few times the state Department of Financial Institutions has opposed a bill during Walker’s tenure, said Peter Bildsten, former secretary of the state Department of Financial Institutions.
“I’m very concerned about the lack of protection here in Wisconsin for borrowers like that,” he said. “They don’t have voices.”
Conneely said consumers can fight such actions if they can show it is the wrong amount, charged to the wrong person or already settled through bankruptcy. Many people in debt, though, cannot afford an attorney, and “unfortunately sometimes it takes a lawyer to figure it out,” Conneely said.
Understanding The ‘Telephone Game’
Conneely said Goodwin’s situation isn’t uncommon. Debts can be bought and sold more than once. By the time someone is sued, how much is owed and to whom it is owed may be unrecognizable.
The FTC found that debt buyers often received very little information about the debts they purchased, usually packaged in one spreadsheet with many other debts. And the accuracy of the information isn’t guaranteed. The likelihood that the information is inaccurate grows as the debt ages.
“It’s sort of like the telephone game,” Conneely said. “It starts here, and by the time it comes around … years later, who knows what you’re going to see and what information is available?”
She said in Goodwin’s case, Jefferson Capital had purchased her debt, which originated from an online school called the College Network.
Goodwin said she never took the online course she signed up for, and she tried unsuccessfully to cancel it. Although she did sign a promissory note in 2011, Goodwin said she was legally blind at the time because of a stroke and didn’t know what she was signing.
The law firm representing Jefferson Capital didn’t return messages seeking comment.
Conneely said she is working on an out-of-court settlement.
A Growing Industry
The debt-buying industry took off during the savings and loan crisis of the late ‘80s and early ‘90s, growing significantly in the early 2000s. The industry took a hit during the recession that began in 2007 when desirable debt was in low supply and more expensive.
The industry is thriving again: Third-party debt buyers recovered approximately $55.2 billion in 2013, earning close to $10.4 billion in commissions and fees, according to a 2014 Association of Credit and Collections Professionals report.
By the FTC’s count, there are now “hundreds, if not thousands” of debt buyers. Although some are small, large players purchase most debt. In 2008, 76.1 percent of all debt sold in the U.S. was bought by nine large companies. Buyers in 2009 paid an average of 4 cents on the dollar, and older debt was generally cheaper than newer debt.
Beth Steelman, of Clinton, was sued by one of those big debt buyers last summer. She asked that the company not be named because she is afraid of getting sued again.
Steelman said she found out about the lawsuit when she was contacted by defense attorneys soliciting her business. She said she was never legally notified of the lawsuit. Online court records show the creditor attempted but failed to serve notice that she was being sued.
Once she confirmed that, Steelman asked the company to provide details about the debt, which was between $1,000 and $1,500. It provided the last six numbers of one of her old credit cards.
“If I had tried to fight it, I could tell I was really up against Goliath,” she said.
Steelman paid the company two installments of about $289 each, and the lawsuit was dropped. She continues to get collection letters and isn’t sure if she still owes the company money.
“I’m very paranoid now,” Steelman said, adding that she checks court records every week to ensure she isn’t being sued. She called the new law “terrifying” and “heartbreaking.”
“And that means now, I’ll probably be checking daily instead of weekly,” she said.
‘Sewer Service’
In some cases, alleged debtors are never notified of the lawsuit, ensuring a no-show in court and a win for the creditor. In a practice sometimes called “sewer service,” a collector falsifies records saying a summons was served when it wasn’t, figuratively throwing the papers in the sewer. In 2010, New York’s attorney general sued to throw out about 100,000 judgments that had been obtained this way.
According to a new study by Human Rights Watch, the debt buying industry is “heavily reliant on litigation,” and judges often “rubber stamp” judgments that can be filled with errors and “enormous accumulations of interest.”
“Many debt-buyer lawsuits rest on a foundation of highly questionable information and evidence,” Human Rights Watch found. “Debt buyers do not always receive meaningful evidence in support of their claims when they purchase a debt, and in some cases the sellers explicitly refuse to warrant that any of the information they passed on is accurate or even that the debts are legally enforceable.”
Wisconsin’s online circuit court database shows that between 2003 and March 22 of this year, Jefferson Capital, the company that sued Sandra Goodwin, had filed 2,630 cases against Wisconsin consumers. Nearly 3,000 cases were filed by debt buyer Portfolio Recovery Associates since 1998. Another major player, Absolute Resolutions, has filed 535 cases against Wisconsin debtors since 2014. Hundreds more cases have been filed by companies including Unifund, Transworld Systems and Midland Funding.
‘Zombie Debt’
Once debts reach a certain age, they can be deemed no longer collectible. In Wisconsin, it is generally six years. Wisconsin and Mississippi are the only states where certain debts are completely extinguished once they are past that statute of limitations. Debt that is past that date but which creditors continue to pursue has been referred to as “zombie debt.”
In theory, the fact that a debt is no longer collectible should be a good defense in court. It’s already a violation of the federal Fair Debt Collection Practices Act to file an action in court to collect an expired debt. However, the National Consumer Law Center said most debtors don’t know the laws exist and may not show up in court to contest it. The center recommends a federal ban on any efforts to collect zombie debt, including phone calls or letters.
Fons confirmed that creditors sometimes do secure judgments on these so-called zombie debts “because they (companies) don’t get caught very often.”
Consumer Concerns
From 2011 through 2015, the Wisconsin Department of Financial Institutions received 2,351 complaints about debt collectors, including third-party buyers, Wisconsin Public Radio found.
At the federal level, Wisconsin consumers have filed more than 1,100 complaints with the Consumer Financial Protection Bureau since July 2013 about all kinds of debt collectors. Americollect, a Manitowoc-based collections agency that uses the slogan “ridiculously nice collections,” was the most complained-about company with 44 complaints.
“Debt was paid” and “debt is not mine” were common reasons cited in the complaints.
Even with so many complaints, the FTC has found consumers dispute only 3.2 percent of cases in which debt buyers attempted to collect. The commission noted that this figure “is likely to understate these problems.”
Debate Surrounds Debt Buyer Law
The new law signed by Walker standardizes but in some cases loosens the required proof at the beginning of a lawsuit for these kinds of legal actions under the Wisconsin Consumer Act. Creditors and third-party debt buyers now must provide a single billing statement as proof at the beginning of a lawsuit.
Under the previous standard, they were required to show all documents “evidencing the transaction,” which could include the initial contract and a record of any charges and additional fees or interest. The law also was changed to make sure the new requirements apply to all creditors, including third-party debt buyers.
Born said in a press release after the Assembly passed his bill in November that the legislation “closes a loophole that has been exploited by bad actors to avoid paying debts.”
Streamlining litigation could hurt consumers, Fons said.
“We don’t need it quicker,” she said. “We need more accountability, we need more accuracy.”
University of Wisconsin-Madison finance Professor Jim Johannes, who testified in favor of the bill, said it standardizes courts’ interpretation of what is required in order to sue.
“It puts a fork in what you need as evidence when you approach the courts in the pleading stage of a case,” he said. “It provides clarity for the courts. Previously, before this the courts could interpret it any way they wanted to.”
For Stacia Conneely, this wasn’t a problem.
“That’s what judges are for, is to review the law and decide what they think it means,” she said.
Johannes said he believes the new law will protect consumers while preventing people from getting out of paying their debts.
“I am all about consumers,” he said. “But I’m not going to sit there and allow somebody to get around paying a debt just because they found a loophole in the law that a judge can now define what they need at the pleading stage.”
Conneely countered that the new law has created a different type of loophole — one that benefits creditors. Now, the required billing statement can be drawn up any time the creditor chooses. It might not include crucial information about the account’s history, she said.
“So, it doesn’t provide the other information that people are going to need, such as how did it get to that amount, and that’s often the question people have,” Conneely said.
At the heart of the disagreement is who is responsible to prove a debt is accurate and can be legally collected — the consumer or the creditor.
In 2014, Georgia Maxwell, then-assistant deputy secretary of the Department of Financial Institutions, testified against Born’s bill.
“DFI would not support legislation that unduly shifts onto consumers the burden of determining the accuracy of the debt they may — or may not — owe,” Maxwell told the Assembly Committee on Financial Institutions.
In 2015, the CFPB took action against two of the nation’s largest debt buying companies, Encore Capital Group and Portfolio Recovery Associates. The agency charged that the companies often did not verify the debt, collected payments by “pressuring consumers with false statements” and were “churning out lawsuits using robo-signed court documents.” The companies were ordered to pay refunds and fines totalling tens of millions of dollars and to halt collection efforts on another $128 million in debt.
Other states have taken steps to fix the system. In 2013, Minnesota started requiring creditors to show evidence including the terms of the original contract and the chain of custody of the debt. New York also enacted stricter requirements in 2014 by changing court rules.
Conneely is keeping an eye on the number of judgments obtained by debt buyers each month now that the law has changed. She expects to see more, adding, “We’re just waiting to see how many more.”