Debt and Credit Score

Consumers should be aware of the debt aftermarket and how it can affect your credit report. I call the sale and resale of debt from the original creditor to a third party “the debt aftermarket.”

Many consumers who have outstanding obligations, especially older obligations, receive collection letters from companies they have never heard of. Sometimes they simply ignore them and assume its a mistake because they don’t recognize the creditor.

The business of the sale of debt portfolios is “big business” and prevalent in today’s financial circles. Therefore, it is likely that some of your debts have been or will be sold.

When reviewing your credit report, be very careful to ascertain the identity of every creditor entry. This sometimes can be a difficult task on some older obligations because they have been sold several times. A common practice for these buyers of bad debt is to place a new entry on your credit report which would look like you incurred a new obligations and defaulted on it. This creates a new set of problems for you. First, it impedes your road to rebuilding credit because it appears as if you continued to default. Secondly, the time period before the adverse entry would be deleted starts over. Thus, assume you owed an obligation to Orchard Bank and the last contact with them was 6 years ago. With nothing else done during those six years, that entry would be deleted in one year and then would not adversely affect your score. However, if Orchard Bank sells the bad debt to a debt buyer, they then enter a new entry on your report for a 6 year old debt. Your time-frame to have that entry deleted would start over.

The debt aftermarket is the sale of obligations you owe to a particular creditor, to a third-party, to whom you do not have an obligation or a business relationship with. This does not mean you do not owe the obligation as your original creditor does, in fact, maintain assignment rights. However, consumers need to be aware of the identity of their creditors in order to repair their credit and increase their credit score.

This is an everyday occurrence in the debt and credit industry and, although done without your knowledge, has certain impact upon you. It is crucial to your credit building process to understand the complex niche of the purchase and sale of debt. Transactions involving third parties relating to the sale and resale of your debts present a clear and present danger to you and your worthy aspirations of good credit.

If a review of your credit report discloses various entries from creditors whom you do not recognize, it could very well mean that your debt was sold by its original owner (the party you contracted with). The debt, in fact, could have been resold as well, thus complicating the matter further. It is critical that you ascertain the original creditor to whom the particular obligation is attributed to. This investigation is crucial to a proper analysis of your credit and in the phase of effectuating a plan of resolution.

Let’s explore the debt aftermarket.

The debt aftermarket provides a method by which creditors can generate immediate revenue from their accounts receivable or customers. The creditors can and do sell pools (or groups) of “bad debts” to a third party agency. These pools are usually obligations of some age after in-house efforts to collect were attempted and not successful. These pools may vary in age greatly. The original creditor usually sells these pools of debts in volume for pennies on the dollar to generate revenue on a non-performing account. By doing so, they save money on collection efforts, commissions, legal fees, etc.

These actions are purely a financial business decision made by the creditor. Many problems can arise by this type of secondary industry of debt collection and precisely, the results of this practice lead us to highly recommend periodically reviewing your credit report.

Frequently, when these pools of debts are sold, there is not a proper review of the individual obligations to determine the viability of the debt. Examples of debts that are not viable or collectible by any creditor may be debts discharged in bankruptcy or debts upon which the Statute of Limitations to pursue have expired (discussed hereinafter).

As a result of the rapid growth of outstanding consumer credit and the corresponding increase in delinquencies, credit granters have increasingly looked to third party service providers in managing the accounts receivable process. In addition, rapid consolidation in the largest credit granting industries including banking, health care, telecommunications and utilities, has forced businesses to focus on core business activities and to outsource ancillary functions, including some or all aspects of the accounts receivable management process. This mindset has led businesses with receivables to determine the best and most cost effective approach for their business. Businesses have several options of collecting outstanding debt, which include in-house collection, contingent fee arrangements with outside collectors and the sale of bad debt.

To understand the debt aftermarket, we need to understand the collection process itself. Thus, lets diverge to the process briefly. Creditors typically attempt their own in-house collection efforts upon a debt becoming delinquent. Many consumers are well aware of the initial calls received from the creditor when an obligation is late. This can be a call received within days of the obligations due date. Thereafter, the in-house collection calls may increase for a period of 30 to 120 days At that point, the creditor may deem the obligation noncollectable and place the non-performing account with an outside collection agency.

The collection agency, under these circumstances, is not the owner of the debt. They are merely hired by the creditor on a contingent or fixed-fee basis. If you have ever been contacted by a collector, you probably have felt the urgency of their necessity to collect. This is a result, most likely, of a contingent fee agreement, whereby the party contacting you does not get paid by the creditor unless and until you pay them. Thus, the urgency on their part. This urgency has been the prominent factor in collection attempts or contact that has been less than ethical. There is a Federal Statement enacted to protect consumers from abusive, illegal, and unethical collection efforts. This is called the Fair Debt Collection Practices Act (FDCPA).

A collection agency, generally, is not empowered to pursue an obligation beyond telephone and correspondence contact. Although they may threaten “putting a judgment or lien” against you or levying a bank account, these actions require an attorney and require legal action and due process must be exercised.

At this point, if the creditor feels the outside agency is unable to collect, the creditor has the option of hiring an attorney to file a lawsuit for collection of the debt. These are considered legal collections and many attorneys specialize in this area. The attorney can file a lawsuit, with notice to you, and obtain a judgment if successful. Once judgment is obtained, there are avenues of collection that may be pursued. Of course, by this time, the actual debt owed is 3 to 4 times its original amount due to accrual of interest, costs and fees. There is much more involved in the collection process but the subject of another article and not totally germane to our subject herein.

As you can see, the collection process for a creditor can be time-consuming, effort-consuming and costly. Therefore, many creditors are now resorting to the debt aftermarket which is selling the obligation itself.

While contingent fee (outside collection agencies) remains the most widely used method by creditors in recovering non-performing accounts, portfolio purchasing has increasingly become a viable alternative. The industry has grown to be a 5 to 7 billion dollar per year industry and continues to grow. The largest percentage of portfolios of bad debt being purchased originate from the bank credit card and retail markets and are routinely purchased at a tremendous discount from the principle value of the accounts. Once these accounts are purchased, the new “owners” of the debt will employ traditional collection techniques to obtain payment. The difference at this point is that the new creditor may be into a bad debt of $5,000 for only $500 or much less. This creates an interesting analysis of the obligation itself, the settlement ability and proper reporting on a credit bureau.

Thus, it is always important to distinguish between who your actual creditor is. Specifically, do you owe the debt to the original creditor or any one of subsequent buyers of the debt.

So, now that you understand what the debt aftermarket is, have you ever received a collection letter and not recognized the creditor? These are the problems created by the debt aftermarket.

There are various problems that can be created as a result of this aftermarket industry. These problems include the aforementioned attempt at collection of debts which may not legally be able to be collected (this has to be distinguished from whether they are reportable on a credit report). Some debts cannot legally be collected. These would include debts discharged in a bankruptcy and debts beyond the governing Statute of Limitations for collection of the type of debt at issue. For example, each state will have a Statute of Limitations on the collection of an obligation, which is generally a contract action. If a certain period of time has expired from the date of default or last payment to legal action (example: 6 years), then the creditor may be barred from pursuing legal action to collect debt.

However, a third-party aftermarket buyer may continue to pursue the obligation regardless of the ability to file any legal action to pursue same.

Another problem to consumers as a result of this industry is the sale and purchase of debts, in portfolios, which have already been discharged in bankruptcy. This is a prevalent problem in the industry. The creditor who arranges the portfolio of bad debt to sell does not take the proper precautions to ascertain whether the debts included in the portfolio were discharged in a bankruptcy. This issue is even more complicated. Because the creditor has to determine and identify debts actually discharged in Chapter 7 or Chapter 13 bankruptcy as opposed to debts listed in a pending Chapter 13 case, which may be discharged in part and paid in part, discharged altogether or survive in the event of an unsuccessful bankruptcy case, which is common.

As a result of all the complications of tracking, mistakes are frequently made and some experts feel these creditors are negligently and/or intentionally selling obligations that are not collectible.

After the sale by the original creditor, the purchaser becomes the holder in due course of the obligation and may become liable to the obligor or consumer for any collection violations. In addition to the spotty information which the purchaser of the debts obtains regarding noncollectable obligations, they routinely receive very little paperwork on the obligation itself, including complete histories, signed applications, etc.

Thus, these purchasers may be unable to pursue legal collections of the obligation due to a failure of the ability to prove their case in a legal action if defended properly. However, the vast majority of legal actions on consumer accounts go undefended resulting in default judgments being entered against the consumer.

Now, we need to distinguish an obligation which cannot legally be pursued to an obligation which can still have a negative impact on your credit score. Although an obligation may have exceeded the Statute of Limitations to pursue legal action, that may not stop the new owner of the obligation from attempting to collect by other means. These other means include traditional collection efforts other than legal action.

Note: In the event legal action commenced prior to the expiration of the Statute of Limitations, the statute does not apply. If a judgment was entered, the judgment will last a specified period of time (Usually 20 Years) and is usually renewable.

One of the biggest problems for consumers as a result of this industry is the proper reporting of the obligation on a credit report. Commonly, the new owner of the obligation will report a delinquency on a consumer’s credit report upon receiving their new portfolio. This reporting can list their name as creditor rather than the name of the original creditor and places a current date on the delinquency. This results in the time period changing for the duration of the adverse credit entry. For example, under the Fair Credit Reporting Act, many consumer obligations which have been reported on the bureaus will last 7 years from the last entry. Thus, you may have maintained an obligation to American Express which has been delinquent for 5 years and reported as such to the credit bureaus. American Express then sells the delinquent debt to E-Cast Settlement (a third-party debt buyer). E-Cast then reports a debt to E-Cast settlement by you and reports it as delinquent. Normally, without the sale of the debt by American Express, the credit bureaus would have to remove the adverse reporting in 2 more years. Now with the new entry, the adverse reporting will last 7 more years.

Some experts claim that the third-party debt purchasers act willfully and intentionally in these actions to coerce payment to resolve. Other theories are that eventually, consumers will resolve the obligation as a result of necessity to clear a credit report to obtain a mortgage or auto loan.

In any event, it is critical to understand these processes in order to identify to whom you may owe money to and how it should be reported.

Another problem for consumers as a result of this industry is identifying who the original creditor is. When the debt has been sold and resold several times, this can become a difficult process. Below, we discuss more on this issue under how to minimize your risks to the debt aftermarket industry.

Assuming you now can identify the original creditor and resolve any reporting inaccuracies, the next hurdle to deal with, as a result of this industry, is the actual amount of the obligation. The obligation which you create with the original creditor is generally pursuant to the terms of a contract. The contract with the creditor sets forth all the economics of your business relationship with them. When that debt is sold by the original creditor to a third-party purchaser, the purchaser becomes the holder in due course and is entitled to all the rights which the original creditor would have been entitled to.

Frequently, the purchaser of the debt includes the balance of the obligation, their own costs and fees, to which they are not legally entitled to collect from you. Your obligation is to be calculated upon the agreement you sign with the original creditor. Consumers need to be aware of this and should analyze the amount of the obligation as well as the viability, legality, and identity of same.

As a result of the aforementioned concerns for consumers regarding the debt aftermarket industry, consumers need to be vigilant to these actions, especially those looking to repair and rebuild credit.

The debt aftermarket has also created an ability for consumers owning obligations to settle those debts for amounts substantially less than the actual amounts due. Because the new owner of the debt may have paid five cents on the dollar (example), a settlement of twenty-five cents on the actual debt is not totally unreasonable. This would create a windfall to both the new owner of the debt and the consumer. The new owner (creditor) could make five times their investment and the consumer could obtain a 75% savings. Obviously, these amounts are examples and would be adjusted to what the purchaser actually pays and what the consumer settles for.

The important aspects of the debt aftermarket for consumers are to review their credit reports very carefully, identify who the actual creditors are at the present, identify the actual amounts due, and assess a plan to resolve.