Debt collection is a necessary evil in the world of lending and finance. The higher a lender’s non-payment rate, the more other borrowers end up paying to borrow money with higher interest rates to offset other losses. Due to historically barbaric practices, debt collection is now a heavily regulated industry, with broad federal and state regulations in place. Current regulations seek to balance the contractual rights of creditors to be repaid the money they loaned, with borrowers rights to be treated fairly and honestly. Despite this balance, ultimately debt collectors must be allowed to exert some degree of pressure on creditors in order to extract payment. Although many lenders do their own debt collection, just as many lenders package and sell their defaulted debts to third party debt collectors, who often buy up debt for pennies on the dollar, and then keep for profit anything they collect.
As a consumer protection and bankruptcy lawyer, I know first hand that a vast majority of debtors are good honest people, who have suffered an unintended event in life that has ultimately causes their debt defaults. Most often the default is caused by job loss, medical issues, or divorce (or sometimes a combination thereof). Because of the debtor’s limited resources, the debt collector often must convince the debtor to pay the debt they are collecting for, ahead of obligations owed to others. This can be especially difficult for debt collectors attempting to collect on defaulted credit card debts, as credit card debt is most often unsecured (i.e., there is no collateral associated with the debt which the bank can take back). Thus, from the debtor’s perspective, non-payment of credit card debt is less impactful to them versus non-payment of other obligations they may owe, such as rent (of which non-payment results in eviction and homelessness), car payments (non-payment of which results in repossession of their car), utility bills (non-payment of which results in termination of their utility services), etc.. Accordingly, as debtors see credit card debt as the least important of the debts they need to pay, collection efforts tend to be the most aggressive. In addition to contacting the debtor to request payment, in Massachusetts, the creditor’s remedies after lawsuit and judgment can include wage garnishment, bank account attachment, and/or placing a lien on other property the debtor owns (such as automobiles and real estate).
The debt collector’s aggressiveness can result in a potential violation of federal or state law, but also risks that the debtor may file bankruptcy. If the debtor feels smothered by the debt collector’s collection efforts, the debtor may ultimately turn to bankruptcy relief, which allows unsecured debts (i.e., credit cards) to be forever discharged (erased). The debt collector must engage in a careful dance in which they push the debtor hard to pay the debt within the bounds of the law, while also not pushing the debtor so hard that the debtor ultimately sees no way out and files bankruptcy – resulting in the creditor getting nothing.
The Federal Fair Debt Collection Practices Act establishes a baseline by which creditors must engage borrowers. For example, lenders are limited in the times in which they call borrowers (8:00AM – 9:00PM) and to whom the debt collector can discuss your debt with (generally only the debtor). Additionally, the debt collector must send a written validation of the debt within five days of contacting the debtor, which includes the name of the creditor, the amount owed, and how to challenge the validity of the debt if it is not the debtor’s. The Massachusetts debt collection statute adds additional consumer protections, including that the collections cannot be “unfair, deceptive or unreasonable”. The intentional vagueness of this language allows courts to evaluate specific collection practices on a case by case basis.
The Massachusetts Attorney General serves as a repository for consumer complaints, and last week resolved a complaint against one of the largest national debt buyers and collectors in the country, Virginia based Portfolio Recovery Associates, LLC (hereinafter “Portfolio”). Specifically, the Massachusetts Attorney General found that Portfolio lied to consumers by (i) collecting on debts in which the statute of limitations had expired, (ii) misleading consumers about what income Portfolio could garnish (as various sources of income are exempt from garnishment); and (iii) failing to verify the accuracy of account information. Many times Portfolio pursed debtors for debts they actually did not owe, or for an amount that was incorrect. To make matters worse, Portfolio failed to inform debtors of their right to request validation of the debt, causing many debtors to simply accept they owed the debt claimed by Portfolio. The Attorney General found that Portfolio engaged in deceptive practices, which targeted disabled, elderly, and low-income consumers, many of whom only had exempt sources of income. The agreement with the Massachusetts Attorney General requires Portfolio to make changes to its debt collection practices, as well a pay a fine of four million dollars (which the Attorney General will use to set up a fund to compensate consumers wronged by Portfolio).
Although this is a positive step by the Attorney General to enforce the Massachusetts Fair Debt Collection Practices Act, the conduct described in the settlement violates federal law too. With over 4,000 debt collection agencies in the United States, collecting from about thirty million people, it is likely that Portfolio’s tactics are not unique, and the federal government would be in a better position to pursue and enforce fair debt collection practices nationally. Although the Federal Trade Commission does occasionally take action, the number and scope of its actions are too limited. Without increased pressure and enforcement from the federal government, it is likely millions of other indigent Americans are being pressured into paying debts that are not theirs or no longer valid. I commend the actions of the Massachusetts Attorney General. However, to make a real difference in the lives of consumers, this should only be the tip of the investigation and enforcement iceberg.
By Justin Dion
Justin Dion is responsible for designing, administering, and overseeing bar examination preparation efforts and activities at Western New England University School of Law. Professor Dion is a proud alumnus of Western New England, where he served as Editor in Chief of the Law Review. Professor Dion received the 2009 Adams Pro Bono Publico Award from the Massachusetts Supreme Judicial Court for his outstanding commitment to providing volunteer legal services for undeserved populations in Massachusetts, and was the founder and Director of the Bay Path University Pro Bono Bankruptcy Clinic for eight years.