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Debt Collection: Something Different This Way Comes

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By some estimates, more than a third of the adult population in the US is going to come in contact with a debt collector at some point. If you have never had to deal with debt collector before, your only exposure to the industry could be from the media, and perhaps by way of this hilarious anecdote about debt buying from John Oliver. Or, you may have tuned in to random soundbites on the nightly news promoting wariness about debt collection scams that flare up.

Count yourself lucky if you have missed out on financial setbacks and have not had to contend with collection issues. Count yourself luckier still if your contact with the legitimate collection side of the debt and credit industry was only in the last couple years.

You are the luckiest if you first come in contact with a debt collector in the near future, say 12 or more months from now. I say this with confidence because the wild west days of debt collection are over. Some people just have yet to catch up with this fact.

Whats different about debt collectors today.

I’ve discussed much needed changes in the debt collection marketplace in the past, but you may be surprised (I still am somewhat) that we are fast entering a time where debt collection is highly civilized (said with a lilt in my voice from Old Spice commercials).

Because of rules and law changes at the state level, and also due to CFPB investigation and enforcement actions against banks and debt collectors, there is much that has changed over the last few years in the debt collections landscape. I want to touch on some of the most dramatic developments that have already influenced collections first, then wade into what debt collections may look like as soon as next year.

Debt collectors made changes in some of the following ways:

  • Starting with the recession, and record credit card default rates, debt collectors at banks and at the larger third party agencies took on a “we are here to help the customer” tone. This stood in stark contrast to the more normal stern sounding, stress the customer out – your full balance is do right now – debt collection tone that existed prior. Record default rates are no longer, but the change in tone of debt collectors largely stuck.
  • Legitimate debt collectors are far more compliant with existing rules and laws than ever before. Things like not calling before 8 am or after 9 pm, or the frequent calls to family and neighbors under the auspices of “locating the consumer” (when they already confirmed your address and talked to you on your phone 3 days ago) happen only seldom, and when they do, it is likelier today you are dealing with a blatant collection scam (I have another article coming next week about the rash of scams I am seeing of late).
  • Banks are putting collections agencies they work with under much higher scrutiny and auditing them stringently. You really have to have your ducks in a row as an agency to get accounts from anyone other than small local creditors and service providers. This has cleansed some of the questionable actors from dialing for dollars all by itself.
  • Banks have to follow new OCC guidance about who they may sell accounts to (transferring the legal rights to unpaid debts is quite normal since the 1990’s). This guidance from a primary regulator like the OCC has been compounded by federal regulatory action by the CFPB against major banks, debt collectors, and debt buyers. The affect of this has been less debt for sale, though that market may be thawing. More on this development below. But suffice to say that the John Oliver video I linked to above would have been much more applicable, say 6 years ago, than today. While I laughed throughout the video, most of the concerns it raised are already managed by state and federal regulators in just the last few years, and will be even more so in the months ahead. While buying a portfolio of really old, out of statute to sue in court medical bills is unfortunately still possible, you would not be able to buy fresh default credit card debt how Oliver did.

Debt collectors and new realities.

There are only a few states with what I would consider excellent consumer protections from certain debt collector practices. California recently enacted the Fair Debt Buying Practices Act, and New York is getting serious about how collectors interact with its residents. There are several states considering legislation to further protect people from questionable collection practices. Regulators have already made meaningful impacts by issuing new guidance to banks, and through existing and pending enforcement actions.

Regulatory actions from the CFPB against the largest credit card issuers, debt buyers, and a large collection law firm, set beside new bank guidance by the OCC regarding how banks sell or place debt for collection, have combined to give somewhat clearer visibility of more formal changes to come that bring a national impact with them.

Fair collection practices for collectors.

Some existing actions prevent the sale of debts that cannot be properly documented to the standard a court may set, or that have been part of a bankruptcy filing. Other actions prevent how or when someone will be sued by a debt collector.

Last week the CFPB announced an upcoming July 28th field hearing about a required small business impact study regarding proposed debt collection rules. We should get to see more details about those proposed rules for the first time in nearly 2 years.

Here is a wish list of a sort that I hope to see changed nationally, and with all players, when it comes to debt collection.

Debt documentation.

Similar to the provision of the FDBPA in California I mentioned above, we need every flavor of debt collector (whether banks collecting post charge off, a collection agency, collection attorney, or debt buyer) to provide every consumer making payments an accurate accounting of how those payments are being applied.

It is ridiculous the trouble people express to me about making payments to a law firm or collection agency, and sometimes for years, without any invoicing and billing system to reflect the amount remaining owed. They try in vain to get some kind of accountability and get nowhere, and that is because it is often not required. It is shameful we have gone as long as we have without this fundamental math being readily provided.

I believe legitimate collections over payment installments would actually increase the more the consumer could see what is left owing. And the debt collection industry as a whole would gain a huge bump in credibility if accurate payment invoicing were the norm.

And while we are on the subject of debt documentation, it should be required that all debt collectors (banks too) are required to send consumers an outline of what they are agreeing to accept as payments, or settlement in full, prior to the consumer remitting the first monthly payment, or full settlement amount, on charged off debts. This practice became widely adapted by the entire industry during the recession, but there are still notable exceptions. Synchrony, a huge branded credit card issuer, still messes with consumer confidence by delaying documentation,  and Portfolio Recovery Associates, the second largest debt buyer in the nation, appears to think its okay too.

If I am the OCC I would want to know why Synchrony values this practice. And if I was thinking about selling debt to a debt buyer like PRA, I would think twice until they got this ridiculous “no soup for you” policy in line with what they partly already have to do for newly purchased debt in California.

Post charge off interest.

Just because you can does not mean you should. Banks charging default interest when accounts go bad is part of the carrot/stick principle of lending. It is also part of the “what the crap… how is making an un-payable debt more un-payable going to help you collect” question I have had for years.

If the IRS is not going to treat an amount as income if cancelled or forgiven, than why have post charge off interest at all? Someone with a huge data set please run the numbers and show me the meaningful benefit when you measure balance accretion on the 1/5 of the accounts that go more than 90 days late (that will ever be collected on), against the safety and soundness principles of our banking system, and the confidence of consumers and the public dealing with collections.

Is that return a benefit to lending practices as a whole? Is there more to be gained by eliminating post charge off interest from accruing? My guess is NO to the former, and YES to the latter.

Bank and creditor notifications.

Some early indications from recent regulatory action is that large credit card issuers are sending what many call a “Goodbye Letter”. This is the bank notifying a former customer – that could not keep up required minimum payments – that their account has been assigned or sold, and who to.

These types of consumer notices will help a percentage of people – who are still trying to actively manage their financial setbacks – to know who is legitimately collecting, and to be prepared for future communication and resolution efforts.

I imagine better lettering to consumers will help everyone in the collection life cycle. I hope this becomes a required practice.

Attorney fair collection rules carve out.

Please… for all that is good and gracious… do not carve out attorneys from new rules designed to protect consumers. Attorney collection abuses are no different than any other debt collector. In many cases it can be worse, as judgments lend credibility to bad practices and the impression that bad acts and practices are court sanctioned.

I have participated in regulatory changes at the federal level. Attorneys were provided some limited carve outs from consumer protection in debt relief. That door left ajar created 100’s of millions of dollars of consumer abuse (that we know about so far).

According to Jared Strauss, a former debt collector for attorney and non attorney agencies “If attorney’s are carved out – regular collection agencies could largely cease to exist”. Jared has keen insights into debt collector behavior, such as how debt collectors look at your credit, and why debt validation letters can cause trouble. I share his concerns.

The abuse we have seen in legal collections is not limited to the court procedural stuff, such as running collection mills with attorneys supposedly supervising thousands of cases a month, affidavit and notary chicanery, or the foundation lacking to prove a claim once it is brought.

Employees that man the phones for debt collection attorneys are some of the most egregious offenders when speaking to consumers.

Beware the unintended consequences.

Fair collection rules for banks.

I have called out some of the best banks out there for how much of an improved debt collection environment they created for their card members and customers for unsecured accounts. Much of those changes came as a result of the recession. And like I mentioned above, the changes have largely stuck. But as can be seen from consent orders between the CFPB and banks, there is reason to extend fair debt collection rules to credit issuers.

If credit card originators were subject to debt collection rules it may lead to some banks assessing the benefits to internal collections. They may opt to outsource all collections after 90 day defaults. Some banks who are not selling debt, like American Express and Discover, may start to look at the benefits of that type of recovery. Maybe Wells Fargo will sell debts instead. If collectors there blatantly lie to me, what can the consumer expect?

Compliance and legal costs at originators, set beside expectations on recovery from post charge off collections, may create a more robust collection space. And that space may soon be filled with nothing but meaningfully regulated entities, rather than years past where we are left to point to the cleanest dirty shirt.

The changes I know would benefit consumers and the collection industry alike are not limited to those above. There are many nuanced things to come that I will cover in greater detail here and on the Debtbytes video channel.

How Low Interest is Affecting Canadians

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Back in January 2015, the Bank of Canada made the surprising move of lowering the key interest rate from 1 per cent to .75 per cent, shocking those who thought a rise was inevitable. But surprise factors like an oil price plunge forced the Bank’s hand, as they made the first adjustment to the key rate since September 2010.

The business section of your newspaper has been filled with stories about it ever since, still peppering in reminders of the “inevitability” of a rate increase, and filling us up to the brim with graphs and pie charts about the economy at large.

But what has it done to your life? Are fractions of percentage points actually meaningful? Are there ways to take advantage of low rates? Are there dangers or risks? Let’s take a look at some of your options:

Mortgages

Mortgages are the single biggest piece of debt that most of us will ever have, so if you want to take advantage of low interest rates, this is probably the place to start. If you’re in the market to buy, this is a great time. A recent Bank of Montreal home buyers survey found that more than a fifth of millennials have shortened their time-frame for home buying, thanks to the low rates.

People shopping for mortgages might want to consider taking the fixed-rate option. Historically, variable rates have been better for homeowners, but some financial experts think now is a time to lock into a fixed-rate. Ted Rechtshaffen, president at TriDelta Financial, argues that a lot can change over a 5-year period, and the risk of variable rates are not worth the reward of the small premium you get when choosing them.

Current home owners can also take advantage by making their mortgage payments as if there was no drop at all. The Canadian Association of Accredited Mortgage Professionals said over a third of Canadians were able to bump up their payments in 2014, with some renewing their loan at a lower interest rate. More money going toward the principal instead of interest means faster repayment and a lot of savings.

Credit Cards

If your mortgage payments aren’t as high as they used to be, there are other ways to spend the difference. The key interest rate may be low but your credit card APR is still astronomically high. If you are only making minimum payments on your credit card, you are not making very efficient use of your money. If your mortgage payment has dropped by $150 a month, putting some or all of that toward your credit card will dramatically reduce your debt and save time and money.

Consolidated Credit’s credit card debt calculator illustrates this idea. If you’re making the minimum payments on a balance of $3,720 (the average Canadian credit card debt), at 19 per cent APR with a minimum monthly payment calculated at 2 per cent of the balance, it would take nearly 50 years and cost you $13,000 in interest.

Add your monthly mortgage savings of $150 to your minimum payments and your debt will melt away. You’ll repay the balance in two years instead of fifty, and you’ll save over $11,000 in interest payments. It’s a no-brainer.

Tread carefully

Before we get carried away, let’s not forget about the “inevitability” of interest rates rising. If you’re taking advantage of lower rates, make sure your budget can handle the eventual bump in rates. Try stress-testing your finances by pretending the rates have increased, and see whether or not you can still meet your financial obligations. Chances are, any actual increases will be gradual and will allow you the chance to make your own budgetary adjustments. But it is still a wise move to tread carefully and try not to over-extend yourself. Make hay while the sun shines, but keep an umbrella handy.

Filing Complaints with the CFPB

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Throughout this website, and several others I contribute to, I suggest people file complaints with the Consumer Financial Protection Bureau (CFPB). I am usually responding to reader comments when I do, so the reason for suggesting filing the complaint is contained in each comment exchange, but only briefly. I want to be sure readers have a strong grasp as to why I am suggesting your complaint be filed with the CFPB, and also provide some commentary that I generally wouldn’t unless contained in a post like this.

First off, the CFPB was born from the recession that many attribute to the lack of stronger financial regulation. The CFPB has  regulatory and enforcement authority in several key economic areas that all of us interact with on a daily basis. You may be thinking “that is all well and good… it is nice to have someone looking over it all and watching out for us, but were we missing that before”? Yes and no.

Much of federal regulation and enforcement of consumer financial products was spread out, and in my opinion resulted in being more spread thin. Yes, regulation existed, but enforcement in key areas was so slow to grind out positive outcomes for consumers, it seemingly may as well have not existed. Take CFPB direct oversight of the three big credit reporting agencies as an example. These large credit bureaus affect the vast majority of adult Americans, yet no one had the authority and oversight the CFPB now has over larger participants in the credit reporting space. The CFPB is perfectly positioned to be able to curb how credit bureaus allow debt collectors to reage collection accounts on credit reports.

Something else about the CFPB, and part of what I really want to drive home to readers, is they do give a rip, and really want to hear from you about your interactions with businesses you engage regarding debt and credit.

Debt and credit complaints to the CFPB get results.

The CFPB is actively involved in helping you get results from the complaints you file. Read the entirety of the initial CFPB complaint process page to get a feel for how they will manage your complaint. You can see there are several CFPB touch points and involvement in helping you resolve your complaint. You will remain updated and aware throughout the life cycle of your complaint.

Filing your complaint with the CFPB all starts on this page: https://www.consumerfinance.gov/complaint/.

The types of complaints filed with the CFPB can include concerns about debt collection and credit reporting, and other key areas of our financial lives, such as:

  • Student loans
  • Mortgages
  • Bank accounts
  • Car loans and leases
  • Credit Cards and Prepaid Cards
  • Pay Day and other types of consumer loans

Be thorough and provide complete information when submitting your complaint to the CFPB. You can upload documents if they would be helpful.

I often encourage putting an outline of your complaint together before you submit it to the CFPB. This will help you remember everything including dates, times of day for conversations you may have had, and an outline of what was said and by whom. That kind of detail will come in handy for the CFPB and the person investigating your complaint at the business you filed the complaint about.

Regulatory complaints can guide the future.

The CFPB is a future looking agency, and not about what just happened. In other words, your complaint may be about the recent past, but your complaints combined with others (to the CFPB and other state and federal agencies) can shape the world we live in later on.

I help people resolve debt and credit issues. My work puts me in a position to care about the big picture when it comes to debt collectors. And even though the CFPB is currently only directly supervising larger participants in the debt collection space, that supervision, and current rule making for debt collection being considered, means debt collection complaints have, and will continue to, guide the activity and focus of the CFPB.

But it is not just the CFPB that is in place to affect change through the complaint process. Businesses who are the targets of the complaints care about the issues too. No, I am not saying they care so much to have prevented the issues you had, or are having, in the first place (though they may). I am saying that it will be some of the better positioned people in the organization that will often be looking into the complaints they get from the CFPB. At a high level, that information is going to lead to changes in business practices that will trickle down to the people, processes and policies that you and I interact with.

You may never have a mortgage or student loan complaint. And you may never have to file one years from now after you have had a mortgage or three, and paid off student loans, as a result of the complaints that led to positive industry changes earlier.

I suspect that over time, the CFPB complaint process will provide us all with a tool that we can use to vote with our feet and wallet before we decide to engage with a business or service.

Businesses and services using the portal.

I also suspect the CFPB complaint portal will provide a tool for businesses interacting with other businesses. One example of how that may happen would be the relationship between credit card banks and debt collectors they use, or debt buyers they sell unpaid accounts to.

Debt collectors will likely always receive a high level of complaints in our current system. It is the nature of the business. The CFPB portal is already loaded with complaints against debt collectors. But any collection agency or debt buyer with a high level of unsatisfactorily resolved complaints; a high metric for certain types of complaints;  or complaints going without response, could lead to a scenario where I can see banks using the data as what I will dub “the CFPB metric”. This metric could mean debt collectors and buyers losing contracts until the company shows improvement, or perhaps just ceasing doing business with anyone without a passing grade.

While I recommend doing everything you can to resolve complaints and concerns you have with businesses in the consumer finance space by dealing directly with companies and service providers, the CFPB complaint process continues to impress me. The speed and impact the system delivers to people I have heard back from is huge.

I should also point out that your filing a complaint is not just about you getting something resolved in isolation. Your complaint can potentially help someone else after they read about how that same company stepped up to do right by you. They can then file their complaint with the CFPB where the may not have before, or perhaps even contact the company directly with more confidence instead.

I see the CFPB complaint process ultimately leading to consumer markets that place a higher priority on fair dealings.

If you have questions or concerns about filing your complaint with the CFPB, or would like to share the outcome of any complaint you filed, you are welcome to post in the comments below.

Canceled debt and taxes when creditors forgive or abandon collection.

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Settling debt for less than the balance you actually owe involves debt forgiveness. Your creditor is forgiving a portion of the debt owed to them because collecting something from you is better than nothing. But there are IRS rules for your creditors to follow if the amount forgiven exceeds $600.00. Your creditor is required to file a 1099-c notifying the IRS that a portion of your debt has been canceled. You can expect to receive a 1099-c from the creditors you settled accounts with starting in January, for the settled credit cards in the prior year.

It is becoming more common to receive a 1099c regarding entire balances being cancelled by creditors (you never negotiated to pay less than the balance owed).

The amount of your debt that is canceled is viewed as income by the IRS. You therefore must include the amount of debt forgiven as part of your income in tax filings for the year in which you settled debt.

Whether or not you will actually owe and pay taxes on forgiven credit card debt will depend on whether or not you qualify for the “insolvency exclusion”. The insolvency exemption is an asset vs. liability exercise. Solvency has nothing to do with your income as derived from wages or a salary such as from your employer. Solvency for the purposes of determining a tax obligation relating to forgiven debt centers on what you owe vs. what you own.

You will certainly want to speak with your accountant or a qualified tax professional to establish whether or not taxes will be an additional concern, but here are some resources to review, as well as some tips to help you stay organized and prepared, for your tax filings when settling credit card debts.

From IRS Publication 908, page 24:

Insolvency exclusion. A debtor is insolvent when, and to the extent, the debtor’s liabilities exceed the FMV of the assets. Determine the debtor’s liabilities and the FMV of the assets immediately before the cancellation of the debtor’s debt to determine whether or not the debtor is insolvent and the amount by which the debtor is insolvent.

Exclude from the debtor’s gross income debt canceled when the debtor is insolvent, but only up to the amount by which the debtor is insolvent. However, you must use the amount excluded to reduce certain tax attributes, as explained later under Reduction of Tax Attributes.

You, or the tax professional you use, will need to file form 982 related to any exclusion claim you may have. The form 982 can be viewed on page 27 at the same IRS Publication 908 link provided above.

Figuring out taxes on canceled and forgiven debt.

The IRS insolvency quote above uses the abbreviation “FMV”, which stands for Fair Market Value. In other words, what is your stuff worth? You will need to establish the value of the things you own just prior to a credit card debt being settled.

  • The value of a car you own outright can be established through the Kelly Blue Book guide.
  • Your home’s value can be ascertained by an appraiser or a broker’s price opinion (BPO) where the selling price of comparable homes in your area will be used in establishing the current value of your home.
  • If you are underwater in your home’s value (you owe more on your mortgage than the home could be sold for), like many Americans today, the amount you are underwater is a liability, not an asset.

If your home has equity at the time of your settlements, the amount of that equity would be considered an asset.

Simple exercise to test your solvency after settling for less.

Take a blank page and on the left side list all debts you have. Include mortgage debt, amounts you still owe on a vehicle, your credit card debts, any and all debt obligations that were extended to you via credit and loans. On the right side list all of the assets you have, including the fair market value of your home and car, the balance in your checking and savings accounts, your retirement accounts etc. Now add up each column. If the total of your debts on the left side add up to more than the total of your assets on the right, you are what is sometimes referred to as “technically insolvent”. By what amount you are insolvent each time an account is settled for less than the balance owed is what will determine whether you meet the insolvency exclusion and thereby whether you will owe tax on forgiven debt.

Many will owe no tax on canceled debt when applying the insolvency exclusion. Others will not be taxed on the canceled debt of the first several accounts they may negotiate lower pay offs for, but as their unsecured credit card liabilities are decreased one by one through settlement, may find the scales tipped to solvency once settlements are reached on the remaining accounts. Some people will not qualify for the insolvency exclusion.

Should you be concerned about debt forgiveness and taxes from settling credit cards?

Yes, and you should plan and budget accordingly. But should your concern reach to the level of not pursuing debt relief through negotiating the balances down which creates the canceled and forgiven debt and the tax? That will depend. You are reading the debt relief program because you are unable to continue timely payments to your creditors. Did that fact change because you read this report? Not likely. Settling credit card debt is still a legitimate option to avoid filing for bankruptcy. Owing taxes on forgiven debt, if there are any that apply to your specific situation, will simply factor into your overall program design.

What you may now better appreciate is that debts discharged in bankruptcy are not taxed. Bankruptcy is the only legitimate way to eliminated the tax concerns related to debt forgiveness. If you can qualify for discharge of your debts in a chapter 7, and the filing of a chapter 7 does not force the sale of assets, some of which could have been sold to fund settlements and pay taxes (if owed), then chapter 7 is something that you should become more informed about.

What is certain is that you cannot afford your debt. Struggling to pay minimums for however long you have been stuck in a debt trap must end. Keeping this in perspective; owing any amount of taxes on forgiven debt is the result of you saving money and getting out of debt faster than could have been accomplished otherwise.

Update 12/2013: A friend and industry colleague, Charles Phelan, has developed a great tool to help you, or your tax preparer, get through the IRS insolvency form 982. Checkout the insolvency calculator available on his site: https://www.zipdebt.com/1099-C-insolvency-calculator.php

If you have questions about debt forgiveness and taxes related to settling unsecured debts like credit cards, post them in the comments below for feedback.

If you are new to the CRN site and would like to get comprehensive information about settling debt, you will want to read through the debt settlement section of our free online debt relief program. Get started with: An introduction to debt settlement.

Furnishers of Bad Information In Your Credit Report Are Costing You Money

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The credit report topic has been covered well on our web site, but mostly as it applies to people who need some form of debt relief due to a financial hardship. While that is an important topic and a concern for more and more people as a result of our tough economy – what about the furnishing of bad data on people who are managing their debts well?

What affect does bad information supplied to the credit bureaus have on your credit report?

Your credit score and loan product price modeling is calculated not just by your timely payment history, but is also based on your credit utilization, debt to income ratio and a few other key points.

Due to how information in your credit report is factored, mistakes made by those furnishing information about you to the reporting agencies can have a major impact on how much credit will cost you and whether you are approved for a credit product at all.

This morning, I read a good example of the type of damage that can be inflicted by a simple loan classification error:

Issue: Most scoring systems take data at face value with little or no interpretation. If you track the erroneous “Installment Loan” designation downstream, the credit scoring systems would see the following:

  • An installment loan for an extremely large sum (i.e. $200,000).
  • Duration of payments for these loans was reported as 30, however, the number reported for an installment loan is seen by Metro 2® as 30 months, whereas, the number reported for a mortgage is seen by Metro 2® as 30 years.

Result: Most credit scores would be calculated based on the facts reported — “Installment” loan of $200,000 with what looks like payment term of 30 months. In effect, a 30 month payback period would require each payment be approximately $6600, whereas a 30 year payback period would yield a monthly payment in the vicinity of $1000. The perceived debt of $6600 per month could potentially negatively impact multiple factors of consumer lending such as approval scores, debt ratios, bankruptcy scores, pre-screen scores, etc.

And those types of errors are just the tip of the credit reporting iceberg. From a potential litigation standpoint, data furnishers that do not invest the time and resources required to evaluate the accuracy and integrity of their credit reporting on an ongoing basis are making a potential titanic mistake.

To read the full article click here: troubling times ahead for credit bureau data furnishers

This type of loan classification error would seem easy for the furnisher to fix. Indeed, common sense dictates that it should be fixed.  It will cost money to do it though.

My experience with credit reporting agencies and furnishers of information.

The credit bureaus and suppliers of the information that show on your credit report do not always think with “sense”, but think more in terms of dollars and “cents”. The key to “common-cents” and violations of the Fair Credit Reporting Act (FCRA) is that it is more profitable to do the wrong thing than the right.

Some credit report information furnishers get it absolutely bass-ackwards.

They seem to be saying “We know we have a problem and that it screws people over, but we will continue to do so until it is more cost effective to fix the problem than to continue to get sued”.

The linked article above speaks to a specific case in the 9th circuit that allows a class action to proceed against one company that may end up costing them between 29 and 290 million. My guess is that their legal defense bill alone would have covered the costs of auditing and correcting their reporting systems on a regular basis which would prevent actions like this from occurring.

It is a small wonder to me that more legal action is not brought against furnishers of bad information about you to credit bureaus.

Similar to the economy of furnishers and reporting agencies making changes only when it makes “cents” to do so, suing them for their transgressions and missteps has long been about the costs for bringing the action and what can be gained from doing so.

Do we need more class action lawsuits against credit reporting agencies and furnishers?

Maybe there is a class out there forming to bring the particularly egregious practice of reporting a balance still due after a settlement on a past due debt is reached, accepted and funded, and where both parties agree that the debt is settled, there is no balance due, but the amount of debt forgiven remains on the trade line and shows that portion of the balance as outstanding when it no longer is!  I wrote about this practice recently. Read more about it here: Why Does Capital One Screw People Who Settle Their Debt.

It is as important now as ever before for people to take responsibility for policing the accuracy of their credit profile. No one else is going to do it for you.

If you find inaccurate, erroneous or out of date information – you can fix it!

You have the ability to dispute bad information with the reporting agencies and you can also send direct disputes to the furnisher of the information. If they do not correct the discrepancies after sending your dispute certified mail return receipt it may be the best use of your time to next consult with a skilled consumer law attorney.

There are not that many attorneys experienced with FCRA violations around the country, but a case they may bring can be filed in federal court, which may make speaking with one you find with an office outside of your state worth the effort.

To locate an experienced FCRA consumer attorney you can go to NACA and search using your zip code to find one nearest you.

Two attorneys I know that specialize in this area are:

Jason Rapa in PA

www.rapalegal.com

Michael or Justin Baxter in OR

www.baxterlaw.com

If you have questions or feedback about this topic, feel free to participate in the comment section below.

Debt Collection Industry Insider Starts Petition to Reign in Collection Abuse

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Collection industry insider, Bill Bartmann, has started an electronic petition he will submit to Congress where he suggests the following amendments to the Fair Debt Collection Practices Act (FDCPA):

We hereby petition Congress to amend the current debt-collection rules by adding the following provisions:

  1. Increase the penalty for violations of debt-collection rules from the current $1,000 to $10,000 for each violation.
  2. Ban all collection activities on debt that is older than the relevant statute of limitations.
  3. Raise the requirements necessary to file a lawsuit on credit-card debt.
  4. Require collection agencies to provide clear and understandable history of debt.
  5. Require all collection agencies to be licensed.
  6. Require all collectors to be licensed.
  7. Require an annual compliance audit for all collection agencies.

Learn more about the petition here:  https://www.stopthesecriminals.com

The FDCPA regulates the collection of debt. It is well recognized that amendments need to be made to this consumer protection law from the 1970’s in order to bring it current with advances in technology, and to assist in curbing the steady increases in reported collection abuses.

Collection abuse has been #1 in industry complaints to the Federal Trade Commission several years running.

2010 saw quite a bit of interest and activity toward amending the FDCPA.  The process to amend the Act is well underway.

Want to see the collection industry cleaned up virtually overnight?

Impose a 10k penalty per FDCPA violation.

Think a penalty of ten thousand dollars is that far fetched? The FTC recently put in place an up to 16k penalty per Telemarketing Sales Rule violation that is primarily imposed upon debt relief advertisers, marketers, and service providers – companies who promote they help consumers resolve delinquent debt.

Congress could certainly impose similar statutory penalty caps for violations of the FDCPA against collection agencies – companies who work with creditors and debt buyers to resolve delinquent debt.

What Happens in the First Six Months When I Don’t Pay My Credit Card Bills?

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This post is part of the Debt Bytes “Charge Off” series and discusses what happens in “pre Charge Off” – when your credit card payment(s) are late between one and 180 days. Credit card debts that go unpaid follow a relatively predictable pattern.

When first missing a payment, the phone rings… a lot.  After 30 days late your account is reported to credit reporting agencies (CRA’s) as such.

Next, the phone rings… a lot.

The pattern of the phone calls when you are 30, 60, 90, 120 days late will often include offers of lower payment arrangements and hardship repayment plans. Your credit report will continue to receive unsightly blemishes in 30 day intervals.

As you get nearer 180 days of nonpayment, some of the debt collection calls will take on a new tone. If you have not already thrown your phone out, changed your number, or continue to answer in your best disguised voice informing the caller that “um… that person does not live here”, you may get offers to settle the debt for less than what you owe.

At 180 days of delinquency (sometimes 210), something strange happens. Suddenly the background melody you became so accustomed to while watching television, or spending time with family, suddenly ceases. No more getting up to check the caller ID to see if you want to answer. No more checking messages for 10 minutes listening to “this call is for ____”, quickly followed by your pressing a button so you can hear “message deleted”.

When you realize that the incessant phone calls have ceased seemingly overnight, you may even be compelled to dance a jig while singing “ding-dong, the witch is dead, the witch is dead” like scare crow traipsing down the yellow brick road in the Wizard of Oz.

Not so fast….

Your debt has been charged off and is in limbo.

The quiet is what happens while your creditor figures out which part of the collection pipe line they are dropping your account into.

Within a matter of days, or weeks, the monkey reappears and plants itself firmly on your back. He announces his presence daily, starting at 8 am and continuing through 9 pm.

Your unpaid account has now been placed with a collection agency.

The pattern I present here typifies what will occur in the first 6 months of nonpayment with most credit card issuers. As you can see, there will be some opportunities.

For many people faced with the inability to pay their credit card bills on time, all the time, it can make sense to capitalize on these opportunities. You should look to optimize your success by:

  • Following an intelligent design that can be tailored to your specific set of financial circumstances.
  • Design a plan using information about what each of your specific creditors will do and when.
  • Be prepared to adjust. Your creditors may change their recovery policies requiring you to tweak your plan.

You can learn more about how charge off can be friend or foe by following the our continuing series on the topic.

If you would like to speak with someone who can assist you in determining what your next best step to getting out of debt may be you can reach me at 800-939-8357, choose option 2, or submit a consult request form.

If you have questions about how to handle credit card customer service and debt collector calls in this early stage of collection you can post in the comments below for feedback.

Credit Card Debts and Charge Off – What it Means to You

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The term charge off describes an accounting function followed by your lenders. When speaking of revolving consumer credit card accounts, a charge off occurs when the credit issuer either chooses, or must, recognize an unpaid loan balance as a loss.

For lenders, losses are bad news. The bad news gets reported and can affect anything from loan loss allowance/reserves, securitization, liquidity, even solvency.

Because of the bad news nature of a charge off, your credit card issuer will generally wait until the maximum time allowed to charge off your unpaid debt. The time frame for your creditor to recognize the loss on your unpaid credit card balance is outlined in Generally Accepted Accounting Principles (GAAP) and is typically 180 days of consecutive nonpayment, or what the Office of the Comptroller of the Currency (OCC) has designated as “seven zero billings”. There will be instances where charge off will seem to occur at 210 days of nonpayment.

Most lenders will wait as long as is allowable to take the charge off hit to their books, but they can take the hit earlier than 180-210 days. It’s just not a common practice.

What does this mean to you?

Charge off is an accounting function with implications for your credit report.

Somewhere before I started paying close attention to debt and credit issues, the term charge off got escalated from a simple accounting function, to a designation you find on your credit reports relating to unpaid collection accounts. The charge off event now has an extra implication for lowering your credit scores (though months of missed payments leading to a charge off do the heaviest damage). And the charge off event now has an impact on when and how you go about negotiating settlements, or whether you can consolidate your bills with any meaningful impact.

While you are trying to navigate your inability to pay all of your debts and when evaluating the different debt relief options available to you, understanding the timing and affects of your accounts charging off will give you a needed advantage in your planning and timing.

The period leading up to, during, and after a charge off of your unsecured debts will impact:

  • Debt collection efforts with your original creditor
  • Debt collection with outside collection agency
  • Debt Purchasing and subsequent collection efforts
  • Debt Settlement/Debt Negotiation
  • Credit Reporting
  • Debt Management Plans
  • Risks of being sued on unpaid debt
  • Biting the Bullet and Filing Bankruptcy
  • Delaying a Bankruptcy

Each one of the bullet items above is deserving of a separate article. I will be posting some consolidated information covering credit card charge off in coming months.

If you would like to speak with a pro for free to discuss your specific situation and what you may be able to do to deal with debts not yet charged off, or that have already charged off, and now you are dealing with the debt collection pipeline, request a free consult with me.

If you have questions about anything covered above and would like feedback, post in the comment section below.

Tax Deductions – A Better Form of Stimulus for the Middle Class

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What if tax payers could claim interest payments on debts (other than mortgages) as a deduction? Would it assist in an economic recovery? I would suggest YES. The fundamental reasoning would be two-fold.

  • It would allow consumers with debt to be able to more aggressively pay down that debt with the tax savings, which could put them in a position to spend responsibly sooner than they would otherwise be able.
  • Doing so would also prompt additional consumer spending

Banks who have proven to be the best lobbyist’s should get behind a move like this. If there were more willingness and ability to borrow, banks will step up. They could charge rates with less public or political back lash. Banks would also likely see an immediate reduction in the sky high default rates they are experiencing now.

Think about it.

This type of policy move could spur spending and thereby job creation. This is what the country’s economy needs to climb out of this recession, not more ZIRP, ineffective onetime tax credits, or short lived sugar rushes from stimulus spending. These things have only proven to cause distortions in market conditions when what we need is stability and a return to some semblance of predictability.

Take this a step further and provide tax deductions for all interest payments on all debts. Interest payment on debt is essentially phantom money that does not really exist in the money supply, unless you count the audible sucking sound it makes. Interest payments are an additional tax on the labor of those who borrow. This type of tax deduction would provide a strong benefit to a struggling middle class.

Other than some pulled forward demand market distortions this may create in the first year it is implemented, what distortions would a policy like this create? The act of using credit to buy a thing is already pulling forward demand as it is.

Would a move like this “screw savers”?

One might argue this is so, but likely only in perception. Savers save, that’s what they do. They are smart enough to look for ways for their money to earn interest, not pay it. Taken in totality, a policy move like this may actually provide more investment opportunity for savers.

The federal tax base would take a hit, sure, but the government has proven it is going to deficit spend no matter what anyway. With the inevitable stimulus plans 2.0 through 9.0, additional backstopping of the states, unemployment extensions etc… being baked into the cake right now, wouldn’t this tax deduction be a better way to let the free market help to sooner find the equilibrium our economy so desperately needs right now?

We have mortgage interest tax deductions as a means to promote home ownership. Given the dire need of consumers and businesses to start participating in an economic turnaround that has solely been fed-by-the-fed to date (the sugar rush is fast wearing off), why not treat all interest on debt the same?

Wouldn’t it be nice if the price of a thing was actually the price of that thing, instead of the price tag plus interest? Sure, that’s exactly what happens when you pay cash, but cash transactions are only part of spending. An economy reliant on credit and fractional reserve money policies is what he have, and have had, for some time now. Unless our country is ready to give up that ghost (it’s not), being able to deduct all interest payments on debt might be a nice little push for a national economy on training wheels in need of finding the balance to ride on its own.

Should a tax deduction on interest payments be temporary? Perhaps only for the next 10 years, while the US is busy emulating Japan’s economy of the PAST 10 years? What am I missing here?

Credit Cards and Interest Rates: Plastic Explosives

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Every day thousands of consumers — hard working businessmen and women, mothers, fathers, grandmothers, students — walk through airport security where their purses, bags and wallets are screened and cleared on their way to their new destinations. Yet, unbeknownst to their carriers and their fellow passengers, they are carrying highly explosive materials onto their planes — ticking time bombs in the form of little pieces of plastic, that could blow up at any moment and incite what could amount to personal financial terror.

I am, of course, talking about credit cards, because the banks that issue them have had the ability for years to explosively increase the interest rates on your outstanding balances for virtually any reason.

Through the artifice of carefully thought out contract provisions and court precedents in selective states, banks have had free reign to set off their own version of a hidden bomb, which consumers have carried willingly after being aggressively solicited and enticed into playing the card issuers’ profit making game.

I’ve Been “Jacked”!

The explosions set off by card issuers when they cause your interest rates to go through the roof, and thus increase the minimum payments and the cost of the purchases you already made with the card and had budgeted for can set off other explosions in your vicinity — the rates on other cards in your purse or wallet may blow up too. While it can only take one rate increase to ruin an already weak budget, a series of such explosions often leads to the destruction of a consumer’s finances and bankruptcy.

Credit card interest rate increase have  been a HUGE source of profits for banks, but the current recession and the joblessness faced by millions of card holders has caused the detonation of their little bombs (which banks handed out like candy prior to the recession) to blow up in their faces.

The default rate on these credit card accounts are at historic highs. For more on this, please read this recent post on Mike Shedlock’s (Mish) blog: reflections-on-credit-card-fees-and-chargeoffs.

Now, however, with the soon to be enacted CARD ACT, many of the banks’ trick and trap policies, which were designed to ensnare the public into becoming debt servicing slaves, are about to be curbed. However, banks will and have already begun to adjust to the coming new reality by finding new ways to profit from their plastic explosives.

One way they are doing that is by switching consumers’ interest rates from fixed to variable rates based on a formula that might charge say 12.9% above prime. Although this switch may not seem like a big deal right now with federal interest rates at historic lows, those rates will most certainly rise in the not too distant future, perhaps significantly, and when they do, the cost of using their credit cards will increase for consumers. In other words, those plastic explosives will detonate in consumers’ wallets yet again, sending potentially more shock waves through their finances. And unfortunately, I suspect that the timing of these future interest rate increases will come at a time when our economy is widely recognized to be solidly on the path to recovery.

For another example of how far those who issue standard grade plastic explosives in the name of profit will go to get around the CARD ACT, please read nationally-syndicated personal finance columnist Kathy Kristof’s personal story in her recent blog post, Credit Reform and My New 703.8% Card.

Kristof wrote:
“Consumer reporters were all crowing about a 79.99% rate credit card that was launched in response to credit reform a few months ago–collectively horrified that a law designed to cut rates and eliminate sneaky fees was inspiring increasingly abusive bank behavior. I thought that was about as bad as it gets until I took a close look at the statement for my new Macy’s card, which I had opened with “instant credit” while Christmas shopping. It made that 79% card look like a bargain.”

Kristof went on to explain that based on her average daily balance of $3.41, her minimum charge worked out to “an actual annual percentage rate” of 703.80%!!!! Also, her blog linked to a good resource over at Get Rich Slowly for additional information about the CARD ACT.

Credit Carnage from high credit card interest rates

More than half of the debt-stressed consumers my company has consulted with over the past several years has indicated that “a plastic explosion” was a key factor in their being unable to keep up with their debts. Furthermore, if you’ve been hit by plastic shrapnel, I know that you will easily relate to the analogies I have used here. I know they are appropriate because I work with the carnage of these explosions every day.

Looked at in this perspective, card issuers and their fee traps have already blown up the finances of millions of consumers. How many more explosions will we see between now and February 22nd when rate jacking, as we have known it, will end? While I see the variable interest rate ticking time bomb referenced earlier in this blog as having the greatest potential to spark renewed controversy over credit cards, many card issuers have already mentioned they will revert back to the annual fees they charged years ago and that they will also be limiting the rewards programs that they used to compete for market share and consumer loyalty.

{So, what’s in your wallet?}

Now, more than ever, in this rapidly changing credit card marketplace, it is important that you use respected, reliable resources to research and understand the credit products you are using or considering using.