The Loophole That Lets Debt Collectors Come After You Again & Again & Again...

It’s a tricky practice from inside an industry that often mystifies consumers. Consumer groups have called it “debt laundering.” Debt collectors call it “withdrawal.” The strategy is simple, but troubling: If at first you don’t succeed at collecting on a debt, try, try again – by sending it to a different collector.

The Fair Debt Collections Practices Act gives consumers explicit rights when contacted by a firm which claims a debt is owed – consumers can file a dispute, demand evidence the debt is legitimate and require the collector cease contact.

However, all those requirements can be ignored when creditors and collectors exploit the “laundering” loophole. When the Consumer Financial Protection Bureau announced recently it would consider new rules governing the collection industry, consumer complaints about the “try, try again” strategy arrived.

“For over 3 years I have been contacted by debt collectors for an alleged debt. I diligently send proof of payment and am ignored, and several months later a new firm sends the same letter (about) the same debt,” a consumer, identified only as elderly, wrote to the CFPB. “The collector never responds, investigates or verifies the dispute. They should be forced to do so.”

Practically speaking, this experience for the average consumer could be no different from the “harassment” that is forbidden under federal law. A debt collector calls, the consumer requests that they stop, but if the debt is withdrawn the calls can continue, only now from a new debt collector.

The same frustrating routine hit consumer Cathy Nestor during the past three years, as I reported in a recent article on Credit.com. Initially, the Illinois woman received a collection notice for an AT&T bill she believed was in error, and she sent the debt collector a note disputing the bill. When she got no response, she assumed the matter was closed. But then a second collector wrote to her. She wrote back, and again, heard nothing, this time, for almost a year. Then a third firm wrote, and she started to wonder if she was getting picked on.

Nope. Instead, her debt had been sent to a debt collector, then withdrawn by AT&T, only to be farmed out to collector No. 2, then collector No. 3. If Nestor’s first debt collector wanted to continue with collections efforts, it would have had to “verify” the debt, sending Nestor paperwork proving its validity, a time-consuming process that is often impossible because collectors frequently don’t have the right paperwork. But if collector No. 1 gives way to collector No. 2 – which occurs when the actual debt owner withdraws the debt and assigns it to another firm — the process begins again from Step 1.

AT&T is not the only company to employ this practice, and though we reached out to them, they declined to comment for this story. It’s also important to note that the company has been working with Nestor to resolve her dispute.

The Fair Debt Collections Practices Act is supposed to give debt collectors one bite of the apple. After the initial contact, what happens next is a well-defined kabuki dance proscribed by law. Consumers file a dispute…collectors respond with verification…consumers send a no-contact notice…collectors file a lawsuit…consumers file a lawsuit if the no-contact request isn’t honored. The process is designed to prevent collections firms from harassing consumers.

But collections firms that simply drop a case can stop the dance. When Nestor filed her dispute, collections firm No. 1 didn’t have to do anything. That left Nestor hanging, and it also made her susceptible to continued collections – starting back at step 1 — from new companies.

It’s not against the law, but it is maddening to many consumers, and consumer advocates believe it flouts the spirit of the law. The problem is now so widespread that advocacy groups have asked the CFPB to change the way it enforces the Fair Debt Collections Practices Act.

“Collectors should not be able to launder the debt of defenses simply by selling it to another collector who can then restart the harassment,” wrote the National Consumer Law Center (NCLC) in a set of recommendations to the CFPB. “Consumer information must travel with the debt and subsequent collectors should be held responsible for past collection acts.”

Last year, the CFPB issued an advanced notice of proposed rulemaking, indicating it planned to revise debt collection enforcement regulations. The agency hasn’t yet tipped its hand about what the new rules might do, but 23,000 individuals and organizations filed comments urging the agency to do something.

Margot Saunder, the debt collection expert at NCLC, said her group favors making all debt collectors responsible for the history of any prior collection efforts. That would allow consumers the ability to sue for harassment by collector No. 2 if collector No. 1 had already been issued a cease and desist request.

“That would give them financial incentive to stop doing this,” she said.

Comments submitted to the CFPB in February by a coalition of hundreds of consumer groups calling itself Americans for Financial Reform laid out its vision for stopping the debt collection “laundering” activity. When debts move from one collector to another, the last collector in the chain should be responsible for possessing:

Information regarding any outstanding or unresolved disputes and fraud claims, as well as any disputes and fraud claims from six months prior to default.
Requests and responses to validation requests or disputes.
The consumer’s request to stop contact.
Settlements concerning the debt.
Status of the debt in relation to the statute of limitations.
Representation of the consumer by an attorney and attorney’s contact information.
Information regarding inconvenient times or places for communication.
Discharge of debt or listing in bankruptcy.
Illness or disability claimed by the consumer or known to the collector.
Known or claimed violation of the FDCPA or other laws to date.
Whether the consumer is or was a member of the military.
Whether the consumer’s income comes from sources exempt from garnishment, such as Social Security funds and/or SSI benefits, or VA benefits.

Debt collectors don’t necessarily oppose requirements that information on prior disputes travel with collection files when they move from one agent to another. After all, they don’t like wasting time attempting to collect on debts that have already been disputed, said Robert Foehl, vice president and general counsel of ADA International, the debt collector’s trade group. He is concerned, however, that requiring full documentation before any collection attempts would be an unfair burden, and a misplaced emphasis. Only 1-3% of all collections efforts are disputed, he said, meaning the paperwork would be unnecessary most of the time.

“Consumers are not disputing debts in large numbers,” he said. “To require additional documentation in hand before any collections efforts can occur seems to be the wrong emphasis when 97% of time the need for the additional documentation is not there.”

The CFPB is expected to issue proposed new rules governing debt collection next year.