Debt Settlement and Collection News

After Congress allowed the Internal Revenue Service to hire private debt collectors to handle severely delinquent taxpayer accounts, a number of critics – including the IRS Taxpayer Advocate – warned that it probably wouldn't end well.

Now, four Democratic members of the U.S. Senate have fired off a letter, obtained by The New York Times, to Pioneer Credit Recovery, one of the firms hired by the IRS, suggesting the company has stepped over legal boundaries in its effort to collect the government's debts.

The four lawmakers – Sen. Sherrod Brown (D-Ohio), Sen. Benjamin Cardin (D-Md.), Sen. Jeff Merkley (D-Ore.), and Sen. Elizabeth Warren (D-Mass.) – said they obtained call scripts used by Pioneer's debt collectors in their interactions with taxpayers.

Risky financial transactions

According to the letter, the senators are concerned that Pioneer violated the Fair Debt Collections Practices Act and the IRS Code. Specifically, the lawmakers said the call scripts appeared to pressure taxpayers into risky financial transactions in an effort to come up with the money. The senators also said the debt collectors' behavior was too similar to that employed by scammers, who often impersonate IRS personnel.

The lawmakers particularly objected to debt collectors' suggestions about how debtors should go about obtaining the money. They say delinquent taxpayers are being advised to take out a second mortgage on their home or cash in their retirement accounts if necessary.

“Pioneer is unique among IRS contractors in pressuring taxpayers to use financial products that could dramatically increase expenses, or cause them to lose their homes or give up retirement security,” the letter states.

Process started in April

As we reported back in April, when the law authorizing private debt collection went into effect, the IRS described the accounts as old and the subject of repeated and unsuccessful collection attempts.

“The IRS is taking steps throughout this effort to ensure that the private collection firms work responsibly and respect taxpayer rights,” IRS Commissioner John Koskinen said at the time.

Pioneer Credit Recovery is a subsidiary of Navient, a federal student loan servicer sued in January by the Consumer Financial Protection Bureau, which alleged it had failed borrowers at every step of the repayment process.

Pioneer Credit Recovery is a large debt collection agency, and has contracts with several state governments as well as the IRS. Consumers posting reviews of the company on ConsumerAffairs have made accusations that, in many respects, closely remember those leveled by the four United States senators.

"This company gave out my personal and confidential information unlawfully. They contacted people who are not my friends, not my family and disclosed my confidential information to them," said Shannon of Vancouver, Wash. "Not only that, they were harassing and threatening to me and the people they contacted in an attempt to get ahold of me."

The state of Florida and the Federal Trade Commission (FTC) have reached a settlement with the operator of several debt settlement companies after filing a lawsuit last year.

The state and federal governments teamed up to bring charges against Chastity Valdes and the companies she controlled, Consumer Assistance LLC, Consumer Assistance Project Corp. and Palermo Global LLC.

The charges specifically accused the companies of targeting consumers with student loan debt with illegal debt relief offers.

The suit claimed the companies took up-front fees in return for their promised debt relief and credit repair services. They allegedly promised victims they could reduce the amount of their student loans and repair their credit.

Tough loan to get out of

Student loans, of course, are among the most binding of debts and can't even be discharged in bankruptcy.

Among the laws the defendants were accused of violating are the Florida Deceptive and Unfair Trade Practices Act, the FTC Act, the Telemarketing Sales Rule, and the Credit Repair Organizations Act.

The settlement essentially puts the companies out of business. Under the terms of the agreement, they cannot sell debt relief and credit repair services, and can't even make any material claims about any products or services.

They are also prohibited from misrepresenting endorsements, making money from consumers’ personal information, and being careless in the disposal of personal information.

They would also be required to cough up $2.3 million in damages, if they had it. Since they don't, they have to turn over all of their assets to Florida and federal authorities. If it turns out they weren't being truthful about the amount of the assets, the full $2.3 million judgment will be imposed.

Avoiding debt settlement pitches

Debt settlement schemes most commonly target people with large amounts of credit card debt, usually making it sound like it's easy to get credit card companies to agree to accept a fraction of what is owed.

That's hardly the way it works. When a consumer stops making payments, as advised by a debt settlement company, he or she is besieged by debt collectors. In the process, the consumer's credit score craters.

The FTC doesn't say you should never try to settle your debt, but it does say you need to be very, very careful. And you should always avoid doing business with a debt settlement firm that charges an upfront fee, which is illegal.

Remember, you can talk to your credit card company yourself, and will probably have better luck than a debt settlement company will.

Learn more about what the FTC advises on debt settlement here.

There are several ways debt collectors can step over the line when they try to collect money from consumers. A lawsuit claims Buffalo, N.Y. debt collectors tried just about all of them.

New York Attorney General Eric Schneiderman and the Consumer Financial Protection Bureau (CFPB) have filed a federal court lawsuit against two individuals who Schneiderman alleges were operating a network of “fly-by-night collection shops that harass, threaten, and deceive” consumers so that they would pay money they might not owe.

The lawsuit seeks to close the debt collection operations and to compensate consumers affected by the debt collection efforts.

Threats and deception

“These collection shops inflated debts, threatened victims, and deceived them out of millions,” Schneiderman said.

CFPB Director Richard Cordray says the debt collectors used fear and intimidation tactics to force consumers to pay debts, without verifying or proving that they actually owed the money.

The Fair Debt Collections Practices Act sets out consumers' rights when it comes to collecting debts and places strict limits on what collectors can say or do. When collectors violate these rules, they can often force consumers to pay money they do not legally owe.

List of charges

The suit makes a number of accusations. It claims the defendants violated the Fair Debt Collection Practices Act in its interactions with consumers. It also claims they ran afoul of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which bars unfair and deceptive acts or practices in the consumer financial marketplace.

The suit claims “repeated fraudulent acts and deceptive acts or practices” in violation of New York law, which also has provisions covering debt collection.

The specific charges provide a laundry list of things a debt collector is not supposed to do: inflating the amount owed by taking on fees they aren't allowed to collect; threatening legal action against the consumer when there were no grounds to do so; and telling consumers they would be arrested immediately if they didn't pay up.

The suit is a good reminder that consumers have options when a debt collector is trying to collect a dubious debt. Among the key provisions is the right to see verification of the debt.

The Federal Trade Commission spells out consumers' rights here.

Calls from debt collectors are always unpleasant. But when the calls are trying to collect so-called “zombie debt,” they can be downright scary.

"As the name suggests, zombie debt is debt that you thought was dead, but has come back to life," said Katie Bossler, a GreenPath financial wellness expert.

To be more precise, zombie debt is money you really don't owe. It may be that you have already paid the debt, but it didn't get recorded. It may be the debt is so old it has passed the statute of limitations and can't be legally collected. Or it could be that the debt never belonged to you, and it's a case of mistaken identity.

Law gives you rights

Sadly, the debt collectors who are trying to collect the money are unlikely to be sympathetic to your protests that you don't owe the money. In fairness to them, they've heard it all before. But the law requires them to respect your rights and, if they fail to do so, they can be held accountable. To do that, you need to know your rights.

Consumer rights in this area are spelled out under the Fair Debt Collection Practices Act. If you are contacted about a debt you think you do not owe, the law allows you to demand to see written verification of the debt. The debt collector must send that to you within five days after first contacting you.

This validation notice must include the name of the creditor and instructions on how to proceed if you don't believe you owe the debt.

If you send the debt collector a letter saying you don’t owe the debt, the collector must stop contacting you. You have to send that letter within 30 days after you receive the validation notice. The only way a collector can legally begin contacting you again is by sending you written verification of the debt, like a copy of a bill for the amount you owe.

What to do

If you are contacted about what you think could be zombie debt, consult your records to see if you can prove it has been paid. Pull your credit report to see if it is still being reported to the credit bureaus.

Demand to see written proof that you owe the debt. If you need a guide for writing the letter to the debt collector, use these samples from the Consumer Financial Protection Bureau. If it's a real debt but you think it is past the statute of limitations, consult a lawyer or legal aid society on how to respond.

Even during the Halloween season, there is no reason to be spooked by zombie debt.

Back during the foreclosure crisis, debt relief companies took to the cable TV airwaves to promise consumers help getting out from under debt – for a fee.

The foreclosure crisis is now pretty much history, so the pitch now is to help students get out from under crushing student loan debt – for a fee.

Student Debt Crisis, a consumer advocacy group, warns consumers to ignore these pitches while pushing the U.S. Department of Education to crack down on them.

According to the group, student loan borrowers are the targets of aggressive marketing by companies that promise debt relief. The group says clients of these firms pay on average $600 for debt relief services.

But according to Student Debt Crisis, these same services are free. It's calling on the Department of Education and the Consumer Financial Protection Bureau (CFPB) to issue cease and desist letters to these companies, establish policies that educate borrowers and protect them from scams, and use available enforcement tools to shut down companies that are found guilty of misleading borrowers and violating federal law.

'Rein in these private companies'

“It is time for the federal government to rein in these private companies that take advantage of thousands of distressed student loan borrowers across the country,” the group said in a blog posting. “Companies that advertise student debt relief, forgiveness, and consolidation services that are completely free of charge need to be closely monitored and shutdown if found guilty of misrepresenting themselves or violating federal consumer protection laws.”

The Department of Education is already on record warning student loan borrowers not to pay for free services. In a recent blog posting, the department cautioned consumers paying back student loans not to fall for pitches that sound too good to be true. As examples, it pointed to internet ads claiming President Obama could easily forgive student loan debts.

The government agency says that, while it is true there are some programs available to assist student loan borrowers, there is no fee for applying.

Want to find out more? Here's the link for information about a legitimate way to reduce your debt. Here's the link to information about how to reduce payments.

And it bears repeating – there is absolutely no charge for accessing these programs.

There are an estimated 6,000 debt collection firms in the U.S., making it a huge industry. According to the Consumer Financial Protection Bureau (CFPB), it affects around 70 million consumers who have some debt in collection.

Some of this debt is legitimate, some is not. Currently the burden of proof to show which is which falls on the consumers. Under proposals outlined by the CFPB, much of the burden would shift to the debt collection industry.

“Today we are considering proposals that would drastically overhaul the debt collection market,” said CFPB Director Richard Cordray. “This is about bringing better accuracy and accountability to a market that desperately needs it.”

Under the proposed rules, debt collectors would be required to limit their communications, clearly disclose the details of the debt, and make it easier for consumers to dispute the debt. When a consumer disputes a debt, a debt collector would not be able to continue collection efforts without providing sufficient evidence that the debt is real.

Sea change for the industry

If enacted, these proposals could bring about a sea change in the industry. Some of the biggest problems occur when a debt collector purchases an old debt from a bank or credit card company. Because the debt is old and has changed hands, the paper trail may be thin or missing.

Nonetheless, there have been instances where debt collectors have hammered away at consumers, even hauling them to court, over debts they insist are not legitimate. A case in point occurred in May 2015, when Portfolio Recovery Associates LLC, one of the largest buyers of written-off debt in the U.S., tried to collect a $1,000 credit card debt from Maria Guadalupe Mejia, who insisted the debt wasn’t hers.

The jury decided the evidence showing the debt was not hers was so clear and overwhelming, it not only dismissed the case but awarded Mejia an $83 million judgment. In its blog, the CFPB says debt collection complaints outnumber all other types it receives.

250,000 debt collection complaints

“We have handled about 250,000 debt collection complaints since 2011 and have handled about 85,000 in 2015 alone,” the agency said. “We have ordered creditors and debt collectors to refund hundreds of millions of dollars through our enforcement actions against unlawful debt collection practices since 2011.”

Among complaints about debt collection, CFPB says the majority concern continued attempts to collect a debt that the consumer said was not owed, either because it wasn't their debt or had already been repaid or discharged in bankruptcy.

CFPB says consumers sometimes pay a debt that isn't theirs just to get rid of the debt collector. Other times, consumers spend time and money to dispute the debt. The proposed CFPB rules would shift the burden of proof from the consumer to the debt collector.

In the meantime, CFPB says that if you're having trouble with debt collection, you can submit a complaint to the CFPB online or call (855) 411-CFPB (2372).

Some consumers are caught off guard when a debt collector calls and may take actions or make statements that are damaging to their position. The law, after all, gives consumers rights when it comes to dealing with creditors.

The law in question is the Fair Debt Collection Practices Act, which spells out clearly what debt collectors can and can't do. That's why consumers should be familiar with the law, especially when an account is turned over for collections.

No one is arguing that consumers should try to weasel out of paying legitimate debts, but there is also no reason to allow yourself to be exploited by a debt collector who is skirting around the law.

Under the law, you do not have to talk to a debt collector, but the Federal Trade Commission (FTC) says you might want to, at least once, to see if you can resolve the issue.

Stopping contact

But at any time, you can request the debt collector stop contacting you. Here's how:

Write a letter instructing the collector not to make further contact. Send a copy to the collector by certified mail and pay for a return receipt. After that, a debt collector may contact you only to tell you there will be no further contact, or to tell you the creditor plans to file a lawsuit.

Keep in mind, cutting off communication with a debt collector increases the likelihood of litigation. If the debt is illegitimate, maybe that's not a concern. Remember, cutting off contact does not make a legitimate debt go away.

If a debt collector calls about a debt that you know you do not owe, you can stop the calls by sending a letter – again by certified mail – stating you don't owe the money and asking for verification of the debt. You must send it within 30 days of receiving a validation notice. The collector may resume contact if it can prove you owe the money.

Old debt can be new again

In recent years debt collectors have purchased old debt from credit card companies for pennies on the dollar and attempted to collect it, even though in many cases the statute of limitations had expired and the credit card company had written off the debt.

The credit card site Credit.com warns consumers they should be very careful should they receive one of these debt collector calls. By saying the wrong thing – like admitting to owing the money – or making even a small payment, can start the clock again. 

Sometimes a debt collector will hound a consumer over a debt that doesn't exist, or belongs to someone else. When that happens, the consumer should consider legal action if the hounding persists.

Last year a debt collector sued a Missouri woman for a debt she insisted was not hers. When the jury heard her story, it not only dismissed the case, it awarded her $83 million from the debt collection company in punitive damages.

Aggressive and abusive debt collection practices persist, despite laws and court rulings affording debtors more protections.

Missouri Attorney General Chris Koster says he's troubled by the fact that racial minorities appear more likely to be on the receiving end of these abuses. While it is impossible to determine who is getting the harassing phone calls, it is possible to tell who gets hauled into court.

Koster says his state has witnessed a dramatic increase in debt-collection litigation in recent years. Charged-off debt, or debt that has been deemed uncollectable by a creditor, is often sold for pennies on the dollar. If the buyer is able to collect, the profit is huge.

Serial law suits

To collect the debt, Koster says these companies engage in what he calls the serial filing of debt-collection lawsuits in state court.

Worse, he says these debt collectors file suit without bothering to find out whether a debt is even owed, what it was for, and how much it is. He says he has seen cases where the same companies sue for debts more than five or ten years old, even though the statute of limitation would normally preclude recovering a debt.

Koster cites research which demonstrates that these litigation abuses disproportionately target racial minorities, creating “devastating long-term impacts for those who already struggle economically.”

He says recent studies from ProPublica and other sources have shown that debt-collection lawsuits in Missouri have obtained judgments in communities with predominately minority neighborhoods.

Missouri court takes a stand

Earlier this year, a Jackson County, Mo., court took a firm stand on the issue of debt collectors suing consumers without finding out first if the debt was legitimate.

Portfolio Recovery Associates LLC, one of the largest buyers of written-off debt in the U.S., tried to collect a $1,000 credit card debt from Maria Guadalupe Mejia, who insisted the debt wasn’t hers. She tried to explain that the person they were looking for was actually a man with a name that was similar, but not the same, as her name.

In May, the judge threw out the debt collector's case, but not before the jury awarded Mejia damages of over $82 million. Despite that lesson, Gregg Lombardi, Executive Director of Legal Aid of Western Missouri, says the debt collection abuses persist.

"Zombie debt collection agencies file thousands of cases in Missouri every year, and in virtually every one our attorneys see, they cannot prove their case in court,” Lombardi said. “They get default judgment after default judgment that they don't deserve by targeting low-income consumers who they know cannot afford to defend themselves. Then they are ruthless in collecting on those judgments.”

Proposed reforms

Koster has proposed reforms aimed at curbing abusive debt collection lawsuits in the state. He's proposed changes to state court rules that he said would end unscrupulous collection practices.

The changes would require debt collectors to produce documentary proof of the debt, stop debt buyers from manipulating court procedures with stalling tactics, and strengthen the proof needed before creditors can recover for attorneys’ fees and litigation costs.

Furthermore, consumers who want to reduce exposure to potential debt collector issues may consider consolidating their debt. Here is a link to our best debt consolidation companies resource.