Got Credit Card Debt? You Still Have Rights

If you’ve been hearing from collection agencies about your old credit card debt, you’re not necessarily at their mercy.

Although collection agencies—and the lenders and debt buyers that hire them—are stepping up their efforts to recover old debt from credit card holders, they may not be automatically entitled to that money.

Unfortunately, few in-debt consumers realize that Wisconsin consumer protection laws are on their side.

It’s terribly difficult and sometimes impossible or illegal for credit card companies and collection agencies to recover their money. But that doesn’t stop these companies from trying to collect. In fact, they count on consumers’ lack of awareness of the laws so that they’ll pay up in full.

A Big Business in Overdue Accounts

Debt buying has become big business in recent years as lenders discovered that the old debt they carried on their books—even if that old debt was discharged during bankruptcy proceedings—might be worth something to someone.

“There’s a lot of money to be made in squeezing the consumer,” said Milwaukee attorney Michael Mack, who specializes in consumer debt settlement.

Much like the exploitation that occurred in the subprime lending industry, this seemingly worthless debt is sold to debt buyers, many of which are owned by hedge funds. Some are even traded publicly on the stock exchange. Billions of these seemingly worthless debts have been sold.

Debt buyers purchase a lender’s delinquent accounts for pennies on the dollar. Typically, the buyer receives names of delinquent account holders, account numbers, and amounts overdue.

These accounts are so cheap to purchase that a debt buyer could collect on only some of the debt and still make a tidy profit—even if they have to hire collection agencies and attorneys to do so. That’s when the phone calls and letters kick in.

O. Max Gardner III, a North Carolina-based consumer bankruptcy attorney, said the debt buyers’ business model is based on consumers’ unwillingness to fight the claim in court. That gives the debt buyer a default judgment, meaning the consumer is on the hook. Merely settling with a debt buyer for a fraction of the debt provides them with a profit.

“Even if you collect 20 or 30 cents on the dollar, that’s 10 or 15 times what you paid for the account,” Gardner said. “And all they’re buying is electronic data. They’re buying the name, the account number and the balance. They’re not buying any of the original loan documents, the bill statements or correspondence. So if you challenge any of these cases, they can’t prove anything.”

Know Your Rights

The catch for debt buyers is that consumers still have some rights. Unfortunately, many consumers aren’t aware that they have significant protections in court. They wind up receiving harassing phone calls and letters, seeing their credit rating reduced to shreds and eventually settling their claims with the collection agency.

Little do they know that the burden of proof is on the credit card company or debt buyer. Under the Wisconsin Consumer Act, lenders and collection agencies must provide complete documentation of the borrower’s delinquent account. Without the complete documentation, they do not have a legal claim.

According to attorney Mack, that means the collection agency must show everything—from the borrower’s application for the credit card, to all of the statements, and even the notices of changes in policy. In essence, the court won’t take the most recent account statement as proof of the outstanding balance. The lender must show how it arrived at that amount.

“We see nothing absurd about requiring the banks [who brought the complaint] to retain the records of charges for which they wish to collect payment,” appeals court judges concluded in a 2007 challenge to the Wisconsin Consumer Act.

Consumer attorney Mack said that requiring the lender to provide all of the account’s documentation is imperative, because the balance could have been incorrectly calculated.

“The consumer can dispute those records,” Mack said. “Credit card companies make mistakes all the time.”

What’s more, the attorney representing the lender must do some due diligence to ensure that he or she isn’t filing a frivolous claim. If there are no supporting documents, Mack says, the attorney shouldn’t be filing the claim at all.

Robert Potrzebowski Jr., managing partner at the Kohn Law Firm in Milwaukee, which specializes in debt collection and litigation for debt buyers, declined to answer specific questions about the services his firm provides and whether his firm files all supporting documents with its complaints.

Bankruptcy Protection

There’s another area of consumer debt in which debt buyers are running amok and engaging in illegal activity: trying to collect on debt that’s been written off or “discharged” during bankruptcy proceedings.

“It’s amazing to see documents filed with the Securities and Exchange Commission where one of the big debt buyers has made an agreement to buy Chapter 7 charge-off debt, and it’s absolutely worthless,” attorney Gardner said.

Oftentimes, the old, forgiven debt will remain on the consumer’s credit report because the original lender hasn’t updated its records with the major credit bureaus.

“There are a number of class actions that have been filed, mainly in California, against Experian, TransUnion and Equifax, based on their failure to monitor with proper software programs individual consumers’ credit reports to make sure that this is not happening,” Gardner said. “One thing that the credit reporting agencies always reported was bankruptcy. They always reported the discharge.”

Debt buyers who purchase these discharged accounts are allowed to report the debt in the name of the original lender.

“Obviously, a credit report that shows an outstanding debt to Chase, for example, on a credit card, is going to have more impact than one to a collection agency,” Gardner said.

Gardner said that a consumer typically isn’t aware of the “zombie debt,” or debt that comes back from the dead, until he or she is applying for a new loan for a car or refinancing a mortgage.

“You’re in a kind of coercive situation where you’ve made plans to proceed with a transaction and at the last minute you’re told about this $900 credit card debt, and that’s got to be repaid so they can rescore your FICO and pay off the loan you didn’t know you had,” Gardner said. “That’s like in The Godfather, the offer-you-can’t-refuse situation.”

What You Can Do About Old Debt

• When receiving a call from a collection agency, Mack suggests the following:
• Get the caller’s name, company and phone number, and the debt that’s being collected
• Ask for verification of the debt in writing
• Don’t argue with the caller
• Once you receive the letter, decide whether settling the claim, fighting it or filing for bankruptcy is your best option—each individual’s situation is unique. You may want to consult with an attorney
• Communicate in writing with the agency
• Remember that you do have some rights, even if the collection agency is putting pressure on you to pay in full
• Monitor your credit report to ensure that “zombie debt” has been erased