If you only read one thing this weekend, it should be Jake Halpern’s book excerpt “Paper Boys: Inside the dark, labyrinthine, and extremely lucrative world of consumer debt collection” in the New York Times Magazine. It describes the colorful, seamy, more-than-borderline-dishonest world of firms that collect old debts.
As the industry has been described to me, there’s a hierarchy of debt-collection professionals, from the people who work for your bank or utility (indifferent, sometimes incompetent, occasionally mean) to the folks who buy ancient debt -- known as "paper" -- for pennies on the dollar and attempt to collect it, relying on no more than the occasional goodwill of debtors and their own antisocial tendencies.
Very old debts are very difficult to collect because they disappear from credit reports after seven years, and after a state’s statute of limitation on debt collections expires, the collector can’t even sue.
So these wily collectors either hope that the debtor feels bad about being a deadbeat and wants to clear his good name … or that he doesn't know the law. And when hope fails, collectors frequently resort to less savory tactics such as threatening to sue (legal), threatening to have you arrested (it may be legal to make the threat, but they can’t actually make good on it) or impersonating a law enforcement officer who is going to come arrest you (very, very, very illegal).
The problem is that even if these collectors engage in illegal tactics, it’s a pretty low priority for the government. Though the harm these guys do is real, it’s not like this is an industry where you clutch your hand to your heart in the fear that tougher regulations might put you of business.
The problem is enforcement. The Federal Trade Commission, which is in charge of regulating this stuff, is not really equipped to rid the world of a bunch of fly-by-night collection shops operating out of temporary office spaces or the back of some guy’s warehouse; it's good at wrangling with corporations that have big, marble-floored headquarters that can’t easily be moved to a nearby shed if the government comes knocking.
It’s easy to see why enforcement would be a low priority when shutting one fishy operation down just means that someone else will pick up the paper and do the same thing -- maybe even the owner, operating through a brand-new shell company.
Halpern suggests at the end of the excerpt that we could move to a registry of debts, something like the central registry we have for real estate sales. That would certainly cut down on overaggressive collection efforts, at least if people bothered to check that they were paying debts they legitimately owed.
But it wouldn’t eliminate them, because as aforementioned, enforcement is tricky. And setting up a registry is harder than you think, because while real estate transactions are relatively rare, consumer debts can come in any size and from any source.
If you require people to register debts so that they can legally collect on them, you effectively create a system in which small-denomination debts can’t effectively be collected upon at all -- which sounds great until Verizon (NYSE: VZ) triples its nonpayment fee in order to bring it up to “collectible” level.
Given all these complexities, the FTC doesn’t seem superinterested in getting such a registry going. That leaves you, the person fielding calls from debt collectors. What can you do?
For starters, know your rights:
Familiarize yourself with the statute of limitations in your state. After that limit expires, debt collectors can’t sue you to collect any more.
After seven years, uncollected debts leave your credit report. Debt collectors can re-report the debt, which would be a huge pain in the butt, but eventually the credit bureau will have to take it off again if you’re sufficiently persistent.
Ask if they can validate the debt. Often, they can’t, because he's some weasel who bought a spreadsheet off some guy he barely knows and is now calling down the list. These sheets frequently have errors. If you don’t remember this debt, or even if you’re unsure, demand proof you owe the money.
You cannot be arrested simply for failing to pay debts you owe to a private company. Government debts are different -- if you have tax debts or a judge has issued a bench warrant for nonpayment, then you will end up spending time in the pokey if you don’t pay. But that $150 credit card bill from eight years ago? Forget it.
They cannot call your friends, family or boss to get help paying the debt. They also cannot call in the wee-small hours of the morning, make threats or otherwise make it impossible for you to live a normal life.
However, you may have a hard time stopping them from doing that last part. Again, the problem is enforcement; the company you’re talking to is often basically a shell, the person who’s calling is using a fake name, and their address is a P.O. Box. Even if you know where they are, short of blackmail or grievous bodily harm, a complaint to the police will result in polite listening, followed by a hearty laugh when they get off the phone at the thought that they’re going to waste their valuable time trying to find a debt collector who was mean to you.
And there’s one thing you can’t stop them from doing: calling to collect on the debt. Even if the statute of limitations has expired -- which means they can’t sue -- legally, you still owe it, and they have the right to jawbone you about it. Be warned that even if it turns out they can’t validate the debt, they may simply the sell the account again, starting the cycle anew with a different collector.
Or you can try to settle it. In general, I think it’s a good idea to make good on debts you owe, unless doing so would pose an undue legal hardship. And remember that by the time you’re dealing with an elderly debt, you're talking to a guy on the other end of the phone who probably bought your account for a few cents on the dollar -- which means that he makes a profit even if you pay only a small fraction of what you owe. Even if you don’t agree with me on the morality of it, it may be worth coming to a settlement just to end the hassle of further calls.
If all else fails, you can try some extralegal means of persuasion to make them stop calling you. Unlike them, you have no legal obligation to behave decently, as long as you stop short of violent threats. Dave Ramsey suggests keeping an air horn next to the phone, but I’m sure you can think of no end to ways of making an unpleasant debt collector find someone else to bother.
As long as we have debts, we’ll probably have debt collectors.
You might as well at least have some fun dealing with them.
Contact Megan McArdle at firstname.lastname@example.org.