A Little History

Prior to the 1980s, most collection agencies were small "mom and pop" operations. "You could set up a collection agency if you had a phone and knew how to use it," says Hobbs, of the National Consumer Law Center.

It was the federal government's decision in the 1980s to farm out the collection of student loan debt that transformed the industry into what it is today, according to Hobbs. "This was billions and billions of dollars and millions of accounts," he says. Small agencies simply could not handle these large government contracts, he says, so larger collection firms started to emerge.

In the 1990s, small and specialty agencies continued to consolidate into conglomerates backed by Wall Street and private equity firms. Since 1995, the combined revenues of the top 10 players in the debt collection industry, which includes all forms of debt collection -- credit cards, mortgages and others -- has skyrocketed from $910 million in 1995 to $2.5 billion in 2000, according to the Kaulkin Report.

"Today's [collection] industry is radically different and its tactics are radically different," says the National Consumer Law Center's Tripoli. He argues that despite the passage of laws designed to regulate the collection industry, some collectors still use tactics that harass, threaten and frighten debtors.

Michael Flannagan, a former collector who ran a 30-person debt collection operation in Washington state, says the most effective collectors knew how to "bend or break the rules." "If you genuinely install fear into the consumer," he says, "they will generally pay you out of fear of the unknown."

But industry analysts say most collectors understand that abusive practices are bad for business. "The debt collection industry has the image of nasty leg breakers that will come after you if you don't pay," says James Daly, editor of Credit Card Management, a trade magazine that covers the credit card industry. Now, Daly says, " there is a feeling in the industry that threatening people is not going to work."

Andersen of ACA International says her association is "tired of that old stereotype" of threatening collectors that harass debtors. She says collectors in her association adhere to high ethical standards and the vast majority of collectors treat consumers in a fair and respectful manner. "We are really working hard to denounce bad practices," she says.

When a complaint is made to the ACA International's ethics committee that suggests a debt collector has "abused, harassed or deceived a consumer," says Andersen, "such an agency will be sanctioned, which may include probation, suspension or expulsion from the association."  

How it Works With Credit Card Debt

Collection of credit card debt is carried out in a variety of ways. Credit card companies initially try to recover an outstanding balance through its in-house collection department or through a third-party firm that collects debt under the name of the creditor. If the creditor is unable to collect, the debt is either handed over to an outside agency that makes a percentage on collections or the debt is sold outright for pennies on the dollar. The sold debt is then written off against the amount of outstanding debt.

An estimated $166.7 billion in charged-off credit card debt was available for purchase by collection agencies and debt buyers in 2003, according to the March 2004 issue of The Nilson Report, an industry newsletter.

According to The Nilson Report, credit card companies are selling off more of their bad accounts to debt purchasers because they can recover an amount close to the amount generated by a collection agency.

"Basically it comes down to a 'time is money' factor," says Daly, editor of Credit Card Management. He maintains a lot of credit issuers would rather have their bad debt converted into cash paid off up front, rather than wait for consumers to pay up over months or even years. So they're selling off more of their bad debt.

According to the Glenns, the collectors who contacted them said they had purchased the couple's outstanding credit card debt. In all likelihood, the collectors paid considerably less than the full amount owed; however, Darlene says they demanded immediate and full payment of the bill including late fees and other penalties.

"He wanted check [payments] over the phone," she says. "We were going to be left without being able to pay for groceries or power bills."

Since debt purchasers pay a fraction of the amount of an account's total outstanding debt, buyers only need to recover a modest percentage to turn a profit. Now, collection lawyers also see debt purchasing as a good investment opportunity and more lawyers are getting into the debt-buying game, says Charles Pona, president of the National Association of Retail Collection Attorneys, an association of debt collection law firms based in Washington, D.C.

Certain state laws prohibit law firms from buying debt, so firms are setting up subsidiaries or limited liability companies that purchase debt and contract with the firm, Pona says.

In many cases, a law firm's debt collection subsidiary becomes the firm's best client, he adds. "In essence, you're collecting your own debt and it assures you of continuing business," he says.

In the case of Darlene and Thomas Glenn, the threat of legal action and the fact that the collection call came from a law firm was particularly effective.

"I was a nervous wreck," says Darlene, recalling the first time she heard the collector say he was with a law group. "I said 'Oh my, an attorney called and we have to do something.'"

Later, the Glenns discovered that the collector was not an attorney but simply worked for a collection agency that was a subsidiary of a law firm.  

Industry Reform?
Consumer advocates say that unless the FTC institutes tougher punishments, efforts to curtail debt collection abuse are merely cosmetic. "The penalties aren't big enough or tough enough," says Steve Tripoli of the National Consumer Law Center.

But collection industry officials disagree. "Under the Fair Debt Collection Practices Act, consumers have a cause of action that entitles them to actual damages and attorney fees," said Andersen. "The industry believes that provides consumers with very strong protections and remedies."

Tripoli is skeptical about consumer protection laws being strengthened in the near future. "We can't play offense in this legislative environment because the forces of industry in Washington right now are more strongly aligned, sometimes on both sides of the aisle," he said.

Andersen says the claim that the collection industry is trying to undermine legislation designed to protect consumers is "shocking, in light of the work we have done with consumer groups over the past two years." She says in 2003, her association strongly backed passage of a bill (HR 3066) that called for clarification of various provisions of the Fair Debt Collection Practices Act. The bill has not yet been passed, and Andersen looks forward to continuing to work with consumer groups to achieve passage of a bill in the 109th session of Congress that is mutually satisfying to all parties.


The bill, which has received bipartisan support, says Andersen, requires debt collectors to submit the same written notice of consumer rights to all consumers. Collectors are required by law to send this notice to consumers within five days of their initial contact with the consumer. Andersen says that the majority of "frivolous lawsuits" filed against collectors are based on disputes regarding the language of this written notice.

"We would resolve hundreds of consumer complaints if everyone used the same notice," Andersen says.
As for the Glenn family, Darlene says that thanks to help from a credit counselor and a favorable settlement against the debt collector, the couple is "back on our feet." "We don't claim to have made all the right decisions," she says, but "we're rebuilding good credit and life is totally different now."