October 30, 2014

Your Debt Is For Sale

Larry was an artist — and ex-con — who turned to debt collection to pay the bills. Halpern met Larry in Buffalo, N.Y. (Some collection agencies won’t buy debts that have been worked in Buffalo, such is the reputation it has developed.)

For a time after he got out of jail, Larry worked as a debt collector, but then turned to buying and selling debt as a less stressful way to earn a living. Except it wasn’t, exactly. The problem, he discovered, was that some debt portfolios he brokered were not exactly legitimate. Some didn’t have a accurate chain of title, meaning there was no way to know if the information was factual, or whether the debts had been sold to multiple agencies, all of whom may have tried to collect. In his book, Halpern recounts a conversation from his meeting with Larry:

“I’ve done deals where I met guys down here,” said Larry, pausing to gesture down the street, “right down at the steakhouse down there — done a deal right in the car.” In such cases, the buyer gave Larry cash, and he handed the buyer a thumb drive with a spreadsheet containing the names, addresses, social security numbers, credit-card balances, or loan amounts of several thousand debtors. Sometimes there was an informal one-page contract, but not always. (“Bad Paper”, p. 143)

While the large industry players may make it seem that these problems are outliers, after reading “Bad Paper,” it’s hard to not get the impression the system itself has a rotten core.

“There is some truth that it has been cleaned up,” said Halpern in a recent interview. “We are past the point of the complete Wild West, but it’s not at all true to think the problems have all miraculously been cured. The original process of how creditors charge this debt off and pass off little to no information — that has not changed,” he said.

He points out a story in the book where a debtor, Julie, did not recognize a debt she was being sued over. Her credit report listed two different debts, one from Chase and one from Washington Mutual, but she hadn’t opened an account with either bank. As it turns out she had held an account with Providian, which was bought by Washington Mutual which was then bought by Chase.

Halpern contacted Chase on Julie’s behalf. After investigating, Chase decided to write the debt off to “fraud,” The reason, it seems, was that the paperwork was nowhere to be found.

Furthermore, Julie was being sued for a debt, but no one knew for sure how much she owed. “It was really kind of chilling,” said Halpern. “This woman is being sued over this debt. Her wages could be garnished. But when you go back to the bank and ask them for the most basic evidence that establishes this debt, they don’t have it.”

Even more astonishing, he shares that when the Federal Trade Commission shut down the collection agency Rincon and sold its debts, it too, could not or would not guarantee the accuracy of the debt it was selling. If the main government agency charged with protecting consumers against unfair debt collection practices can sell debts that may or may not be accurate, imagine what happens in the marketplace.

Halpern compares it to someone who wants to sell their car and tells a potential buyer, “’See that Red Toyota there? I’ll sell it to you. There’s no VIN number and I don’t have a chain of title. Trust me.’ A buyer would say, ‘Wait, you can’t do business like that. It’s crazy.’” That’s what happens in the debt buying business. But in the case of selling debt portfolios, “What hangs in the balance is consumer’s ability to get credit, to buy a home to live in, and to live my life normally,” he says.