Credit Scores and Credit Reports, by Evan Hendricks

Chapter 12

Debt Collection

Beautiful credit! The foundation of
modern society... I wasn't worth a cent
two years ago, and now I owe two
millions of dollars.

— Mark Twain
"The Gilded Age"

Unpaid debts, especially ones that have gone to collection, are bad news for your credit report.

Debt collection companies and creditors view the credit reporting system as a tool for debt collection. Often, debtors will pay or settle an account to avoid negative information appearing on their credit reports. For this reason, credit reporting is a "powerful tool designed, in part, to wrench compliance with payment terms."¹⁹⁷

While it is appropriate for companies to inform consumers that unless they take care of a valid debt by a certain deadline, accurate derogatory data will be reported to credit reporting agencies (CRAs), it is highly improper to threaten to report-and to report-inaccurate data as a tactic to pressure a consumer to pay an amount that is in dispute.

Unfortunately, some debt collectors and creditors have been accused of crossing this line.

One common problem is accounts that have gone to collection often result in duplicate or even triplicate negative accounts. Say your Sears card account was charged off and sent to collection.

¹⁹⁷ Rivera v. Bank One, 145 F.R.D. 64, 623 (D.P.R. 1993)

It is not uncommon for the debt to be reported separately by Sears and by the debt collector. If that collector fails to collect and the debt is sold to a third collector, still another negative entry to your credit report could result. Of course, there should only be one entry.

'Re-Aging'

A second common problem is known as "re-aging." This involves the debt collector reporting an account with a more recent date, like the date it began trying to collect on it, as opposed to the actual date the debt became delinquent, which is what is supposed to be reported.

The Federal Trade Commission already has brought two cases against debt collectors over re-aging, as well as other alleged violations of the Fair Credit Reporting Act and Fair Debt Collections Practices Act.

In the most recent case, the FTC brought suit against DC Credit Services, Inc., and its owner David Cohen. "In numerous instances, in the course and conduct of their business, defendants have reported information about debts to consumer reporting agencies using a date of delinquency other than the month and year of the delinquency that immediately preceded date,"¹⁹⁸ stated the FTC complaint, filed in a Los Angeles federal court on June 27, 2002.

Four days later, on July 1, 2002, DC Credit Services and Cohen settled the charges, agreeing to pay a $300,000 civil penalty and to notify CRAs to delete all adverse information the collection agency previously reported to them over the past seven years. The consent decree permanently banned Cohen from engaging in debt collection activity.¹⁹⁹

¹⁹⁸ U.S.A. v. DC Credit Services, Inc., et al.: U.S. Dist. Ct. - Central Dist. of California; Case No. 02-5115; The FTC alleged that this violated 15. U.S.C. § 1681s-2(a)(5) of FCRA; www.ftc.gov/os/2002/07/dcscmp.pdf ¹⁹⁹ "California-based Debt Collector Agrees To Pay, $300,000," FTC press release, July 1, 2002; www.ftc.gov/opa/2002/07/dccredserv.htm

Performance Capital Management

Two years earlier, the FTC filed suit against Performance Capital Management (PCM), another California debt collector. According to the complaint, PCM systematically reported accounts with delinquency dates that were more recent than the actual date of delinquency, resulting in negative information remaining on consumers' credit reports long beyond the seven-year period mandated by the FCRA. The Commission's complaint also alleged that PCM violated Section 623 by ignoring or failing to investigate consumer disputes referred by credit bureaus and by failing to notify credit bureaus when consumers disputed collection accounts with PCM.²⁰⁰

The FTC charged that PCM's practice of merely comparing the name, address, and information in PCM's computer database with the information provided on each consumer dispute verification form was inadequate.

"Where the two match, PCM reports that it has verified as accurate the information in its files. The actual records of the original creditor are not reviewed, nor is the matter referred to the original creditor for the original creditor to verify the accuracy of the information," stated the complaint.

"Because PCM collects accounts that are often old, information in its computer files may not be accurate for a variety of reasons, including incorrect updating of addresses, errors in recording names and information, and problems with the original creditor's records. Accordingly, verifying information in the computerized PCM file does not constitute an 'investigation' for purposes of Section 623(b) of the FCRA when a consumer disputes the accuracy of the information," the complaint stated.

²⁰⁰ U.S.A. v. Performance Capital Management, et al.: U.S. Dist. Ct. — Central Dist. of California; www.ftc.gov/os/2000/08/performcomp.htm

Under an August 24, 2000 settlement, PCM was enjoined from "serious violations" of the FCRA. Because PCM was in bankruptcy, the FTC waived a $2 million fine.²⁰¹

Re-Aging Grows Old

There are indications that some debt collectors have continued to use re-aging tactics to improve their chances of collecting old debts. In Chicago, Georgia Redd was the lead plaintiff in a potential class action lawsuit against Arrow Financial Services, LLC. Ms. Redd defaulted on a car loan in 1990; the car was repossessed and the debt charged off.

However, in October 2002, she received a letter from Arrow Financial Services, advising that the client was "willing to settle for 45% of full balance," and that if Ms. Redd paid $4,449.33, "the appropriate credit bureaus will be notified that this account has been settled."²⁰²

Citing the FCRA's seven-year limit for derogatory information, the complaint stated, "No report concerning the (12-year-old) debt could legally appear on plaintiff's credit reports. The statement that if plaintiff paid money on account of the debt credit bureaus would be notified is misleading in that it tells the unsophisticated consumer that a credit bureau could report the payment, when that is not the case." (The case was pending when this book went to print.)

In October 2003, Ruth Zitka filed a separate suit against Asset Acceptance, LLC, over its alleged failure to remove duplicate accounts. Zitka's Trans Union report already listed her First USA credit card account, which was charged off as a bad debt in July 2000. However, the report also showed a collection account with an October, 2002 date for a First USA Bank as an "open account." When Zitka disputed the duplication with Trans Union, Asset Acceptance allegedly verified the debt as accurate.

²⁰¹ "California Debt Collection Agency Settles FTC Charges," FTC Press Release, August 24, 2000; www.ftc.gov/opa/2000/08/performance.htm
²⁰² Amended Complaint, Georgia Redd v. Arrow Financial Services, LLC: USDC-N.D. Illinois (Eastern Div.); CA No. 03 C 1341; filed February 24, 2003; Ms. Redd is represented by Edelman, Combs & Latturner of Chicago.

"When Asset Acceptance reported it to Trans Union, it dated the debt October, 2002 or 27 months later. It also reported the debt as an 'open account,' which was not true (none of the debts purchased by Asset Acceptance remains 'open'), and which tells the credit bureau that the delinquency being reported is recent," the complaint charged. The case was pending when this book went to print.²⁰³

More To Come

Some observers think these four cases are only the tip of the iceberg, and that future investigations will reveal that some debt collectors' compliance with the FCRA and FDCPA is at best uneven.

One leading opponent of unethical debt collection practices is Bud Hibbs, a credit expert, author and radio personality. As of March 2005, his Web site listed 142 "Debt Collection Agencies, Scavenger Debt Buyers, & Collector Attorney - Law Offices" to watch out for.

Hibbs said his self-help book, "The American Credit System: Guilty Until Proven Innocent," was "not designed to help anyone evade debts or to undermine the integrity of the credit reporting system. There is a moral and legal obligation to pay all credit accounts. However, an often unfair credit system discriminates against those who do not understand how it works and can adversely affect the consumer on a daily basis."²⁰⁴

²⁰³ Proposed Second Amended Complaint, Ruth Zitka and Dyvonne Brown v. Asset Acceptance, LLC,: USDC-N.D. Illinois (Eastern Div.); CA No. 03 C 1601; filed October 27, 2003; Plaintiffs are represented by Edelman, Combs & Latturner of Chicago.
²⁰⁴ www.budhibbs.com

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