Debt buyers revive ghosts of old loans

The page was mostly blank. It contained only a name, three words and a series of tiny numbers. But in Minnesota’s creditor-friendly court system, the page became the sole legal evidence that Darren Sabinske had defaulted on a Citibank credit card nearly eight years ago.

Sabinske, a security technician from Albertville, Minn., was ordered to pay $7,595 to Debt Equities of Golden Valley, Minn., whose business is collecting old debts. Sabinske insists he never owned a Citibank card but was soon to learn the frustration of trying to defend himself against a computer database that listed his name near that of the bank.

“All they had was a row of numbers,” he said.

In the hands of the new breed of debt collectors, those rows of numbers have become gold mines. Firms with little-known names, such as LVNV Funding and Unifund CCR Partners, buy massive databases of unpaid debts for cents on the dollar, and then inundate courts with legal actions seeking to collect the full amount, plus interest and fees. These firms, known as debt buyers, base their claims on data up to 15 years old that can be impossible to verify.

The National Consumer Law Center, an advocacy group for low-income Americans, estimates that one in 10 debt-buyer lawsuits nationwide is based on inaccurate information. Bank accounts have been tapped, wages seized and people threatened with arrest for debts they don’t owe or for inflated amounts.

In Minnesota, the court system rubber-stamps most debt claims without scrutinizing them for accuracy. Proof is needed only if a debtor disputes a debt claim in writing, which happens in less than 10% of cases. People disputing those claims often face an expensive legal fight in which it falls on them to prove a database is wrong.

Regulators have been imposing new rules on credit card issuers in recent months to protect consumers, but debt buyers operate with little regulation. Minnesota’s rules for traditional debt collectors don’t apply to them. And many debt buyers are associated with law firms, which Minnesota courts have ruled are exempt from the state debt collector law.

“When consumers make small mistakes, such as failing to answer a lawsuit, the full power of the courts comes down on them,” said Sam Glover, a consumer rights attorney in Minneapolis. “But when a debt buyer flouts the law, it rarely experiences any consequences and keeps collecting as if nothing happened.”

Debt buyers insist that consumer attorneys exaggerate mistakes. The aggressive pursuit of old debts should be cheered by those who pay their bills and want access to cheap credit, said Robert Markoff, a collection attorney from Chicago. “If you knew your neighbors didn’t have to pay their bills, then why would you be a chump and pay yours?” he said. “Debt buyers fill a need, though not everyone is going to like it.”

Valerie Hayes, general counsel for ACA International, an association in Edina, Minn., that represents the collections industry, said there is no hard data to prove debt buyers are filing unsubstantiated lawsuits. “It’s hard to solve the problem when you’re not sure what the problem is,” she said.

Two decades ago, unpaid debts didn’t live forever.

If a bank or credit card company couldn’t collect within two years, it typically would write off the account as uncollectible and take a tax deduction. A black mark was placed on a borrower’s credit report, but the debt otherwise didn’t follow the individual.

All of this began to change with the savings and loan debacle of the late 1980s. The Resolution Trust Corp., the federal entity that liquidated failed thrifts, auctioned off nearly $500 billion of unpaid loans, spawning an industry to buy, resell and collect old debts.

Later, these firms shifted to buying and collecting consumer debt, finding a rich vein of new business in unpaid credit card accounts. Between 1990 and 2005, outstanding credit card debt in the United States grew from $214 billion to $830 billion.

The debt-buying industry got another boost in 2005 from sweeping changes to federal bankruptcy law that made it harder for people in financial distress to wipe the slate clean. Instead, many struggling borrowers defaulted on loans, expanding the debt buyers’ market.

Today, buyers exist for almost every type of charged-off debt — from unpaid cellphone accounts to hospital bills — and they are ready to hound people for years.

The nation’s five publicly traded debt buyers last year paid $835 million to acquire $20 billion in old debts. That’s 4.2 cents on the dollar. Debt buyers can lose money if they acquire a particularly bad portfolio. But as a whole, the industry has been consistently profitable over the last decade, with some firms enjoying double-digit profit margins even as the economy soured.

One of the worst abuses in the industry involved a dead woman who seemingly pursued debtors from the grave.

The signature of Martha Kunkle of Texas appeared on thousands of sworn affidavits prepared over the last five years attesting to credit card debts in many states.

Kunkle died in 1995. For reasons that remain unclear, workers at a bank kept signing her name on debt-verification documents furnished to 30 debt buyers nationwide.

Last year, Portfolio Recovery Associates Inc. of Virginia and CACV of Colorado, two of the nation’s largest debt buyers, agreed to pay more than $1 million in damages in a class-action lawsuit representing about 30,000 people whose case documents allegedly contained the forgery. The two firms denied wrongdoing.

The Kunkle case wasn’t the only one to bite the industry.

In an Ohio case, a federal judge found that a Midland Funding employee had signed debt-verification documents at random.

Under questioning, Midland employee Ivan Jimenez admitted he signed up to 400 affidavits a day, asserting “personal knowledge” about each debt case, though he knew nothing about them. Midland, a unit of one of the nation’s largest debt buyers, Encore Capital Management of San Diego, said any missteps were unintentional.

U.S. District Judge David Katz rejected Midland’s explanation. The judge ruled in August that the firm’s sworn assertions of personal knowledge were “clearly false statements” for which Midland “offered absolutely no legitimate explanation.” He ordered the company to cease the practice.

Sworn affidavits often are the sole evidence courts use to validate a debt, the step that is necessary for a debt buyer to get a court order to seize money from someone’s bank account or paycheck.

Krystyna Bartulska, a housekeeping manager at the Hilton Minneapolis hotel, said she sent a letter to Minnesota Atty. Gen. Lori Swanson’s office in May after a New York debt buyer, Erin Capital Management, began garnishing her paycheck for a 10-year-old debt. Bartulska said her ex-husband paid the debt in full in 2004, and she sent a copy of the canceled check to Swanson’s office.

Three weeks later, the attorney general’s office sent a letter saying it could not help. By then, Bartulska had been slapped with a default judgment. She contacted the state Commerce Department, which regulates traditional collectors but not debt buyers. She got no response.

“I’ve got no one else to complain to,” she said.

Serres and Howatt write for the Star Tribune/McClatchy.