FTC: Debt collection system is broken

To anyone who has read the stories about consumers harassed, taken to court and even jailed over debts they may not even owe, the latest Federal Trade Commission report on debt collection comes as no surprise.

The system is broken, the FTC concludes, and consumers don't have adequate protection against abuses. "The current situation is untenable," FTC Commissioner Julie Brill wrote.

The National Center for Consumer Law agrees, adding its own report, "The Debt Machine: How the Collection Industry Hounds Consumers and Overwhelms Courts" (.pdf file), to the FTC's report, "Repairing A Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration" (also a .pdf file).

The consumer law center writes:

In pursuit of judgments, creditors and collectors have swamped small claims and other state courts with a torrent of lawsuits. They file mass-produced suits that do not clearly identify the debt involved. They often send notice of lawsuits to old or incorrect addresses. And by inserting forced arbitration clauses in millions of credit card and other consumer loan contracts, collectors and creditors have carved out shortcuts to judgments, and denied many consumers a day in a real court.

The operations of this well-funded and insatiable debt machine long ago outstripped existing consumer protections.

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Both the FTC and the consumer law center advocate an update to the Fair Debt Collection Practices Act, passed in 1977 as a response to abuses of the 1970s. The FTC report was a sequel to a report (.pdf file) the agency released last year, concluding that debt collection laws need updating and modernizing. (Here is an FAQ about consumer rights under the 1977 act.)

The FTC convened roundtables around the nation, involving the debt collection industry, lawyers, judges, consumer advocates, academics and government officials, plus solicited public comments. Based on its research, the agency issued these recommendations:

• States should consider laws to protect consumers in court cases, including making sure they receive notice of lawsuits against them.
• States should require that debt collectors include in their lawsuits such basic information as the name of the original creditor, the date of default, the name of the current owner of the debt, and the total amount being sought, broken down by principal, interest and fees.
• States should make it harder for collectors to sue to collect debts for which the statute of limitations has already expired, plus protect consumers from waiving the statute of limitations without realizing it.
• Federal and state laws should be changed to limit the amount of money that can be frozen in an account in which customers deposit funds that are exempt from being garnished, such as Social Security.

The report also focused on problems with mandatory arbitration, written into many credit card contracts, and the subject of significant controversy in the last year, as explained in this story at CreditCards.com.

The FTC recommended that: consumers be given meaningful choices about arbitration, bias be eliminated, rules be changed to make it more likely that consumers will participate, and awards be required to contain more information about how the case was decided and the award amount was calculated.

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The consumer law center report focused on how debt collectors have nearly taken over the small claims courts in many states, creating a process in which consumers have few protections. Robert Hobbs, NCLC deputy director and co-author of the report, wrote:

The recession has thrown millions of consumers into the jaws of a giant collection machine. Existing laws and regulatory efforts have lagged behind what is needed to effectively monitor powerful, wealthy and ubiquitous collections companies.

A group of nonprofit organizations that provide legal services to low-income residents in New York also recently published a report on problems with how debt collectors use the court system, called "Debt Deception: How Debt Buyers Abuse the Legal System to Prey on Lower-Income New Yorkers" (.pdf file).

The New York Daily News repeated one story from that report, from Claribel Pichardo, 36, of Brooklyn. She said:

I was sued for a debt I didn't even owe. They claimed they delivered court papers to my home, when in fact the address was for a building where I did not reside. I knew I didn't owe the debt, but I almost agreed to make payments because they froze my bank account and I was in a panic.