People who make money collecting debts in Wisconsin are about to get a big favor from their government. A law sitting on Gov. Scott Walker’s (R) desk this week would make it much easier and much less risky for debt collectors to go after consumers in court, and much harder to prove that any given collection effort is bogus.
The same idea was defeated in 2014 after state officials testified it would harm consumers. The state didn’t raise those same warnings in a September hearing on the nearly-identical 2015 version of the bill, however. It passed both Republican-dominated chambers of the state legislature on party-line votes.
The bill dramatically lowers the standard of proof that collectors have to meet in court in order to bring the justice system to bear on the person they claim owes them money. It also makes it harder for people to recover the cost of hiring lawyers even when they win in collections court, thus encouraging collectors to take matters to court almost risk-free.
Winning a court judgment in a debt case frees collectors to use their most invasive tools. Collectors can start garnishing wages and seeking liens on private property once a judge decides they’ve proven their case.
Wisconsin’s consumer laws currently require collectors to lay out how they arrived at the dollar figure they’re demanding from a debtor. The bill on Walker’s desk, however, would dramatically ease those “pleading requirements,” allowing the collector to simply assert an amount owed without providing detailed substantiation.
Eliminating the requirement to substantiate a debt claim will erase one of the best opportunities to catch collections errors. The collector’s explanation of charges was key to proving that a New Jersey man was being defrauded in one recent case, for example.
The bill’s supporters say they want to untangle conflicting interpretations of the existing law’s requirements for debt lawsuits. But their measure would also explicitly aid the collections industry’s self-described bottom-feeders: Collectors that buy debts that the original creditor is giving up on for pennies on the dollar and then hound debtors for payment. The bill changes Wisconsin’s collections lawsuit rules so that any “merchant” can use them, where currently only the actual creditor who is owed can seek a judge’s help.
Supporters of making things easier for collectors argue that these third-party debt buyers are essential to the broader economy. If hospitals, retailers, and private lenders couldn’t recover some fraction of their losses by selling defaulted consumer debts to collectors on the back end, the thinking goes, then they would have to tighten up their own billing practices and extend less credit to customers on the front end.
But it’s not as though the secondary debt market is collapsing under the expense of proving someone owes what you say they do. Third-party debt collectors had net revenues of about $45 billion in 2013, according to Ernst & Young research for the Association of Credit and Collection Professionals, up 14 percent from 2004.
The people collectors make money from aren’t doing quite so well. As a debt gets sold and re-sold down the chain of secondary market collectors, the information associated with the account gets shakier and shakier. A spreadsheet with inaccurate contact information can lead to a debtor never showing up in court because she never received notice of the lawsuit, leading to a default judgment and garnished wages. A collections network recently paid $59 million to settle a lawsuit over such failures to notify debtors. Errors become more likely as the collections work moves farther and farther away from the original transaction.
So do flat-out abuses. The secondary debt market sometimes operates like a free-for-all, where a mix of large, sophisticated collections shops and amateurish one-man outfits hustle, cajole, and intimidate their way toward cash from people they have never met — and primarily people of color. Debt portfolios get sold off as spreadsheets of names, addresses, and phone numbers, and the spreadsheets are not linked to any master database that updates entries as circumstances change. Sometimes multiple collectors will end up working the same case without ever talking to one another, potentially leading an uncareful debtor to pay twice.
Even collections cases that don’t escalate to full-blown horror stories for consumers are something of a charade. The entire premise of the secondary market is that it puts a new dollar value on old debts. The collector who says you owe $13,000 in old credit card debt probably paid a few hundred dollars to acquire the right to collect it.
Once the original creditor gives up on recouping the debt, its real value drops dramatically. Consumer debts are generally only worth about four cents on the dollar, according to a 2013 Federal Trade Commission study.
Flipping the collections industry’s profit-seeking habits around unlocks the economic reality underlying consumer debts, as activists from the Occupy movement have illustrated in recent years. A crowdfunded program called Rolling Jubilee was able to cancel $15 million in on-paper medical debts for just $400,000. The same capitalist magic trick allowed The Debt Collective to void about $4 million in student debts for just $100,000, and helped to spark a new wave of radical debt protests.