Consumer Law In the News

Not All Debt Collectors Are Created Equal

In this column for the Washington Post, Michelle Singletary attempts to defend her previous advice to a reader to pay the entirety of an old debt although the purchaser of that account offered to settle for about $10,000 less than the full amount. In defending her advice, she had this to say:

[T]his is more about our collective feelings about the companies charged with collecting debt. Let’s say you’re buying a home and you find out that the seller paid an incredibly low price for it. Would you argue that the homeowner shouldn’t get the fair-market asking price because she paid so little for the home? This same principle applies to legitimate and legal debt collection efforts. It is none of your business what a debt purchaser paid for your debt. And it certainly is none of your business what commission a debt collector is getting to collect on money you clearly and morally owe.

With all due respect to Ms. Singletary, that’s hogwash. And here’s why: When the debt is purchased from the original creditor (or subsequent purchasers), the nature of the debt changes. To repay the entire amount when the repurchaser offers lower terms is akin to allowing that repurchaser an unbargained-for profit - unbargained for by the debtor. And it is the debtor’s obligation, after all, with which this interesting moral quandary is concerned. How much more ethical is it to pay money unnecessarily to a company that essentially profits off the financial difficulties of the middle and lower class consumers of the world?

When the repurchaser of an obligation enters into negotiations with an account holder to repay the debt, the consumer is just as entitled to rely on the good faith of those negotiations as the repurchaser is. Attitudes such as those reflected in Singletary’s comments - that as between the consumer and that amorphous entity known as “corporate America” it’s the consumer who should pay - completely miss the mark and are just plain wrong-headed, in my opinion.

That said, Ms. Singletary’s column does explain the differences between debt collectors, a distinction that too many consumers aren’t aware of: There are two types of debt collectors, those who work on commission and get a percentage of the debt they collect, and those who purchase the debt at a discount. Debt purchasers contract to buy debt from companies, usually for pennies on the dollar. It is true that a creditor who sells a portfolio of past-due accounts relinquishes all right, title and interest to the accounts once the sale of the debt is closed.

It might surprise some consumers to learn that their old debts are being traded on the market just like stocks and bonds. What happened to the original creditor? It usually sells the debt for something less - a lot less - than the face amount. This allows the creditor to recoup a portion of the original debt - but it also gets to write off whatever it doesn’t recover from its tax obligation, don’t forget - and creates, essentially, a tradable commodity (the account itself). How long can this go on? Theoretically, forever, but of course there comes a point where the commodity’s cost becomes unprofitable when compared against the likelihood of collection. And the purchaser’s profit? It comes from convincing the consumer to pay more than the purchaser paid. And remember - that purchaser does this for all the accounts it purchases.

So, as between that purchaser, making a profit off of consumers’ financial problems, and the consumer with the financial difficulties, Ms. Singletary would give the advantage to the corporate purchaser. That’s not the way I see it - and that’s not the way the law sees it, either. A consumer has every right to negotiate in good faith with one of these debt repurchasers. (We won’t even get into the bad faith repurchasers, which are unfortunately all too common - that’s a whole other post.)

© 2006 SC Bankruptcy & Consumer Law Blog.