Do any rules govern how much collection agencies can inflate debt?
October 14, 2014 6:06 AM   Subscribe

I've noticed that when collection agencies buy debt, they often, though not always, significantly inflate the original debt. Do any laws govern how much they can do so? If not, how is it possible to be liable for an amount that someone has essentially made up?

I have noticed that it can be inflated by as much as 50% as "the cost of the collection itself." But reading some articles about collections, they seem to buy them for pennies on the dollar anyway. How does this work?
posted by corb to Work & Money (4 answers total) 5 users marked this as a favorite
FFEL loans are subject to this federal regulation (34 C.F.R. ยง 682.401(b)(27)(i).19):

19. "(27) Collection charges and late fees on defaulted FFEL loans being consolidated. (i) A guaranty agency may add collection costs in an amount not to exceed 18.5 percent of the outstanding principal and interest to a defaulted FFEL Program loan that is included in a Federal Consolidation loan."

West Virginia has a "debt pooling" statute that caps monthly service fees at 7 percent of the consumer's monthly payment.
posted by rada at 6:37 AM on October 14, 2014

Best answer: There was a This American Life episode a few weeks back. It didn't address inflating debts per se, but as for specific question How is it possible to be liable for an amount that someone has essentially made up?, well, if you get before a judge, and say "Show me the evidence that this is the amount I owe", there's a good chance your case could get dropped:

The Georgia Legal Services lawyer told Jake that if you're standing before a judge and you say, OK, I don't recognize this amount that you say I owe, and I want to see some documentation, I want to see account statements or whatever, because I have no way to know with certainty that this debt is really mine, the judge will usually turn to the other side and ask for the evidence. And in all likelihood, they'll have no documentation and they'll drop the case.

The way this business works, Jake says, when credit card companies sell these IOUs to debt collection companies, they usually don't give them any documentation. Usually they just give them a spreadsheet with a long list of people who owe money on their credit cards and their addresses and the last payment and how much they owe, and not a whole lot more than that.

posted by damayanti at 8:10 AM on October 14, 2014 [2 favorites]

I am not a lawyer and this is not legal advice and whatever. But, generally: The fact that you only bought a $10k debt for $100, say--I have no idea if this is the right proportion, but whatever--does not mean that it's not still a $10k debt. The person initially incurred a $10k debt, you've purchased the right to enforce a $10k debt. But if they originally incurred only a $5k debt and $5k of that is late fees, my practical experience seeing the local courts working with these things is that if you protest at all, you can usually get a huge chunk of it knocked down because they can't usually prove where you agreed to those fees. (My experience was that they did often have some documentation, but it was often, for example, a single statement from before all the late fees were applied.) Heavily depends on the situation, etc.

The credit cards were the least likely to have documentation, at the time; the payday loan places showed up with stacks of paperwork half an inch thick with the entire signed contract and records of every payment the person ever made. Since that was a couple local chains, I have no idea if that is actually a general truth, it was just an interesting observation.
posted by Sequence at 8:35 AM on October 14, 2014 [2 favorites]

Best answer: At the Federal Level, there is the Fair Debt Collection Practice Act, which is amending the Consumer Credit Protection Act.

Your state should have some consumer debt info regulations and they should be findable on the attorney general's website.
posted by soelo at 8:11 AM on October 17, 2014

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