Things to think about when dealing with debt collectors

If you're preparing to buy a home, clean up your credit report, or if you're dealing with debt collectors, you may run into some information regarding the Debt Validation Letter. This information generally entails sending a debt validation request on your "valid" debts prior to communicating with the debt collector who is attempting to collect from you.

It is very important that you understand the potential reactions that are created when sending a debt validation letter on "valid" debts.

If you feel your debt isn't valid, and this information doesn't apply to you, then you should send a Debt Validation Letter.

However, you may want to read this article so you may educate yourself for the future.

If you're debating sending a validation letter on a valid, small balance debt (generally $1,000 or less, aside from payday loans), the risks I outline in this article are minimal. However, the psychology pertaining to the negotiation aspects is the same.

I recently spent a little over 7 hours watching the videos produced by the FTC covering their recent debt collection workshop that took place on June 6th, 2013. The workshop participants included representatives of the FTC, CFPB, state regulators, consumer protection attorneys, junk debt buyers, and original creditors.

There was a lot of information that was shared in these videos. Information that can benefit our society when it comes to understanding the debt collection process and how it relates to us.

I have included some of the highlights (short clips) of these videos that pertain to debt validation in this article. I hope you find them to be informative and relevant.

I also share my opinions, when it comes to interpreting this information, from both a debt settlement and debt collection perspective. In an effort to help you better understand the risks of requesting validation on a valid debt.

Debt Validation Letter - What happens when I send one?

The common practice when an account is disputed is to validate it. There could be a 90/10, a 50/50, or a 20/80 chance that they will do so. The probability of validation is generally dependent on your perceived ability to pay, the creditor, and the age of the debt.

In the above clip, Heather Allen, an Attorney who works for the FTC, in the Division of Financial Practices, explains that per the FTC's report, debt buyers verify disputes about 50% of the time.

The full video can be viewed here: Length 1:35:35

Source: United States Federal Trade Commission, ftc.gov

The report states: "The information submitted in the study further provides insight into debt buyers’ verification of debts that consumers have disputed. As shown in Table 14, the Commission’s analysis of 713,308 disputed debts in 1,853 portfolios revealed that debt buyers reported that they verified 51.3% of the debts that consumers had disputed. In addition, debt buyers reported that they were more likely to verify debts that they had obtained from the original creditor (55.7%) than debts they had acquired from other debt buyers (35.9%). Regression analysis, presented in Table 15, indicates that debt buyers were significantly less likely to report verification of disputed medical, telecommunications, and utility debt, as compared to verification of credit card debt. Debt buyers also were significantly less likely to verify debt that was more than six years old, as compared to debt less than three years old."

Source: The Structure and Practices of the Debt Buying Industry by the Federal Trade Commission in January 2013 - Page 40

Based on my experience, the lack of response is generally related to one of two things.

One, if they feel that you are uncollectable, they may not find it personally beneficial to bother with validating the account.

The characteristics that define the most "collectable" accounts to a junk debt buyer or collection agency are accounts where they have confirmed any of the following: your place of employment, open checking or savings account, home ownership, paid or settled charge-offs on credit reports, and high credit and collection scores.

And two, it is possible that they may not be able to validate it.

As Heather Allen pointed out in the video, the older your debt is, and the more it has changed hands, the less likely that they will do so.

If you are debating requesting validation on a credit card debt, make sure to note that the FTC report did state: "debt buyers were significantly less likely to report verification of disputed medical, telecommunications, and utility debt, as compared to verification of credit card debt."

There is no time limit to provide the validation.

The time for acquisition generally varies as well. Based on my experience, its range can be from anywhere from a few days to possibly as long as 6 months, and sometimes longer.

Which leads me to another consideration you should make: there is no time limit on how long a collection agency or junk debt buyer has to provide you with debt validation.

The collection agency or junk debt buyer can respond to a validation request years later, aside from a couple states that have specific laws for this. So if you're thinking that if you dispute the account and they fail to validate it within 30 days, that, that will be the end of it, you're mistaken.

While it is true that they can't attempt to collect from you previous to providing the validation after the validation has been requested within the first 30 days, including credit reporting, they can resume their collection efforts after they do so.

So if sending a debt validation letter is part of your strategy to clean up your credit report, please know that it is possible that your credit report could be negatively impacted in the future if the account remains unresolved and is validated in the future, provided it's still within the 7-year reporting period.

So if you're looking for a long-term solution to your situation that doesn't leave your credit vulnerable to future negativity: debt validation doesn't align with your goal.

Why you should think twice before disputing a valid debt...

I run into it all the time and you may too. Almost every website out there recommends sending a debt validation letter on a valid debt. I believe these people are trying to help you. But, I also believe that they may not be aware of the potential reactions that may be created when sending a debt validation letter on a valid debt. Unless they come from the debt collection industry, they would have no way of knowing how debt collectors think and react to these letters.

Generally, the advice on sending a debt validation letter on a valid debt is premised on making sure that the collection entity who is attempting to collect from you is legitimate. There are ways to accomplish this without exposing yourself to the risks that are associated with formally requesting validation on a valid debt. I explain them in detail at the end of this article.

Now, on to why you should think twice before requesting validation on a "valid" debt.

First, it singles you out...

Most collection agencies and junk debt buyers service tens of thousands to hundreds of thousands of accounts at any given time.

In the above clip, Heather Allen explains that consumers dispute 3.2% of accounts that are being collected by junk debt buyers.

The full video can be viewed here: Length 1:35:35

Source: United States Federal Trade Commission, ftc.gov

Sending a Debt Validation Letter draws attention to your account.

This next piece of information is going to shock you. Most people assume that junk debt buyers and collection agencies collect a high percentage of the accounts that they service.

Based on my experience when I was in the collection industry, and by information recently reported by the CFPB and the FTC, approximately 80% of all accounts that go into collections are never paid. You read that right, 4 out of 5 accounts go unresolved.

The reality is that junk debt buyers and collection agencies collect a very low percentage of the accounts that they service. In fact, just to put the 80% figure into perspective: it takes a full 7 years to collect the 20%. Which means, on a monthly basis, debt collectors only collect between less than one percent to a few percent of the debt that they are servicing. Most of the 20% that is collected is collected within the first 12 months of the 7-year cycle.

When you consider these dynamics, I personally believe, if you're in a position to where you can't afford to pay anything, that your best protection is to mingle with the tens of thousands to hundreds of thousands of accounts that the collection agency or junk debt buyer is servicing, and to maintain a defensive rather than offensive position.

As you continue to read this article, you will learn that your chances of ever needing to "fight" are quite slim if you don't put yourself in an adversarial situation to begin with.

Phone calls and letters are standard operating procedure. They're annoying, they cause stress, but... they're a lot better than a lawsuit. The good news is, thanks to technology, there are ways to manage the calls to reduce the stress and annoyance that you're experiencing, while maintaining the protection that mingling with the 96.8% of people who don't send a debt validation letter affords you.

My point is that when you are dealing with debt collectors, letters and phone calls are not what you need to "formally" protect yourself from. It's lawsuits that you want to be ultimately concerned about. So if you're in a situation to where you are trying to buy time to round up the money to resolve the debt, the last thing you want to do is aid them in filtering through your account in a more expedited fashion than they would have normally.

In the above clip, Brandon Black, former CEO of Encore Capital aka Midland Credit Management (one of the largest debt buyers in the country), explains that 8 out of 10 charge-offs that go into collections never pay.

The full video can be viewed here: Length 2:14:23

Source: United States Federal Trade Commission, ftc.gov

This figure is consistent with the entire debt collection industry. Read it for yourself from the Consumer Financial Protection Bureau.

On the bottom of page 42 it states: "a recent survey found liquidation rates ranging from 12.0 to 28.8 percent depending on the type of debt being collected. ACA International, 2012 Agency Benchmarking Survey, at 21%."

On the bottom of page 43 it states: "The five publicly traded debt buyers’ portfolios appear to yield, on average, 17% of their purchase price five years after purchase."

Psychologically, debt validation letters on valid debts put you at a disadvantage.

Here’s something else you may find shocking: based off of my experience, approximately 40% of collection accounts are verbally communicated with. Meaning that approximately 6 out of 10 consumers who are in collections never answer their phone.

Since approximately 80% of collection accounts never pay, and approximately 60% of the accounts are never verbally communicated with, collectors pay very close attention to accounts that demonstrate consumer concern.

In a lot of circumstances requests for validation are intertwined with major purchases. The consumer requesting the validation may be trying to buy a home or clean up their credit report. Sending a debt validation letter demonstrates that the sender desires to have the item resolved on their credit report. If your goal is to settle the debt – this is the worst possible negotiation position to put yourself in.

If collectors think you’re part of the 20%, and not the 80%, they take an entirely different approach.

If they feel that you’re part of the 80%, they lack confidence in your intent. They roll over and negotiate WAY more easily. Almost to the point of desperation in a lot of situations.

If they feel you are part of the 20%, they possess great confidence and they’ll generally be a lot less negotiable. They think they stand in the way of something you want. They feel they have leverage.

I've been settling debts for consumers for over 17 years now. In fact, I'm the only debt settlement provider in the country that limits my services to consumers who have the ability to settle ALL of their delinquent debts at the same time. I do this by reviewing my client's ability to settle their debts via their assets rather than their future income.

I limit my service because debt settlement isn't successfully reliable if you can't settle your delinquent debts quickly.

The FTC has reported that less than 10% of consumers who hire a traditional debt settlement company settle all of their debts. You read that right: less than 10%! You can reference this number in the first paragraph on the second page in the link.

In 17 years time, I have never, not once, recommended to my clients to send a debt validation letter on a valid debt. My job is to help my clients avoid adversarial situations that may make their situation worse or more expensive to resolve. Sending debt validation letters on valid debts presents that risk. And they also eliminate the psychological advantage that you had previous to formally making your intentions and desires known.

Sending a debt validation letter on a valid debt also potentially arms the debt collector with the means to escalate their collection efforts against you.

When debt buyers or collection agencies are assigned debt, it is generally done by way of an Excel spreadsheet. There is no contract. There are no statements. So they generally don't have the means to validate your debt on hand.

The information generally provided to the collection agency or debt buyer is as follows -

Personal Information

• Name
• Address
• Home phone
• Work phone - sometimes
• Cell phone
• Social Security number
• Date of birth

Account Information

• Creditor
• Balance
• Account number
• Date of last payment - sometimes with the amount
• Interest rate

So it's enough information to communicate and collect from you if you don't have a dispute. But it's not what they need in order to legally pursue you. This system has been in place essentially forever.

Most agreements involving the sale of debt to a junk debt buyer permit the JDB to request documents on 10% of the accounts without additional expense.

UPDATE:

On 8-4-2014, the Office of the Comptroller of the Currency (the main regulator over banks) released new guidelines that require banks to provide, at the time of sale, the following when selling their delinquent debts to junk debt buyers. The guidelines are as follows:

• A copy of the signed contract or other documents that provide evidence of the relevant consumer’s liability for the debt in question.
• Copies of all, or the last 12 (whichever is fewer), account statements.
• All account numbers used by the bank (and, if appropriate, its predecessors) to identify the debt at issue.
• An itemized account of all amounts claimed to be owed in connection with the debt to be sold, including loan principal, interest, and all fees.
• The name of the issuing bank and, if appropriate, the store or brand name.
• The date, source, and amount of the debtor’s last payment and the dates of default and amount owed.
• Information about all unresolved disputes and fraud claims made by the debtor. Information about collection efforts (both internal and third-party efforts, such as by law firms) made through the date of sale.
• The debtor’s name, address, and Social Security number.

Source: Office of the Comptroller of the Currency

In my opinion, this development creates even more reason to not send a debt validation letter on a valid-bank-related debt that has been sold after this guidance was released. As it appears that the junk debt buyers will be able to produce the documentation.

Now back to the original article...

In the above clip, Thomas Lowery, Assistant Attorney General in Maryland, explains that a lot of debt-buyer agreements (previous to 8-4-2014) allow for a small percentage of the documents to be obtained without additional expense.

Brandon Black, explains that his former company only sues 6-8% of the accounts that they purchase.

The full video can be viewed here: Length 2:14:23

Source: United States Federal Trade Commission, ftc.gov

In the above clip, Brandon Black explains why they are less negotiable when they pursue litigation.

The full video can be viewed here: Length 2:14:23

Source: United States Federal Trade Commission, ftc.gov

The JDB is very careful about what they request.

Outside of validating a disputed debt, junk debt buyers generally focus on acquiring the documentation for the most "collectable" accounts, for the purpose of pursuing litigation.

This isn't the case for all debts...

This is mainly true for debts with large banks.

Apartment leases, commercial, credit union, and bad check debt often differ from this normal protocol on a fairly consistent basis. It is fairly common for the "Media" (industry term for contract, credit app, statements, or affidavit) to either be included or readily available for these classes of accounts.

Interestingly, there appears to be a correlation with the percentage of accounts that are sued and the percentage of accounts that junk debt buyers acquired the Media for.

In the clip above, Brandon Black said that his former company sues approximately 6-8% of the accounts that they purchase. That range is consistent with my experience when I worked for Collect America (another large debt purchaser).

When you compare this information to the documentation that was recently released by the FTC: pertaining to their findings from their investigation of the Debt Buying industry (see the chart below), you will notice that debt buyers obtain Media for 6-8% of the accounts that they purchase.

Source: The Structure and Practices of the Debt Buying Industry by the Federal Trade Commission in January 2013 - Page T-15

When you consider junk debt buyers need these documents to successfully obtain a judgment against you (if you fight it), it is risky to ask them to get them, previous to being sued, when you truly owe the account.

Especially when you consider that a fair amount of junk debt buyers file for litigation when they don't possess the documents, in hope that you will ignore the suit so they will obtain a default judgment. Watch the clip below to see some discussion on that.

It is reported by various outlets that approximately 90% of all judgments related to debt collection are won by default.

In the above clip, Thomas Lowery, Peter Holland: a Consumer Protection Attorney with the University of Maryland, and Brandon Black discuss default judgments and the quality of of the documentation that is commonly produced.

The full video can be viewed here: Length 2:14:23

Source: United States Federal Trade Commission, ftc.gov

In my opinion, requesting validation on a valid debt not only increases the risk for a lawsuit but it also potentially prepares them for it too.

My logic, which is based on a combined 20 years of experience on both sides of the fence (debt collection and debt settlement), is why increase your risk of suit by requesting validation on a valid debt when you have a 6-8% chance of being legally pursued if you don't invite them to get the documents?

And furthermore, why prepare them for the suit, by asking them to get the documents they need to prove their case in advance of them taking any legal action?

You effectively reduce your chances of successfully defending the lawsuit when you do so. If you haven't watched the above clip, please do. It will help you better understand this point.

Clearly, the most opportune time to fight is in the event that you are sued. And if that happens, call an attorney and ask them for help with filing an answer.

Filing an answer will prevent debt buyers and collection attorneys from winning by default. It will also put them in a position to where they will have to prove their case against you.

If you are looking for resolution, your more safe and reliable alternative...

Dealing with debt collectors is like a game of chess. It is vital that you debate their potential reactions to your actions.

When you dispute a "valid" debt, you are risking arming your debt collectors with the information they need to get nasty, you are formally identifying yourself as someone who desires resolution (a major no-no when you're attempting to negotiate), and you are putting yourself in an adversarial situation with the debt collector who is attempting to collect from you. Thus inhibiting the potential cooperation that you may receive when it comes to working out a settlement or payment arrangement.

Unfortunately, most of the credit and debt advice that you encounter on the Internet encourages you to avoid your debt collectors and to take an offensive/adversarial approach. This is just plain bad advice.

Your best possible deal will be available via conversation with a debt collector. And working out a deal with a debt collector is incredibly similar to working out a deal with a used car salesperson.

When you negotiate verbally, you put yourself in a position to immediately shoot down any offers that are made by the debt collector, which, in turn, influences the debt collector to offer something better.

If you can emotionally place yourself back in that moment when you previously dealt with a used car salesperson, you will probably recall how they wanted to "close" your deal right then and there. That's exactly how debt collectors operate.

And as you may have experienced in the past with your used car salesperson, one of the debt collector's tactics to "close" you, is to arrive to an offer that you can't deny.

Most debt collectors have real-time access to decision makers that enable them to negotiate better deals immediately. Debt collectors work in a very fast-paced environment. It is to your benefit to take advantage of their environment and processes.

If you are interested in resolving the delinquencies on your credit report, it is very wise to resolve your "valid" accounts by engaging your debt collector verbally to work out an affordable arrangement and to get everything in writing prior to making payment.

If you would like help with doing so, please feel free to contact me. I'm a small one-man company, so you will be working directly with me. I charge no upfront fees and my fee is based on a small percentage of the money that I save you.

What if I just want to make sure the collection agency or debt buyer is legitimate?

Your goal is to confirm their involvement without formally drawing attention to yourself.

If you suspect that it COULD be a debt you owe, but don't recognize the name or you're uneasy about the third-party collection agency and you would like to confirm their involvement, it is in your best interest to inquire on the chain of title.

This can be done verbally by calling the original creditor and confirming the collection agency or debt buyers' involvement.

If you're unclear on who the original creditor is, ask the debt collector for their clients' contact information. Then call the collection agencies' client and inquire on who the original creditor was. Once you're provided that information, call the original creditor to make your inquiry.

What if the accounts have exceeded the statute of limitations?

If your accounts have exceeded their statute of limitations and you have no interest or ability to resolve them, just send a cease and desist letter.
I don't see much of a point to sending a debt validation letter in this scenario. If anything, a debt validation letter could be counterproductive in this situation since it could lead you to a communication that could possibly renew the statute of limitations.

In some states acknowledging the debt will restart your clock. Please see my article about acknowledgement of debt and the statute of limitations for a list of links to the specific state laws regarding this.

If your accounts have exceeded the statute of limitations and you're trying to clean up your credit report, a debt validation letter may provide you some value in attempting to achieve your goal if the collection agency has possessed the account for less than 30-35 days.

The reason for the 30-35 day caveat has to do with the credit reporting requirements after the 30-day validation period expires. If the entity that is reporting the collection to your credit report has had the account for beyond that amount of time, they are only required to report the account as "disputed" rather than remove the item from your credit report.

If you're in this situation, you may want to look into disputing the accounts that you question directly through the credit bureaus.

If your valid accounts have not expired from the statute of limitations, I personally wouldn't send a debt validation letter until they do as you're still exposed to the possible dangers that I outline in this article. In my opinion, it is not a risk worth taking.

If you are debating settling your debts, there are a fair amount of moving parts. Please refer to my 4-part series about how debt settlement really works to learn more.

If you are thinking about talking to your debt collectors, please see my article on how to talk to debt collectors prior to doing so. It will provide you with additional insight on how to approach your situation and what information they do and don't have access to.

If you are thinking about presenting a settlement offer in writing, please see my article on debt settlement offer letters.

I hope this information pertaining to a debt validation letter helps you avoid putting a big bull's-eye on your "valid" collection accounts. Please feel free to contact me with any questions.