Zombie Debt


Under the backdrop of the passage of the new credit card legislation and President Obama's desire to create a Federal Consumer Protection Agency, a small spotlight shown on one of the most profitable sub-industries within the credit card industry - that being what industry people call " Zombie" debt collectors. Just three weeks ago, New York State Attorney General Andrew M. Cuomo's office shut down perhaps the most abusive debt collection operation in the country. "This case is one of the more egregious cases we have found," said Cuomo. " Debt-collection companies have to operate legally because consumers also have rights." "Debt buyers or repurchasers" as they are known, buy old and uncollected debt, which has now become popularly referred to as "Zombie" debt. The Zombie moniker comes from the fact that most of this debt has either been uncollected beyond the state's statute of limitations or has either previously been discharged in bankruptcy or actually paid off as part of a prior settlement by the so-called debtor.

The industry arose during the 1980's as an unintended side effect from the Savings and Loan crisis when the government auctioned off the failed S&L's receivables. Since its inception, there has been unprecedented growth.. The larger companies such as Sherman Financial Group, Unifund and Asset Acceptance Capital Group each have glossy websites marketed to businesses, often with promises that they can collect and deliver . And deliver they can. In 2006, these three companies reported revenues of almost two billions dollars. Like the "zombies" glorified in books and movies, the once-dead debt comes alive again upon purchase for pennies on the dollar, thus making this a very simple risk/benefit analysis for these industry executives. Not only do these companies often try and successfully collect on debt for which they couldn't otherwise sue, but they are notorious for engaging in some of the most violative behavior against consumer rights. Unfortunately, the Fair Debt Collection Practices Act ("FDCPA") provides only a minimal deterrent to these abhorrent actions. As to be expected, the lack of specific regulation of the Zombie debt collectors' practices has spawned several scam companies who operate in much the same manner as the big Zombie companies but have taken their practices to an even lower level.

Attorney General Cuomo's recent actions in obtaining a court order to shut down the operation of Tobias Boyland was just one small step in stopping abuses which have brought already distraught consumers to their knees. According to a lawsuit filed by Mr.Cuomo's office, Boyland, operated out of Buffalo, New York, which is widely recognized as the collection capital of the United States, due to its concentration of collection agencies and attendant employment opportunities. Thanks mainly to the increased internet accessibility to information, Boyland's company would use lists of people whose debts were successfully discharged in bankruptcy, many of which were at least ten years old or more, and attempt to collect these no longer valid debts. According to Mr. Cuomo, among the collection methods used by Boyland's gang was to read from a script and call their unsuspecting target, demand payment for nonexistent debt, for expired debts, or substantially inflated amounts on actual debt. Boyland's people would further inform their intended victim that the local police were holding a warrant for their arrest. Many of these people, who either had no debt or had long ago repaired their credit, would panic at the thought of being arrested, and would often send the money they demanded. I had one such client, who, although in a state of panic, had the sense to call me. I made several attempts to trace the origin of the phone number they had given my client. My efforts led me to one of Boyland's people in Baltimore, who ultimately gave me a contact address in Atlanta in which to send my client's money. As it turned out, this company, was using a type of software, Voice Over Internet Protocol (VOIP) that routes their phone number through the internet, in order to hide the origin of the true phone number and the whereabouts of the company. As I began comparing notes with fellow members of the National Association of Consumer Advocates (NACA), it became clear that the source of this activity was located in Buffalo and was run by Boyland, who, proudly advertises his nickname, "Bags O Money" on a billboard in Buffalo. Mr.Boyland, who, formerly served time for an armed robbery conviction, has been notorious in the debt collection industry for a long time both for his practices and his criminal past.

Much to Attorney General Cuomo's credit, followed up the Boyland case by suing thirty five law firms and two debt collectors in New York State in an attempt to have the Court throw out an estimated 100,000 default judgments against New York consumers. According to the suit, the law firms and debt collectors used false affidavits to obtain these judgments over a nineteen month period. Many of the defendants did not know anything about the judgments until they learned that their wages were garnished or their bank accounts frozen.

Although, these are extreme examples of how debt collection practices can go awry, they do serve to illustrate how easy it is to engage in the type of abusive practices which the FDCPA was designed to prevent. The problem with the FDCPA is that the penalties were legislated in 1978 and have not changed since. Although, the attorney's fees are a mandatory award and the aggrieved party can sue for actual damages, meaning out of pocket losses and emotional distress, the statutory penalty is still as it was then a mere $1,000.00.

Considering how much less the dollar is now worth compared to 1978 when the statute was written and the advent of the profitable, Zombie debt collection industry this statutory penalty is hardly a deterrent. Moreover, the penalties are not imposed per violation, but per each consumer case. Therefore, in many cases, where the collector has violated the FDCPA by making phone calls to one's neighbors and employers or umpteen harassing and abusive calls to you and your family, the statutory penalty is still only $1,000.00.

Equally egregious are some of the practices engaged in by both the Zombie debt collectors and their designated law firms. Many of the same firms pop up for each debt collection case. For instance, a cursory search of either the name of the one of debt collection companies or zombie debt buyers on your county court docket will generally show that only a handful of law firms are representing these entities. Interestingly, the dockets almost always also reveal another disturbing fact - that most of these lawsuits go unanswered and default judgments against the debtors are usually taken. Moreover, a good amount of these lawsuits are filed beyond the statute of limitations. However, with nobody defending them or unable to afford to defend these suits, judgments are taken without a second thought to the rights of the consumer.

In the rare instance where a debtor actually opts to defend the suit, the debt collection law firms, especially, those representing zombie debt collectors, almost always fail to provide the written contract between original creditor and debtor as well as the assignment agreement giving the debt collector standing to sue. This exposes both the attorney and the debt collector to litigation under the FDCPA Section 1692a(6) which defines both as debt collectors. Further, pursuant to the decision in Heintz v. Jenkins, 514 U.S. 291 (1995) , the lawsuit is considered a communication under the FDCPA and, unlike most other forms of litigation, the debt collection attorney is not immune from being sued for deceptive practices found in the lawsuit. Adding unauthorized amounts onto the debt such as attorney's fees without legal entitlement (e.g. not being able to prove that the original contract authorized attorney's fees) is a violation of FDCPA Section Sections 1692f and 1692e which profibits using "false representation or deceptive means to collect any debt".

Although some states, such as Pennsylvania, have criminal statutes forbidding debt collectors from collecting debts absent providing the original agreement and any assignment thereof, these statutes are rarely enforced so the abuses continue with little incentive to do otherwise.

According to the Federal Trade Commission's 2009 Annual Report, FTC reported that, in 2008, it received 78,838 FDCPA complaints directly from consumers. This represented 18.9% of all complaints received. In 2008, the 32.5% of complaints to the FTC about debt collectors, which represented the most amount of these type of complaints, concerned attempts to collect debts which were not owed or an amount larger than actual debts, both hallmarks of Zombie debts.

The FTC has concluded that "the debt collection legal system needs to be reformed and modernized to reflect changes in consumer debt, the debt collection industry, and technology."

In light of its conclusions, The FTA has made several recommendations ranging from mandating debt collectors to transmit better information to consumers about their rights to modernizing debt collection laws minimizing the consumer costs when being contacted via cell phones. The FTC also recommends that it be given the authority to create regulations to employ the FDCPA prior to congressional action.

The FTC recognizes that collection agencies, collection lawyers, and debt buyers need better information in order to prevent collections of the wrong people or for the wrong amounts.

More to the point, the FTC report raises concerns over " certain debt collection litigation and arbitration practices" an area that has been particularly ripe for consumer rights violations. Although the FTC expressly recognized that aggressive law enforcement is needed to deter collection abuses and that the FTC will step up its efforts in doing so, it also emphasized that the consumer, through their filing of lawsuits should be the "main means of promoting industry compliance."

But these, too, do not go far enough. In order to effectively stop these abuses and balance the rights of the collectors and consumers, legislation and enforcement is needed as follows:

  1. Penalties should be imposed per each violation and not per case;
  1. Penalties should be increased to $25,000.00 per violation.
  2. The original, executed contract as well as the assignment documents should be produced as part of the initial communication between the collector and consumer.
  3. Call for stronger state legislation such as mandatory attorney's fees'
  1. Passing of federal statutes criminalizing practices prohibited by the FDCPA
  1. Stronger enforcement by the state of both civil and criminal statutes.
  2. Expand the Statute of Limitations for lawsuits against debt collectors under the FDCPA from one year to four years.

By legislating the aforesaid recommended changes to the current FDCPA statute, not only will consumers be protected, but legitimate collection claims can still be pursued and the zombie debts will remain dead and gone which is where they belong.

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