Private Tax Collection

The New York Times has a story today that Credit Slips readers will want to check out. It catalogs the growing trend of local governments to sell their real estate tax debts to private investors. The reporter, Jack Healy, succinctly states the opposing policy points:

Investors say the arrangement actually benefits everyone. School districts, fire departments and public parks get an infusion of cash. The investors take on a risky but potentially high-yielding investment. And taxpayers do not have to pick up the slack from scofflaw landlords or tax evaders.

Governments, of course, can charge interest and penalties too, and they foreclose on properties for back taxes. But governments charge interest rates that are half what private investors charge — often offering no-interest payment plans — and are also more likely to be concerned about the long-term prospects of neighborhoods.

All good points, but there is nothing that the ivory tower can't make more confusing.

After Notice and a Hearing -- One Out of Two Ain't Bad?

Wow. I missed this one last week. New York Attorney General Andrew Cuomo has brought civil and criminal charges against lawyers and process servers who were abusing the debt collection system. From the New York Times article:

According to a lawsuit filed on Tuesday in New York Supreme Court in Buffalo, lawyers and debt collectors obtained more than 101,000 court orders that were improperly issued, allowing them to seize, on average, $5,474 from each consumer.

The lawsuit asserts that consumers were never properly notified and were not given a chance to defend themselves in court; creditors won default judgments. The total amount of money seized exceeded $500 million, according to the attorney general’s office.

The cornerstones of due process are notice and a hearing. It sounds like these consumers were only getting half of that, and without notice that it is going to occur, the hearing does not do much good. From the press release, it sounds like the problem was with the process servers who are alleged to have knowingly failed to serve process. After serving process, the process server files an affidavit swearing that it was done. A false affidavit is akin to perjury, hence the criminal charges against some participants.

Hat tip to Brian Wolfman and Jeff Sovern over at the Consumer Law & Policy Blog for pointing the way to the story.

Courts as Creditors

I teach my students that the days of the debtor's prison and the workhouse are long past; the only debt you can go to prison for are domestic support obligations.  But it turns out that there's another jailable offense:  failing to pay the court.  The New York Times has a story about Florida's practice of issuing writs of bodily attachment or "blue writs" for failure to appear in court.  The jail time under one of these writs is supposed to be at most 48 hours (plus a $20 fine!), but a study by the Brennan Center for Justice at NYU found that some individuals were imprisoned longer.  Florida's state constitution (like many other state constitutions) specifically forbids imprisonment for debt (excluding fraud), and there's a line of US Supreme Court cases holding that the Equal Protection Clause bars imprisonment solely because someone is unable to pay a debt. 

Technically it is jail time for failure to comply with a court order (much like failure to comply with a domestic support obligation); in that sense it's just plain old civil contempt.  But the wide-scale use of civil contempt to force payment for court fees strikes me as novel.  It's certainly been used before to effectuate things like turnover orders, but there's something very awkward about the courts in the role of creditor.

Mortgage Servicing Problems for Prepayments

With all the problems in the mortgage industry caused by defaults, it's easy to forget that the traditional bugbear of mortgage lenders isn't credit risk, but prepayment risk.  If a lender contracted for a 6% return and the loan is prepaid, there's a chance that the best return the lender can get now is say 4.5%. 

As it turns out, prepayments can cause just as many problems for servicers as defaults.  Recently, one of my relatives laid into me with this story about her problems getting her servicer to correctly credit her prepayments.  The servicer has been crediting them all to interest, not to principal, so the loan balance isn't getting paid down (and the servicer is making more money that way, at the expense of the investors).  What's worse, is that the servicer says it can't correct the problem because some of the prepayments were made before it acquired the servicing rights.  And, the servicer says that if it corrected the problem, it would result in the account being listed as 30-days late and credit reported because the servicer did not make an automatic withdrawal one month because it treated the prepayment as a regular (but partial) payment (even though the total prepayments should put the loan way ahead on its original amortization schedule). 

Put another way, the servicer is saying that they cannot produce an accurate payoff balanceand that if the homeowner demands one it will result in her being credit-reported incorrectly. 

This aggrevating situation illuminates what a mess the mortgage servicing world is in.  For all of the attention justly paid to mortgage servicing problems with defaulted homeowners and servicing fraud in the context of default, my relative's case makes me wonder whether the rot in the servicing industry extends all the way up the tree, to an inability to properly handle transferred servicing rights and an inability to properly handle prepayments. 

And here's the real problem: consumers trust financial institution creditors to be competent and fair.  They trust that balances are right, that APRs are properly applied, that amortization schedules are correct, etc.  Without that trust, the entire system of financial intermediation cannot work.  Financial institutions trade in trust.  Absent that trust, every consumer would have to subject every credit card bill, auto loan bill, mortgage bill, and student loan bill, etc. to a forensic accounting.  That would be astonishingly inefficient.  We shouldn't want consumers to have to be so careful.  It's one thing to expect consumers to look at their bills to make sure that there are no unauthorized line items.  It's another to expect them to run interest and amortization calculations.

For the most part the system works, as it's all highly automated.  But when it doesn't, the power imbalance between the financial institution and the consumer puts the consumer at a serious disadvantage.  We really need a better system for resolving consumer disputes with financial institutions.  I'm not sure what it is, but maybe the trick is to avoid the disputes by making sure the FIs get things right. The least cost avoider of the errors is the financial institution, and we should really have stronger incentives for FIs to get it right. 

The Role of Recourse in Foreclosures

Martin Feldstein has been pushing a mortgage bailout proposal that has been getting some undeserved attention (see here and here, e.g.).  Feldstein gets  (here, and here) how central negative equity is to the economic crisis.  Homeowners with negative equity have a reduced incentive to stay in their home if the mortgage is burdensome.  Negative equity fuels foreclosures, which in turn force down housing prices, setting off a downward spiral. Feldstein is right to focus on negative equity as a key issue for housing market stabilization. The problem is in his solution--it is based on a few erroneous factual premises, all of which could have been discovered with very limited Google searches. 

Operation Repo

TruTV has a reality series called Operation Repo. Basically they follow around a crew of brawny, heavily tattooed auto reposessors (men and women) in the San Fernando valley. Drama and hijinks ensue.

I'm sure they only show the more dramatic repos on TV (and I found the show strangely compelling, especially to see how a lot of the time the repo crew gets tips about auto whereabouts from disaffected family members), but what I was most struck by was how often the repos "breach the peace." People are routinely getting pepper-sprayed or shoved or put into headlocks as they try to stop the repo actions. Occasionally someone pulls a gun on the repo men, and they back off.

My secured credit class spends a tiny bit of time on repos, but the show is a vivid reminder that practice and law (repomen can't breach the peace) are very far removed. I think it's safe to say that the law of repomen is law of the jungle.

Apple Pie, Fireworks, and the Financial Squeeze

It's that patriotic time of the year when we celebrate our shared bond as American residents. It's the season for community celebrations, parades, and ice cream socials. Attending such events gives us a common experience, a shared reference point for what it means to live in America. Apparently, struggling to pay your bills is also part and parcel of being an American. An April survey showed that 52% of households had taken money out of savings, retirement accounts or investments in the last year to pay for necessary living expenses. The number is up from 43% when an earlier survey was conducted in October. 

Other evidence shows that Americans have low confidence in their financial prospects. The Pew Research Center found that for the first time in a half-century of polling, more than half of Americans feel they either haven't moved forward or have fallen backwards in the last five years. The number of those who say they are better off has dropped to a record-low of 41%--and that was in back in late January/early February before the collapse of Bear Stearns, gasoline prices at $4 per gallon, and another preciptious drop in the stock market. Nearly 8 in 10 Americans (79%) say that it is harder for people in the middle class to maintain their standard of living. Such pessissim won't stop the fireworks on the 4th of July but financial pressure is an increasingly common part of middle-class life experience. 

Maxed Out

The luncheon speaker for the conference was James. D. Scurlock, the director and producer of Maxed Out, which airs this month on Showtime. For those of you who haven’t seen the documentary, it’s a scathing, eye-opening depiction of how the financial services industry (most notably, credit card issuers, debt collection agencies) treats ordinary, hardworking Americans and how people are seduced into debt. He expressed his gratitude to the sponsors for inviting him to a conference where he was sure his talk wouldn’t be the most depressing.

San Francisco City Attorney Sues NAF

My semi-favorite debt collector, er, I mean arbitration service, the National Arbitration Forum (NAF), has been sued by the San Francisco city attorney. The San Francisco Chronicle reports the story here. Different contributors have discussed the NAF here on Credit Slips (see here, here, here, and here), noting the high win rate for creditors and describing how the NAF acts almost as if they are a disguised debt collection agency. According to the article, the lawsuit makes very similar allegations against the NAF.

The lawsuit also names Bank of America as a defendant, which makes me wonder if that part of the lawsuit (not the part against the NAF) will be preempted under the Supreme Court's Watters decision from last spring (see here).

Reexamining Non-Judicial Foreclosures

Katie Porter's posts and scholarship about illegal fees tacked on by mortgage servicers to defaulted mortgages raise an interesting question:  why aren't states reconsidering non-judicial foreclosure?  Non-judicial foreclosure is generally faster and cheaper than judicial foreclosure, which is a good thing, at least for the foreclosing lender as it reduces loan losses.  And as Karen Pence has shown, there is a reduced supply of credit in states with judicial foreclosure.  But as the name implies, non-judicial foreclosure lacks court oversight, and this raises the possibilities for abuse.

[UPDATED LINK 3.4.08 at 5:06pm]

A Law Unto Themselves?!

A thank you to one of my students, Scott Wilson, for pointing me toward yesterday's front-page article in the Wall Street Journal about the growing phenomenon of "civil demand" that retailers are using against shoplifters. It was a new topic for me, although I am sure some Credit Slips readers were aware of it already. The article is worth reading.

It's very difficult to get people to see what is wrong with this system. No one could responsibly argue that shoplifters should not be held responsible for their actions and make restitution to their victims. What I see in this article, however, is troubling. It's the same pattern with the broader debt collection system, a system where a few abusive private actors essentially have become a law unto themselves. Their threats against uninformed consumers become shakedowns where the consumers have no choice but to pay.

This is not an indictment of debt collectors generally. Some of my best friends are debt collectors. Hey, I even did a few debt collections myself when I was in practice. The debt collection industry needs to stop its own bad actors before they get more regulation.

Profit Possibilities

One of the hardest things about teaching debtor-creditor law is keeping up with all the market innovations.  Subprime mortgages are in the spotlight, but credit card debt has not subsided. Last quarter credit card grew at a rapid 9.3%. For families looking for a way to get off the debt treadmill without declaring bankruptcy, a new industry has been born:  debt settlement companies.  These businesses promise to negotiate some debt write-down with the creditors.  But the negotiators too often take a customer's money and offer little relief. 

The industry is growing rapidly, but there are no regulations, no industry standards, and no one to turn to for help if the customer gets cheated. Will this become the next path to bankruptcy--a family hit a rough spot, faced a double-digit rise in interest rates, went to a debt consolidator, then ended up in bankruptcy with even more debt and fewer assets?

Creditor Calls Debtor Excrement

Under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692d(2), creditors are prohibited from using "obscene or profane" language in collecting debts.

Would this count?

Or is truth an absolute defense?

(Thanks to students in my bankruptcy class for bringing this article to my attention.)

Mortgage Magic--Recreating Servicing Documents

The latest uproar about mortgage servicing in bankruptcy is an admission by Countrywide that it "recreated" documents related to the servicing of a consumer's home loan. The short story is that Countrywide says a debtor's monthly mortgage payment changed during the Chapter 13 plan and that the debtor didn't make the increased payments. The problem is that the debtor, her attorney, and the trustee say that they were never told about the increase in payments, which is purportedly due to changing escrow requirements. Countrywide gave the debtor letters showing that the amounts changed; those letters were dated 2003, 2004, and 2007. The problem is that those letters were not copies of actual letters from 2003, 2004, and 2007. As Countrywide admitted, it "recreated" these letters as "evidence" of the change in the monthly payment. The judge had a few questions about that practice:

Think Public Benefits are Exempt from Execution? Think Again.

I have been telling my students this for years. Perhaps you have too. 42 U.S.C. § 407(a) says social security and other public benefits are free from the claims of executing creditors, but for many people that is true only on the books, not in real life. Why the disconnect? Because right now, under current law and regulations, banks are under no obligation to check to see if the money in a bank account comes from social security or disability payments before allow a garnishment to go through. This is true even if the only funds in the account are wired there directly from the government and are marked SSI or SSA. In fact, banks say they must comply with any garnishment order, even if the funds are obviously exempt. Of course, they also make a bundle on all the fees that result from this shameless practice.

Section 407(a) is not worth the paper it's printed on because it is very hard for a consumer to undo the garnishment, as I recently learned. My cousin (a 67 year old woman with a disabled adult son, who has been through a horrible marriage and divorce, several minimum wage jobs since she had no work experience, a car breakdown, etc.) had her ATM refused.

The Poop on Foreclosure

A couple bought a house at a foreclosure sale, but when they got inside they learned it was full of live animals, dead animals and animal poop.  The buyers are scrambling to get out of the deal, but, at least from the news report, there are no obvious grounds for reversing the deal.

The story is pretty gross, but it highlights something that lots of people don't realize: A homeowner is entitled to stay in possession of the home until after the foreclosure sale.  No one --not the bank or the potential buyers--have any right to enter the house to see if the room arrangement is pleasing, the plumbing is functional or there isn't poop several inches deep on the floor. 

As the subprime market continues its downward trend, think about the poop.

Stop or My Debt Collector Will Shoot!

From the Oak Forest (IL) Star--The village of Midlothian, Illinois apparently has a full-service police department. If you're a local merchant, the chief of police thinks it's OK if the police help you collect your bills.

The story begins like many we hear in our academic research of talking to people with financial problems. Angela Procter ran up a $460 bill to a brake-and-muffler shop. She made a partial payment of $200, and the shop released her van to her. A later $150 payment brought the balance down to $108. Procter was not working because of a broken ankle, was pregnant with a child on the way, and had just been evicted from her apartment. Her fiancé was a construction worker and unable to find work during the winter months. As Procter was quoted, she appreciated the forbearance of the muffler shop, but she had to prioritize putting food on the table and a roof over the head of her child. Like many people to whom we talk, Procter was attempting to deal with her debt to the muffler shop, paying what she could. What did she get as a reward?

The Debt Divide: Gender

Gender-specific marketing is a mainstay of the ad industry--just think about the Virginia Slims ad. Woman-oriented versions of male products ("vintage rose" Carharrt overalls, pink hammers, etc) or women-only services (gyms, golf schools, etc) are growing in popularity. I recently received an advertisement that used gender specificity to market debt relief. This company, www.debtrelief4women.com, proclaims itself the "woman's choice for debt relief options." Their  homepage features a drawing of a slim, young woman wearing a sporty outfit and make-up. In her hand, is a wad of cash (although a stack of bills might be more realisitic). It seems the company does not itself provide financial consultations, but instead matches women with debt management, consolidation or settlement companies based on information women provide. It's pure marketing ploy; the substantive "help" that women get when using a service is not necessarily tailored to women.

Individuals cope with debt and financial distress in ways that reflect their gender. Fellow Credit Slips contributor Dr. Deborah Thorne examined some of these issues in her dissertation and has a forthcoming work on the topic. A recent Pew Center study showed that women bear responsibility for bill-paying in most households. These behavioral differences along gender lines aren't lost on creditors. A Wall Street Journal Article on debt buyers reported that collectors know that women are more likely to repay than men, incentivizing debt companies to focus their efforts on accounts on which women are the primary debtors. See Suein Hwang, Small Claims, Wall Street Journal (Oct. 25, 2004). Debt Relief 4 Women is just another reminder of Elizabeth Warren's observation that the facial neutrality of commercial law can distract us from the gendered realities of debt and household economics.

Collecting Consumer Debts: Talk to the FTC

In the nearly  year of Credit Slips' existence, posts on debt collection have provoked consistently strong responses and lots of interest. The Federal Trade Commission is all ears if any Credit Slips readers would like to share their perspectives on issues relating to collecting consumer debts. The deadline is June 6th, and comments may be submitted by mail or electronically. Here are the technical details. The public comments to date offer some scary stories about abusive debt collection practices and seem to be submitted by consumers with real-life experience with debt collection. Read them. The FTC clearly is interested in comments from lawyers on the front lines of debt collection, whether their clients are creditors or debtors. For our professor audience, note that FTC says that it also welcomes "original research, surveys, and academic papers regarding consumer debt collection issues" and these papers are due September 7, 2007.

The topics for comment that interest the FTC illustrate a range of trends in debt collection, and hint at the FTC's interest in redirecting its regulatory focus in certain areas. As I read the topics for comment, I repeatedly was struck by pessism about obtaining reliable information on these questions. The sad reality is that there simply is not a substantial body of serious academic research on debt collection. Most empirical research is about bankruptcy, in part because the court process facilitates data collection. Many of the inquiries would require corporate proprietary or industry association data to answer, such as "provide data illustrating trends in the number or percentage of accounts in collection with each of the following: (1) credit issuers; (2) collection agencies; (3) collection law firms; (4) debt buyers; and (5) other identifiable industry sub-groups." On the other hand, an optimist could read the topics for comment as a future research agenda, a list of possible news stories, a manisfesto for legislative action, depending on one's livelihood.

A Twist: Predatory Borrowing!

For reasons not entirely clear to me, I am receiving advertisements for seminars on debt collecting.  An example's here.   Leaving aside my need to "protect creditor assets" from the rapacious pitfalls of the FDCPA and other such scourges, I am particularly intrigued by the branding message to "steer clear of predatory debtors' attorneys".  This is surely a co-option of "predatory lending," which has (finally) worked its way into the policymaking lexicon.   Frank Luntz (sorry, Dr. Frank Luntz) would be so proud!

Paying for the Privilege to Pay

During the lead-up to BAPCPA, consumer advocates complained that the law's new credit counseling requirement was going to require consumers to participate in an industry that had some serious unsavory segments. While many credit counseling agencies are truly consumer-oriented, offering sound, free advice, others have been attacked for pushing debt management plans, which are credit-industry funded programs. The basic idea is that a consumer makes one payment to a DMP, which distributes the money to the person's numerous creditors. Someone recently asked me to look over the deal that an entity that she described as a "credit counselor" had put together for her to deal with a credit card obligation. Take a peek.

Debt Collector v. Widow

I wanted to draw Credit Slips readers' attention to a wonderful (front-page) feature a couple weekends ago (Sat. Apr. 28) by Ellen E. Schultz in the Wall Street Journal ($) regarding the above captioned. Yes, it's another depressing but highly humanized account of elderly debtors having their bank accounts drained by savvy creditors with garnishment writs. But there's an interesting twist regarding the garnishment of putatively exempt Social Security funds. The funds, while exempt of course, lose their exemption once deposited into a bank account, unless the account owner (here, the elderly debtor, presumably having independent knowledge of this arcane legal requirement) affirmatively files an exemption notice. Does the Social Security Administration help out by reminding of this legal hurdle, perhaps under its FAQ? Nope. How about the banks, out of a sense of customer service? In hand washing that would make even Pilate proud, most of them (with some commendable exceptions) say that's not their place to get involved in the private treatment of customers, etc., etc.  It's an eye-opening account about the chasm between legal formalism and statutory text ('exempt" social security in Congress' intent) and the less savory, and less inspiring, world on the ground....

Sitting in the Back Row

This semester, I am teaching a required first-year course that teaches principles of statutory interpretation within a specific topic, and for my topic I am teaching the consumer credit statutes. As I have posted about previously, I structured my course as a mini-legislature. Students elected a speaker and adopted their own set of procedures to vote on amendments to the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), or the Illinois Payday Loan Reform Act (ILPRA).

Recently, we had our committee hearings, which consisted of students presenting their proposed legislation to the class. I just sat in the back row and listened. This is depressing for several reasons. First, the more I stay out of their way, the more they apparently learn. I watched presentation after presentation where students had studied each of these statutes, researched the academic literature and public-interest reports about problems with the statutes, and proposed changes to the statutes to make them work better. The other thing one learns sitting in the back row is that are more students than you would hope reading e-mail or surfing the Net instead of listening to their colleagues' presentations (note well if you are one of my students!).

I have been very impressed by the proposals that my students have made, and I thought I would share a few of them here. To catalog all of them would take too many pages, and this post will be long enough as it is.

Going to Texas for a Discharge?

Yesterday, a practicing attorney left a note on a December post from Elizabeth Warren, "Bankruptcy Reform and Credit Card Losses." He wrote:

[A]s a consumer practitioner I have noticed a tendency among debtors to suffer the indignities of bottom feeding debt collectors rather than the indignities imposed by Congress. True creditors are not any better off, because they still write off debt, but now it is now bought up at deeply discounted rates by a developing cottage industry of bottom feeders who attempt to collect by being obnoxious. I have actually had clients move and leave no forwarding address to escape such practitioners as Collect America.

If this one report has captured a more general phenomenon, we have come full circle as a society. The United States did not have a permanent bankruptcy law until 1898, and there were various bankruptcy laws in effect for only 16 of the first 109 of this republic. That did not mean there was no discharge from your debts. Many debtors would simply move west, beyond the reach of their creditors. The phrase "G.T.T." or "Gone to Texas" was shorthand for a debtor who had moved to escape creditors. It is no coincidence that the United States enacted a permanent bankruptcy law about the same time as the frontier closed. Is history repeating itself? Debtors cannot move to the frontier anymore to escape their creditors, but is going underground the new "Gone to Texas?"

This comment also made me think about some of the concerns that were raised about the harsh 2005 bankruptcy law. Its proponents even admitted that the goal was to get fewer people to file bankruptcy. Of course, shutting the door to the bankruptcy courthouse does not solve hopeless financial problems. It just leaves consumers with hopeless financial problems with one less place to turn for a solution. I like to analogize the law and its proponents to shutting down a hospital and claiming to have cured disease.

There were concerns raised that the 2005 bankruptcy law might create a permanent underclass of debtors, perpetually hounded by creditors with no hope of being restored to financial health. It was not uncommon to hear the term "debt peonage" thrown around or to hear predictions that consumers in hopeless financial straits simply might go underground. We don't know whether that is happening, and one person's experiences does not tell us whether a general trend is afoot. The comments are open here, however. Does the comment represent a more general phenomenon? Are there debtors going underground, so to speak, to avoid their creditors? If so, has this behavior increased after the 2005 bankruptcy law?

I Was Once on People's Court. Does that Count?

Courtesy of Crooked Timber, these parking standards seem fairly high. Do the merely notable pawnbrokers have to park somewhere else?

Hat tip to Buce.

Trends in Debt Collection

A recent post, Collecting from the Top, sparked an exchange about debt collection, including a query from a reader about whether data existed to support my proposition that public concern about debt collection might be increasing.

At least at the federal level, debt collection is a growing concern for consumers. Complaints about both third-party debt collectors and in-house debt collectors have risen significantly in the last few years. From 2004 to 2005, the FTC saw complaints about third-party debt collectors rise 14% to a record level of 66,627 complaints.  Complaints to the FTC about in-house creditor collection also increased, both in absolute terms and as a percentage of all complaints. In total, complaints about either third-party debt collection or in-house collection exceeded 25% of all FTC complaints. More information is available in this FTC report. And then there are the responses to ABC's story on Debt Collectors Gone Wild, which conveniently was released the day after the exchange on CreditSlips.

A consumer complaint to the FTC, or a post to a news blog, does not necessarily mean that a debt collector or a creditor violated any law. The FTC complaints and blog postings are evidence, though, that the consumer BELIEVED the debt collector's actions were inappropriate. The rising number of complaints, combined with the industry trends that I highlighted in the prior post, suggest that Americans' concerns about debt collection may be increasing and will continue to increase. The fact that national news programs are doing stories on debt collection suggests this topic is of interest to a broad swath of Americans. This increasing interest in debt collection, and its expanded coverage in the media, may spark a renewed conversation about what the proper boundaries of debt collection should be and how best to design a law that effectively enforces those boundaries.

PIRG to the People!

I thought Credit Slips readers might be interested to hear that PIRG has come up with a telephone script to help consumers negotiate rate adjustments (i.e., lowerings) on their personal credit cards.   Some lenders interviewed for a newspaper article said, sure they lower rates sometimes, but they were (understandably) coy about giving specifics on quantities.

Almost Like Getting Your Teeth Drilled

We're at the point where our oldest is about to go through orthodontia. He will be able to salve his pain with the knowledge that we are paying through the teeth! (Sorry for that.) We came back from the orthodontist with a document entitled, "Estimated Financial Plan for Upcoming Orthodontic Treatment." It would make a great exam question for my class in consumer protection, and it made me wonder about small-business compliance with consumer credit regulation. It also got me thinking about the contractualist solution to these sorts of issues.

The orthodontist's financial plan offers two options. The first option is an "interest free financing" plan (their boldface) under which we can pay $1,250 as a down payment and then pay $3,750 over 24 months. The second option allows us a "one time payment" (again their boldface) including a 5% discount of $250. Of course, the first option is not interest free. I would be foregoing a $250 discount today to finance $3,750 over 24 months. On an unamortized basis, that is only a 3.3% annual interest rate, which is not a bad deal for an unsecured loan (although more in a moment on whether it is truly unsecured). The point, however, is the first option is not interest free as the financial plan states.

UPDATE (1/15): Thanks to Jack Ayer, I have the correct interest rate calculation. The true interest rate on this loan is 6.71%. Still a good deal for unsecured financing but not interest free.

Collecting from the top

Dow Jones, the publisher of the Wall Street Journal, also publishes a magazine, Smart Money.  Dow Jones takes pride in its well-heeled, savvy readers; this characteristic is a major part of the advertising and marketing strategies for its publications. The Feb. 2007 issue of Smart Money had a lengthy feature story, The Penny Pinchers, about trends in debt collection. My initial thought was that the article would evaluate whether investing in debt collection companies had serious profit potential; was this industry like buying stock in Waste Management and other refuse companies. There could be a little stench but it would quickly be masked by the aroma of profit.

The article had a totally different focus. It advised consumers on how to handle debt collection calls. What???? People who read Smart Money, a magazine whose other feature articles addressed choosing a high-end flat-screen TVs and reviewed the new self-parking Lexus are getting collection calls? Apparently, the answer is yes. The article highlights how trends in the debt collection industry are exposing more people--even people with high incomes who normally pay their bills--to encounters with debt collectors.

Yeah, But You Read It Hear First

The NY Times (reg. req'd) reports that the national taxpayer advocate, Nina Olsen, recommended in her report today that the IRS end the practice of using private debt collectors. We posted on this development back in November. You read it here first . . . OK, actually we read it first in a Bureau of National Affairs service.

Congress Says Debtors' Thumbs May Be Amputated!

Strictly speaking, this may not be true.  (The reason this may be so is because the statement is a complete lie of my own fabrication.)

Yet as we visit my parents where many old Canadians flee for the winter (Florida), I was struck by a radio adverstisement.  My dad has something called XM radio in his car, which I think is satellite, so I don't know if the adverstisers are local or national.  The ad was one of those super-hyped, manicly-overlapping succession of rapid rhetorical questions: "Trouble with credit?  Did you know you can consolidate your loans at a lower rate?" Etc., etc.

Here's the question that stuck out to me: "Did you know what new laws require you to pay back twice as much debt?"  (Or it may have been "Did you know new laws require you to pay back half of your debt?")

I wonder to readers who may have heard this or similar ads: Is this how credit consolidators and others are framing BAPCPA?  (In fairness, maybe it was some quirky state-specific law in Florida, or maybe I misheard, distracted by the challenge of driving with octogenarians.)  If this really is BAPCPA-puffing, then I think it is a strong illustration that perception may be more important than reality for new bankruptcy laws.  (Indeed, could ads like these literally be scaring people away from filing for bankruptcy?)  Worrisome, at least to me.

Update: Private Debt Collectors & the IRS

A while back, Angie Littwin asked some good questions about the wisdom of the IRS's use of private debt collectors. According to a Bureau of National Affairs (BNA) (subscription required) news service, IRS Taxpayer Advocate Nina Olsen will recommend that Congress repeal the statutory for the IRS to use private debt collectors. An appropriations bill (H.R. 5576) already has passed the House with language that would prevent the IRS from using private debt collectors.

Bloodsuckers, Godless, or Both?

In "Arbitration and the Godless Bloodsuckers," Richard Neely relates his experience as an arbitrator for the National Arbitration Forum:

[T]he bank asks for substantial costs related to the arbitration itself, and those costs are significantly higher than court filing fees. . . . In one case that I handled, the fees alone amounted to $450. Furthermore, the arbitration company sends the arbitrator a judgment form already filled out so that all the arbitrator need do is check the appropriate box. . . .
   In my case I did not award the bank the litigation-related fees. . . . I never got another case!

In addition to writing this article, Richard Neely also happens to be a retired chief justice of the West Virginia Supreme Court. Katie Porter had previously posted about arbitration actions in credit card collection. The National Arbitration Forum seems a particular concern and appears to be nothing but a huge debt collection operation. Mr. Neely's comments are illuminating about the NAF's business practices. The article is a quick read (only two pages long) and appears in the September/October issue of the West Virginia Lawyer, which is available online here. (Note to readers: it is a huge file (9 Mb). Note to West Virginia Bar Association: thanks for making this content available online, but there are ways to do it without making a huge file.)

Bankruptcy, Eviction and Patient Records

The 2005 bankruptcy amendments added a provision to the Bankruptcy Code to help protect the privacy of patient records in the bankruptcy case of a "health care business."  The provision sets forth a process by which a trustee can notify patients about their records (broadly defined) and then ultimately destroy them if they are not claimed.  But reality may not always operate according to such plans.   According to this news story, a giant pile of patient financial records of a bankrupt doctor were found in a parking lot after an eviction overseen by the sheriff and the building manager in the doctor's absence (thanks to Rebecca Redwine for the tip).   

Defaulting on inter-family loans

Major news media outlets have been reporting on a business that manages inter-family or inter-friend loans, focusing on a company called Circle Lending (thanks to Salil Mehra for the tip).  Medical debts are among the business'  list of popular reasons for personal loans between family members, so the service was of immediate interest to me.  But beyond this, I would focus readers' attention on the stated protect-the-personal-relationship justifications for an formalizing intermediary and how these justifications relate to broader discussions of our debt collection system that sometimes is thought to be inefficient.  If an inter-family secured loan is set up properly, and the borrower defaults, the lender may exercise formal remedies (and in an NPR story linked on the website, the founder makes clear that this is contemplated).  Of course, foreclosing on one's grandson could indeed have relationship implications, so the relationship-protecting idea presumably stems from the belief that a borrower is less likely to default on an inter-family loan given the use of extra formalities that expand collection and enforcement entitlements even if rarely used.  Presumably, the risk of default is also lessened to the extent that these loans are granted with lower interest rates than those available from those in the business of extending credit to individuals?

Differential Methods of Medical Debt Collection

Should medical debt be subject to different collection rules than debt owed to other creditors such as credit card issuers?  My answer to this has generally been "no," in part due to the fungibility of obligation. But even if states refrain from imposing differentially restrictive rules, various collection approaches are naturally generated through other means.  Specialty publications on collections have featured a variety of articles on the evolution of medical debt collection (thanks to Jason Kilborn and Nick Sexton for tips on some of the recent ones).  The stories in periodicals such as Collections & Credit Risk have been paying particular attention to the outright purchasing (as opposed to contingency collection) of medical debt from hospitals or other providers.  The stories in the collection industry publications convey the impression that medical providers impose more constraints on the collection techniques of debt buyers than the originators of other debts do because of the nature of the obligation and the localized nature of the business and resulting public relations issues.   Thus, less litigation, prohibitions on resale of the debt, etc.  Of course, some patients immediately use a credit card for the self pay portion of the debt.  If they don't pay, and if such bad credit debt gets sold, it will be sold as general consumer debt, presumably without these particular originator restrictions.  Medical providers still have incentives to encourage patients to use credit cards at the outset; bad medical debt portfolios are selling for only a few pennies on the dollar.  It is possible that some convergence could occur if buyers purchase newer accounts receivable, and then team up with lenders to provide financing options for patients. 

Mann's Calls Study

Professor Mann's proposed study is, as usual, interesting and thought-provoking.  (I confess to finding it somewhat exhibitionist to engage in a public dialogue with a colleague, awkwardly having to use the third person, but I guess that what a "blog" is all about.)  In any event, what I would counsel Professor Mann to consider as he pursues this project is the role of denial in the psychology of distressed debtors.  While his study is not designed to gather this sort of data specifically -- that is more the domain of co-blogger Professor Thorne -- it occurs that readers of this blog might have helpful anecdotal data to share with Professor Mann regarding his intuition that a bankruptcy filing comes in response to external legal prompting, and my related intuition that that passivity in turn stems from a denial of the seriousness of the debtor's affairs until objective forces conspire to make such denial no longer tenable.

One Call Too Many?

If most bankruptcy is induced by external factors -- divorce, health problems, and job loss being the most commonly mentioned -- we still don't really know why people call lawyers when they do.  Is it too many calls from a collection agent?  Or perhaps a collection lawsuit is filed.  I suspect that most families use the legal system only when they are already involved in it.  This question of course can be addressed through surveys, but I am considering a project designed to shed some light on this question using quantitative data about bankruptcy filings.

Weekly bankruptcy filings over the last several years reveal several patterns.  For example, at the end of each year, Chapter 7 filings fall steeply during December but rise shortly after the first of the year.  Total filings fall sharply after the first week of the year and then increase steadily through the first quarter (until April 15).  Chapter 13 filings, by contrast, are more evenly distributed throughout the year.  Notably, both Chapter 7 and Chapter 13 filings show a monthly peak.

This led me to wonder what would cause bankruptcy filings to surge on a monthly basis.  In Texas where I live the obvious answer is foreclosures.  Because all foreclosures in Texas happen on the first Tuesday of the month, it might be possible to isolate the share of bankruptcy filings motivated by foreclosure avoidance.  Georgia has a similar statute, so I plan to collect the number of Chapter 7 and Chapter 13 filings by individuals in Texas and Georgia on each date from January 1, 2004 through December 31, 2006.  The statistical analysis might be tricky, especially if foreclosure-motivated filings are a small share of filings.  And I don't see any easy way to account for differences in state foreclosure law or practice.  Still, a discernible rise in the last few days before the foreclosure date might quantify a share of filings attributable to foreclosures.

Looking forward, what would it tell us about bankruptcy filings if we know how many were filed to protect homes?  Also, how can we quantify bankruptcy filings that might be attributable to other causes?  Ultimately, I would be interested in trying to isolate the filings caused by informal collection practices -- people trying to escape what they perceive as harassment.  The policy initiative I would like to explore is the idea that borrowers would benefit if lenders were forced to initiate formal collection procedures more quickly.  When I interviewed collection attorneys several years back, one of the things I learned is just how much information collection calls can produce.  People are willing to give out bank account numbers and places of employment that enable the formal collection actions to proceed.  If the caller can persuade the debtor to make even a single $10 payment, the collector then has access to the acccount information from that check.  It is not clear how much of this activity is efficient.  More fundamentally, as I argue elsewhere, procedures designed to push individuals into bankruptcy more rapidly might be beneficial.

OJ, Rights of Publicity, and Debtor-Creditor Relationships

According to an Associated Press report (yes, as published on ESPN.com), Ron Goldman's father has asked to receive OJ' Simpson's rights of publicity because Simpson has never paid out on the multi-million dollar wrongful death claim.  Seems to me that if the right of publicity is considered a property right under the relevant state laws that a judgment creditor should be able to reach it.  After all, some sports figures create separate corporate entities that manage and own their rights of publicity.  Of course, as Diane Zimmerman and I wrote here a few years ago, the issues may be just a bit more complicated than I'm now suggesting  . . . 

You’ll Wish the IRS Were Collecting Your Taxes.

The New York Times and the AP report that the IRS is moving forward with its plan to turn over the collection of relatively small amounts of back taxes to private collections agencies. Starting this September, CBE Group Inc., Linebarger Goggan Blair & Sampson LLP, and Pioneer Credit Recovery Inc. will be in charge of collecting back taxes of under $25,000 from 12,500 taxpayers.  The agency plans to contract with eight more private debt collection companies to collect back taxes from approximately 350,000 taxpayers by 2008. 

There’s an idea.  Take an industry that’s come under scrutiny for abusive practices in two recent exposes [and here] and turn over a core governmental function to it.  The private companies will be paid by the amount they collect, so they will have strong incentives to use aggressive collection tactics. The Associated Press quoted National Treasury Employees Union President Colleen Kelley as saying that she has “‘no confidence at all’ in the agency's ability to make sure the private firms are not overstepping their bounds.”

Budgetary constraints appear to have forced the IRS’ hand. The agency has funds already allocated for a private program, but believes that it could not get budget authorization from Congress to hire additional IRS collection agents. But there are several problems with this proposal, not the least of which is that the IRS acknowledges that it will cost the federal government substantially more to contract with private companies than to hire more IRS agents to do the job.  In addition, giving volumes of confidential personal information about taxpayers to private companies raises significant privacy concerns.  But from a debtor-creditor perspective, my worry is this:  in an industry where debt collectors are often accused of overreaching, what kind of power will companies have when they can say they are collecting debts on behalf of the United States government?

The Debt Collection Market

The Boston Globe's excellent analysis into the actual workings of the debt collection world brings up at least two points worth policy reflection.

First, it should not be surprising that as consumer debt explodes, so too does consumer debt default.  That means ancillary markets, such as those for debt collection services, will also explode.  (If people start driving more cars, then there will be more mechanics, not to mention more lawyers bringing tort lawsuits.)  The question, therefore, is do we want to regulate this emerging market?  After reading the Globe's series, how can anyone seriously interested in civil society not answer yes?  Indeed, we do have federal regulation on debt collection, such as the fair debt collection practices act, so the real question is do we want to make enforcement meaningful and back it up with necessary funding?  The Massachusetts experiences shows what happens when, in the necessary and commendable effort to balance deficits, states cut back on court services and the Attorney General's oversight capacity.  (One almost pities the assistant-magistrates' crushing debtload and perhaps sees some explanation to their routinized treatment of grinding debtors through a legal mill.)  So the first call to order is to meaningfully police this debt collection market.  We need to revisit the constable oversight system, just as we need to enforce legal requirements on creditors using the courts to help collect their debts (such as seriously sanctioning those who ignore bankruptcy laws and holding plaintiffs to their required standards of proof in court).

The second point is even more troubling.  This is not just about the need to regulate a market as prospectively sound policy, but about the development of a market that is fundamentally dysfunctional.  The problem is that what should be, ideally, a way to deliver state services (the public execution of debt) competitively (by farming out to delegated constables) has turned into a profitable business for collectors that is utterly divorced from the amount of the underlying debts.  Making $600 on hooking a car (not the tow company, this is the constable, for his official oversight "time") is a quick way to make a buck by feeding off a legal system.  And, moreover, it is one that creates the sorts of incentives that result in the story of the lady whose car was re-hooked three times, or the constable who doublecharged for one tow on the theory that he was "entitled" to a separate fee for each creditor's judgment he was enforcing (2 creditors warranted 2 oversight fees in his mind for the 1 tow).  This should give us broad, worrisome pause about what happens when well meaning local politicans see a quick fix to budget shortfalls by outsourcing public work to private entities (which is what the constables essentially are, their glorified appointment by public officials notwithstanding).  The Globe's pieces serve as a sobering lesson of how privatizing sheriff's levies has worked out so far in the Bay State: great for the private constables, not so great for the debtors in the system, and ambiguous for the initial creditors.

Small Claims Courts: The New Debt Collectors

One point from the Boston Globe story that’s particularly interesting is the role of small claims courts.  These courts are supposed to be about small-time justice, about providing a informal forum for ordinary people who can’t usually afford lawyers, about ensuring some degree of law and order for plaintiffs whose claims are of less value than the lawyers’ fees it would otherwise cost to prosecute them.  In my personal experience, I’ve seen a freelance computer programmer sue for payment for completed work and tenants sue sub-letters for non-payment of rent.  But according to the Globe, “an estimated two-thirds of small claims lawsuits are now filed by debt collectors.”  Undoubtedly, part of the attraction for debt collectors is the low filing fees.  It costs just $40 to sue someone for up to $2,000 in Massachusetts small claims court.  These companies couldn’t afford to bring so many suits for $500 or $1,000 if they had to go to district court.  But that was supposed to be the beauty of small claims system in the first place; ordinary citizens couldn’t sue each other for $500 or $1,000 either if they had to use a more expensive forum.

This raises some questions about what we want our small claims system to look like. We tend to think of small claims cases as being ordinary citizens suing other ordinary citizens about mundane, ordinary matters, like minor property damage or fender-bender auto accidents.  And in the best case scenario, they can be a forum for ordinary citizens to take on more powerful interests, as when freelance workers sue for unpaid wages.

But the Globe story shows what happens when the system is turned inside out.  Now powerful repeat players have found a cheap way to sue on debts.  These big-time players--not ordinary citizens--are using two-thirds of this judicial resource in Massachusetts.  No longer are these courts a level playing field for the ordinary citizen to seek justice.  Perhaps it is time to limit institutional players’ access to this forum before our small claims system simply becomes an arm of the collection agencies.

Perpetual Debt Servicing Equals Wealth Stripping

The topic for this entry was generated by a recent conversation that I had with an individual who was unwavering in his assertion that folks should pay their debts in full, regardless of how long it would take or the costs to a family’s wealth and security. I would like to ponder on the implications of this perspective.

First, let's crunch some numbers. Based on data from the Consumer Bankruptcy Project (2001), the average filer of Chapter 7 had a median annual income of right around $20,600 and a median unsecured debt of approximately $27,200. What are the implications of this debt-load? Best case scenario is that the interest on these debts will be around 18%. If the debtor pays the minimum of approximately 3 percent monthly, it will take right at 28 years to repay this debt, and will result in around $27,000 in interest paid to the lenders. At least initially, monthly payments will be just over $800. We know that the majority of filers are 35-44 years old (Sullivan, Thorne and Warren 2001), so the debtor will be approximately 68 years old, maybe 70, before the debt is repaid (assuming that no additional unsecured debt is accrued).

From these facts evolve two pretty important questions. First, how are families affected by a lifetime of servicing debts like this? For example, how in the world will they be able to put away money for their children’s college expenses when so much is going toward debt repayment? My guess is that they won’t be able to save for college. So, their children will leave college buried in student loan debt. Further, if they are like many American families, the house has probably been refinanced a couple times and will not be paid off before retirement, thus leaving them quite vulnerable to foreclosure. Rather than making larger mortgage payments, the family has spent hundreds of dollars each month bolstering the wealth of the lending industry. And what about saving for retirement? If there is a monthly outlay of $800 to service debts, will there be anything left for the 401K? Doubtful. And if not, then these folks will enter retirement with essentially nothing in savings. Which leaves them quite vulnerable and quite likely to end up dependent on social programs.

Second, what does this type of perpetual indebtedness mean for the distribution of wealth in our country? Rather than building their own wealth through homeownership, retirement accounts, and higher education, these families are financing the massive wealth accrual of the lending industry. If it were just a couple families who were experiencing this type of wealth transfer, then there would not be much cause for alarm, but millions of families are experiencing this wealth stripping. Their wealth is sifting through their fingers and falling directly into the laps of the credit card companies, who are accruing massive wealth. So, rather than a society of families who have invested in themselves, and as a result have modest wealth and are financially stable, we now have families that are much more likely to have negative wealth and are exceedingly vulnerable—and more likely to eventually need the help of social services.

So, to return to the comment that precipitated this entry. Does it make sense to chain indebted families to decades or lifetimes of debt repayment? I don’t think so. We would be better off encouraging them to grow their own wealth, rather than transfer it to the already gluttonously wealthy.

References

Sullivan, Teresa A., Deborah Thorne, Elizabeth Warren. 2001. "Young, Old and In Between: Who Files for Bankruptcy?" Norton Bankruptcy Law Advisor. 9A:1-10.

21st Century Debt Collection Techniques

Several years ago, Lucette Lagnado wrote a series of Wall Street Journal articles on the use of formal debt collection techniques for debts owed to hospitals by patients.  That series probably helped set off a chain reaction of Congressional hearings, state legislative initiatives, lawsuits, and self-regulation measures by the hospital industry. As Bob Lawless has reported, the Boston Globe is nearly done with a set of investigative reports that broaden and deepen the inquiry regarding debt collection practices in Massachusetts, framing each article so far on a major institution or actor that shapes the debt collection process (e.g., debt collection companies, small claims court, and -- perhaps the most intriguing -- the constable).  Like the Wall Street Journal series, the Globe investigation apparently has been a wake-up call of sorts, this time to the Massachusetts court system.

The Globe investigation comes at a time of reawakened interest among debtor-creditor scholars in the use of formal collection procedures for consumer debts (including some important systematic in-the-trenches studies being conducted now by Rich Hynes at William and Mary and separately by Sidney Watson and colleagues at Saint Louis University).  In the past several decades, many scholars have assumed that the formal judgment collection process was too expensive and cumbersome for relatively small consumer debts, and largely have focused their research energies elsewhere (e.g., federal bankruptcy, or laws that regulate informal collection techniques such as phone calls or letters).  With technology that facilitates spreading default risk and encouraging debtor repayment through other means, one might have expected even less use of the arcane formal process by repeat player claim holders today than a decade or two ago.  The Globe investigation does not study changes over time, but it does invite the question of whether technological developments and innovation in the credit and collection industries actually have increased, rather than decreased, the use and cost-effectiveness of arcane state collection procedures.

Boston Globe on Debt Collection

Readers of this blog will want to take a look at a four-part series from the Boston Globe called "Debtor's Hell." In the words of the Globe, this series is an "investigation into the world of consumer debt in the United States found a system where debt collectors have a lopsided advantage, debtors are often treated shabbily by collectors and the courts, and consumers can quickly find themselves in a life-upending financial crisis." The Boston Globe's series comes on the heels of a July 5 article in the NY Times ($) about possible regulatory responses to increasingly aggressive debt collection practices.