Debt Collectors Toast Each Other in San Diego as Consumers are Left for Dead with Zombie Debt

by Sophia Huang

San Diego, California is home to sandy beaches, a naval base, and one of the nation’s largest debt buyers. Encore Capital Group is no stranger to controversy over its treatment of consumers. The Consumer Financial Protection Bureau (CFPB) has punished it for deceptive practices including using false information to pressure consumers, and buying debts with inaccurate information. Encore has also entered into a settlement agreement with 42 states over its alleged practice of robo-signing lawsuits against consumers.

On July 16, Encore will have company in San Diego as thousands of debt collectors will descend upon the city for their annual convention. This year, they will be celebrating the Consumer Financial Protection Bureau’s newly proposed debt collection rule. The proposal was an opportunity to offer consumers more protection from abusive debt collection practices. Instead, it is a giveaway to the booming collections industry.

Debt collection activity has been on the rise. According to a report from the Wall Street Journal, data from states like Texas, Delaware, and New York show the number of collections lawsuits filed against consumers increasing by as much as 56% in one year. Additionally, Encore has increased the number of debts it purchases by 20% and other large buyers are not far behind.

To go along with this increase in collections activity, consumer advocates are saying aggressive collection tactics are becoming more common as well. This was the perfect time for the CFPB to issue a rule that could protect consumers. Unfortunately, its proposal could potentially leave consumers more exposed than ever to the industry’s worst practices, including the collection of old zombie debt.

What does this mean for the state where debt collectors are gathering next week? Nearly 70,000 Californians have filed complaints with the Federal Trade Commission about debt collection. Thousands of Californians are haunted by zombie debt, also called time-barred debt. These are debts that are at least four years old, under California law, and therefore too old to be sued on. If the CFPB does not change its proposal, debt collectors will be allowed to keep hounding Californians over zombie debts.

Debts have a time limit for a good reason: documents get lost and memories fade. After four years, and after a debt is sold and resold multiple times, very little evidence survives about who owed the debt and for how much. When debt collectors go after a zombie debt, they may be going after the wrong person, the wrong amount, or both.

Among other gifts it grants the industry, the CFPB’s proposed rule would prohibit debt collectors from suing or threatening to sue a consumer only if the collector “knows or should know” the debt is too old. This is a step backwards from existing standards; most courts have said that collectors who sue or threaten to sue on a time-barred debt violate federal law, regardless of the collectors’ knowledge. In order to take advantage of this “safe harbor,” shady debt collectors will have more incentive than ever to ignore what little evidence of zombie debts that still exist and charge full steam ahead with threats and lawsuits.

Currently, it is estimated that 29% of Californians have debts in collection. How many of those 11.5 million people are victims of zombie debt and do not actually owe what the debt collectors say they do? How many of them have seen their credit scores unjustly plummet and been denied loans, housing, employment, etc. thanks to an unscrupulous collector? Even one Californian being harmed this way is one too many.

Worse still, debt collectors may attempt to pressure and trick consumers into making small payments on the debt. Once the payment is made, the debt’s clock is restarted and the debt collector will be allowed to sue the consumer again. A debt collector could then drag a consumer into a meritless lawsuit over a debt with minimal records.

If the CFPB really wanted to protect consumers, it would have banned collection of old zombie debt outright. Instead, the CFPB chose to continue allowing zombie debt collection and loosen some of the standards around it.

Californians deserve better than to be chased around by zombie debts and abusive debt collectors looking to make a quick dollar without any regard for fair treatment or accuracy in their collection activity. If the CFPB cares about protecting consumers at all, it will rethink its proposal and kill off zombie debt for good.