The average consumer does not realize that the delinquent debt industry is a trillion dollar a year business. Everybody has borrowed money to buy a house, buy a car, for school loans or over charged credit cards. A large number of these loans will end up in default. These troubled loans have a market. There are very large debt buyers who purchase millions of dollars of delinquent debt for pennies on the dollar. The debt buyers purchase the delinquent accounts at a substantial discount and then come after consumers for the full balance. The debt buyers purchase large volume of delinquent accounts often purchasing tens of thousands of accounts at a time. The purchases are often made electronically with only the data being stored and transferred. Hard copy documents such as the original loan agreement often are lost or were never transferred from the original creditor to the debt buyer. A problem for the debt buyers arises when the consumer challenges the claim and the debt buyer can not prove that the consumer entered into the original loan agreement.
Debt buyers do not want their right to collect on obligation challenged by consumers. Debt buyers purchase delinquent debt in large volume aware that many of the accounts will be uncollectable. Debt buyers make a business decision to try and collect as high of a percentage of the delinquent debt accounts as possible. Typically, debt buyers hire debt collectors and/or debt collection attorneys to collect the delinquent debt. The debt collectors or debt collection attorneys will be assigned a large number of accounts for consumers in the area where the debt collectors or attorneys practice. They are paid a percentage of each account they are able to collect on, approximately 15% to 20% percent of whatever they manage to collect on each account. Remember, debt buyers have purchased the delinquent debt accounts for pennies on the dollars so any money they recover is usually profit. If the debt buyers average 50% collection of the delinquent debt on 10% to 20% of the accounts they have purchased but fail to collect on 80% to 90% of the delinquent accounts purchased, the debt buyers will still make a profit. It is in the best interest of debt buyers and the debt collectors to get the money from the consumers as quickly and as cheaply as possible. Any challenge to the claim by the consumer wastes time and costs money which ultimately reduces profit.
For this reason, debt buyers do not want to start a law suit unless they are forced to. It is much more cost affective to send a demand letter threatening legal action in attempt to get the consumer to agree to pay back the debt. This creates an opportunity to negotiate with the debt buyers to reduce the amount of the obligation or to pay it back over time. The debt buyers are more than willing to work out a repayment plan because they have purchased these accounts for pennies on the dollar. For some that is a reasonable option. Hard times may have led to the original default and now when the consumer is in a better position they wish repay their loan or credit obligation.
What many consumers don’t realize is that in this computer electronic transfer age, may of these debt buyers never received the original loan documents and can not prove the original debt or that they actual own the right to collect on the debt. Recently, a New York Times article discussed this problem with regards to privately held student loans. In summary, the article discusses how debt buyers who own at least 5 billion in troubled private student loans could not prove they had a right to collect. As a result, many consumers where seeing thousand of dollars of their student loans wiped out because the loans were uncollectable.
Credit card debt is very difficult to prove for third party buyers of debt in Pennsylvania. In 2011, the Pennsylvania Superior Court decided the case of Commonwealth Financial Sytems, Inc. v. Larry Smith, No 3455 EDA 2009. In that matter, Mr. Smith obtained a Citibank credit card in 1989 and proceeded to use it for the next thirteen years. By July 2004, Mr. Smith’s account was delinquent account and was sold to Commonwealth who filed suit in March 2006 seeking $5,435.93, plus interest at 23.99% per annum, plus attorney fees at a rate of 20%, and costs. Commonwealth failed to attach many of the original documents and those that were attached the Court found were inadmissible hearsay and did not qualify under the business record exception of the hearsay rule. The question of whether computerized files of an original creditor were admissible as the business records of a successor debt buyer was one of first impression in Pennsylvania. Without the original creditor testifying, the debt buyer could not establish the trustworthiness of the documents, the chain of title, and/or whether an original contract existed.
Any consumer who receives a letter from a debt buyer needs to understand that while a debt buyer may claim it has the right to collect the delinquent debt, they still have the burden of proving that right in court.