Average Canadian’s consumer debt hits $25,960

The average consumer’s debt load climbed to a record high $25,960 at the end of 2011, although annual data from a credit bureau report released today suggests that the Canadian love affair with debt is waning.

Consumer debt, which excludes mortgages, edged 1.4 per cent higher in the fourth quarter of 2011 from the previous quarter, according to a report released early on Thursday by TransUnion.

The increase comes on the heels of three quarters of flat-to-negative growth but is in line with a year-end spike that generally comes during the holiday shopping season, said Thomas Higgins, TransUnion’s vice-president of analytics and decision services.

He believes the “continued deceleration in the annual growth of overall debt levels” is the more interesting – and hopefully promising – trend.

The report showed that annual growth in consumer debt fell below 1 per cent for the first time since TransUnion began tracking credit trends at the start of 2004. The current trend of slowing consumer debt growth began in late 2009.

That basically means that while debt levels are still growing, the pace of growth has slowed drastically.

“The first and second quarters of 2012 should be quite revealing as we may see the first year-over-year decline in total debt since at least 2004,” Mr. Higgins said.

He attributed the increased caution among consumers to the uncertain economic outlook, debt problems in Greece, as well as the warnings issued by Canadian policy makers.

“All of this has really helped to get people focused on debt and trying to get it down before interest rates start to rise,” he said.

Debt levels among Canadian households have soared to new highs in recent years, with people turning to credit to finance purchases of cars and home renovations.

Central bankers have been warning Canadians about excessive debt loads and their ability to repay the money they owe once interest rates rise from their current lows.

Lines of credit are by far the biggest source of non-mortgage debt among Canadians, accounting for 42 per cent of the overall debt pie. This type of debt, which is cheaper than credit card debt, continues to grow although at a slower pace, Mr. Higgins noted.

Other key credit statistics listed in the TransUnion report include:

  • Canadian average credit-card borrower debt declined 1.49 per cent on an annual basis but rose 0.61 per cent quarter over quarter
  • Canadian lines of credit (LOC) borrower debt increased 1.1 per cent year-over-year and 0.64 per cent from the previous quarter
  • Canadian installment-loan borrower debt fell 5.3 per cent year over year and 2.58 per cent quarter over quarter
  • Canadian auto borrower debt jumped 9.7 per cent year over year and 2.8 per cent from the previous quarter

The data released Thursday by TransUnion also shows that while debt levels are high, most Canadians are still able to meet their debt repayment obligations.

Delinquency levels remain low across all major product categories, the report said, with delinquencies on lines of credit sitting at 0.21 per cent and for credit cards at 0.31 per cent.

Roma Luciw
Globe and Mail Update

The TransUnion analysis is based on anonymous credit files of all credit-active Canadians.

 

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Beware of phony debt collectors

The calls went out by the millions to unsuspecting consumers across the country.

Phony debt collectors – based in Southern California and using call centers in India – demanded immediate payment on delinquent loans. Often posing as attorneys or law enforcement officials, they threatened consumers with lawsuits or arrests if payments weren’t made.

And they were highly effective. In 8.5 million calls tracked over four months in late 2010 by the Federal Trade Commission, the callers raked in more than $5 million in payments from intimidated consumers.

Only problem: Nobody owed them a dime.

The “phantom-debt” collection calls originated from two companies – American Credit Crunchers LLC and Ebeeze LLC, based in Orange County’s Villa Park. Last week, the FTC announced that both companies have been shut down by court order and their assets frozen while an investigation continues.

“This is a brazen operation based on pure fraud, and the FTC is committed to shutting it down,” said David Vladeck, director of the FTC’s Bureau of Consumer Protection, in a statement last week.

According to the FTC, the deceptive collection calls focused on payday loans, the short-term, high-interest loans that have been riddled by consumer complaints for years. In many cases, the victims had not even taken out a payday loan, but had filled out an online application that disclosed their bank account, Social Security or other personal financial information.

Using that information, the callers would use coercive tactics, such as threatening to file lawsuits or arrest people for failure to pay.

Why would victims pay for loans they’d never made? In last week’s press conference, one victim, JanLaree DeJulius of Las Vegas, said she was so rattled by the call to her workplace that she paid more than $700 just to make the caller go away.

In its complaint, the FTC said payday loan applicants are often financially stressed and “overwhelmed with bad finances,” causing them to be confused or scared into paying.

“It’s very frightening,” said Chicago-based FTC staff attorney Elizabeth Scott. “They threaten to show up at your home or workplace and arrest you. And they have so much personal information on you – your bank accounts, etc. – that they’re believable.”

During the four-month investigation period, about 17,000 payments were taken from consumers’ credit or debit cards, ranging from about $300 to more than $2,000 each.

The so-called “phantom-debt” calls occurred in virtually every ZIP code across the country. Scott said the FTC could not determine how many victims might be in California.

The companies’ owner, Varang Thaker, could not be reached for comment.

According to the FTC, a review of Thaker’s company bank accounts show plenty of deposits by consumers, but no money going back out to known lenders or debt sellers. The accounts also show payments to outsourcing companies in Gujarat, India, where the call centers are believed to be located. Other company transactions show transfers to Thaker’s personal bank accounts, as well as the purchase of a Mercedes-Benz SUV, airline tickets and tens of thousands of dollars in store purchases in both California and India.

Debt collection ranked No. 2 among consumer complaints received by the FTC in 2010, making up 11 percent of the 1.3 million total complaints filed that year.

That same year, an FTC report described the country’s system for resolving disputed debt collections as “broken,” citing lawsuits filed by debt collectors that leave consumers unable to defend themselves. It recommended that states enact laws to tighten their rules on the debt-collection process.

In California, the state Senate last month passed Senate Bill 890, by state Senator Mark Leno, D-San Francisco, which would require debt buyers – who purchase bundles of uncollected debts – to provide documentation that the debts are valid.

The state attorney general’s office said unscrupulous debt buyers “have flooded California’s courts” with poorly documented lawsuits seeking judgments on debts, often resulting in collection efforts against the wrong person.

The Leno bill provides “basic consumer protections for an industry that has no real controls on it,” said the attorney general’s spokeswoman Lynda Gledhill. “This will help a lot of people whose credit can be ruined by (deceptive) debt collectors.”

Under the federal Fair Debt Collection Practices Act, it’s illegal for debt collectors to threaten arrest, use abusive language, or pose as a law enforcement or government official. Within five days after first contacting you, debt collectors must send a written verification notice listing the creditor and the amount you allegedly owe. (For more details on fair debt collection practices, see accompanying box, “Beware of Fake Debt Collectors.”)

If you get a call from a debt collector, be savvy. “Immediately ask for a written verification of the debt owed,” said Scott, the FTC attorney. If the debt collector can’t or won’t provide one, “it’s a red flag.” Similarly, she said, if a debt collector suggests you could be arrested if you don’t pay, “it’s an instantaneous red flag.”

Robert Tavelli, past president of the California Association of Collectors, said fraudulent companies that use abusive tactics harm the reputation of legitimate debt collection companies.

“The industry shouldn’t receive a black eye for what criminals do. The majority of folks (debt collectors) do it right. These are the kinds of guys who make a big splash.”

Although the massive Southern California operation got shut down, the problem isn’t going away. As FTC’s Scott noted: “We are certain there are other entities engaging in similar activity” across the country.

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Credit card debt: Back to the bad old days?

The Federal  Reserve published its monthly G.19 statistical release of consumer credit on  Feb. 7, and, as many expected, it revealed another uptick in household  borrowing. In December alone, the month the figures covered, it rose at an  annualized rate of 9.3 percent. At the end of 2011, we as a  nation owed some $90 billion more than we did at the end of 2010.

Revolving credit, which is virtually all credit  card debt, had fallen in 32 of the previous 37 months, but was up again in  December, the third consecutive monthly rise. As with the wider consumer credit  measure, after two years of successive and significant falls (9.6 percent in  2009 and 7.5 percent in 2010), credit card debt actually rose very slightly between  the start and end of 2011.

Problem credit card debt returning to haunt us?

How worried should we be by rising consumer debt? Unsurprisingly, some think  we should be positively petrified. Writing in The Hawai’i News Daily on Feb. 5  (before the latest Fed figures were released), Michael Snyder’s predictions were  positively apocalyptic. Under the headline “The financial crisis of 2008 was  just a warm-up act for the economic horror show that is coming,” he argues that  nothing’s changed for the better since the credit crunch, and that among the  systemic problems that remain is credit card debt:

Making a beeline for recovery?

Snyder makes a persuasive case for the financial meltdown he predicts.  However, the late John Kenneth Galbraith, a celebrated (by some) Harvard  economics professor, put such apocalyptic visions into context back in 1952 in  his book “American Capitalism.” On the first page of that volume, he drew an  analogy between the American economy and a bee: “It is told that such are the  aerodynamics and wing-loading of the bumblebee that, in principle, it cannot  fly.” But it does, and for way more than 60 years our economy has been flying in  practice (with periodic soars and plummets), even though there are countless  theoretical reasons why it shouldn’t.

And not all the news is bad. January’s edition of McKinsey Quarterly,  published by the eponymous management consulting firm, included an article that  explored how the United States was deleveraging household debt by comparison  with some other advanced countries. And, generally speaking, we’re doing much  better than those others. The U.K., for example, has reduced that measure by 6  percent since it started the process, and Spain by 4 percent. The United States  has achieved a remarkable 11 percent. Meanwhile, unemployment in both those  European nations is on an upward trend while here, happily, it’s decidedly  not.

Moreover, the news in this country is even better for the debt service ratio.  That, according to an OECD definition, is “the ratio of debt service  payments (interest and principal payments due) during a year, expressed as a  percentage of exports (typically of goods and services) for that year… a key indicator of a country’s debt  burden.” And McKinsey says that, for U.S. households: “it’s now  down to 11.5 percent — well below the peak of 14.0 percent, in the third  quarter of 2007, and lower than it was even at the start of the bubble, in  2000.”

Or taking the road to ruin?

McKinsey’s household debt data include borrowing tied to real estate such as  mortgages and home equity lines of credit, while the Fed’s consumer credit  figures don’t. So they’re not immediately comparable.

That partly explains why McKinsey published a graph showing US household debt  as a percentage of gross disposable income. This suggests a smooth downward line  over the past two or three years, and then a dotted line on pretty much the same  trajectory showing a projection that takes us to the second quarter of 2013, by  which time we’re supposedly going to be back on trend after the inflation and  bursting of the credit bubble. That paints a soothing and reassuring  picture.

However, if you look just at student loans, credit cards, auto loans and  other consumer borrowing that isn’t secured on housing, then things look very  different. So how worried should we be?

Who knows?

Well, the simple fact is, nobody knows. Not many mainstream economists share  Michael Snyder’s doom-and-gloom prognosis, but that means very little. Remember  the last time mainstream economists smugly believed they had all the answers?  You don’t have to think back further than 2007/8. And, at the risk of irritating  regular readers with the repetition of this blogger’s favorite J.K. Galbraith  quotation: “The only function of economic forecasting is to  make astrology look respectable.”

What we can do is look at three recent nuggets of news that tell us something  about the real world today:

  1. “Loan balances for six of the country’s largest credit-card issuers are set  to grow this year for the first time in four years, as consumer  confidence rises…” — The Wall  Street Journal, Jan. 17, 2012
  2. “Uptick In Card Loan Losses In View” — headline in Collections & Credit  Risk, Jan. 20, 2012
  3. “In October 2011… monthly subprime bank credit  card originations were up 22 percent over October  2010 levels.” Equifax  press release, Jan. 30, 2012

You might have noticed that every single headline and subhead in this blog  ends with a question mark. That’s because your blogger shares one single  characteristic with every world-class economist on the planet: he hasn’t the  faintest idea what’s going to happen to the economy tomorrow, let alone in six  months’ time.

But he would suggest to anyone who’s feeling relaxed about their finances and  tempted to run up significant levels of credit  card debt that they should, unless they’re keen gamblers, think again.

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Consumer credit card debt down sharply in Phoenix

U.S. consumer credit card debt is continuing to decline, and according to a new study by Equifax Inc. Latest from The Business JournalsConsumer credit card debt falls moreCharlotte consumers’ credit-card debt down 8 percent in 2011Consumer credit card debt continues to slideFollow this company, some of the largest declines can be found in the Phoenix area.

The percentage of income that consumers owe to credit card companies declined between the fourth quarter of 2010 and the fourth quarter of 2011 in nearly 60 out of 100 metro areas. It was down 14 percent in the Phoenix area.

The cities with the largest reductions are clustered in Florida, Louisiana, Washington and California. Florida had five cities with the largest declines, Equifax said.

However, the company (NYSE: EFX) also noted that while total consumer debt has declined from its peak of $12.4 trillion in October 2008, American households still owe more than $800 billion just in credit card debt.

 

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Consumer credit card debt rises

A new federal report shows consumer debt is once again on the rise, reversing a long recession-spurred decline.

The latest monthly Federal Reserve report showed that revolving credit, made up primarily of credit card debt, increased at an annual rate of 4.1 percent in December, rising nearly $3 billion to $801 billion. December marked the fourth straight monthly increase in revolving credit spending, reversing a recession-spurred decline.

That followed a $5.5 billion jump in November, when the Christmas holiday season kicked off during Thanksgiving weekend. That November increase amounted to an annual rate increase of 8.4 percent. While the Federal Reserve report is good news for Alabama and other states, which rely on consumer spending to stimulate their economies, it’s not good for those folks who remain overburdened by heavy debt loads, said Bill Hardekopf, president of Birmingham-based Lowcards.com, a consumer financial education website.

“These credit card debt numbers are a concern but it’s too early to tell whether we are all falling back into the trap of spending more than we can afford,” Hardekopf said. “People certainly charged more this Christmas than last year.”

Hardekopf said the rise in credit card spending could be a positive sign that consumers are more confident in the economy, which was battered by a three-year economic downturn that began in 2007. But, he added, “it could mean that people are struggling and have to rely on using their credit card to make ends meet.”

“Consumers are going into 2012 with higher credit card debt but the same wages,” he said. “If consumers have a hard time paying this down, we might see delinquencies and defaults start to increase by spring.”

Hardekopf, author of The Credit Card Guidebook, said people need to be cautious when spending on credit cards. He said new federal rulings have cost banks and credit card issuers hundreds of millions of dollars, which may have indirectly led to higher rates and fees for consumers.

“Whenever banks incur additional costs or have their revenue stream cut in one area, they typically make up that money by raising the rates or fees in another area,” Hardekopf said. “And we, the consumers, will usually be the ones paying the price for those additional rates or higher fees.”

Two other challenges loom that could come back to bite those who overdo it on credit card spending as the economy improves: an unemployment rate that remains historically high and gasoline prices that are on a pace to this summer surpass the record $4.05 Alabama saw in September 2008.

“Even though the unemployment rate is dropping, it remains historically high and there are still a number of people out of work,” Hardekopf said. “Gasoline may be the only fly in the ointment that hurts an economic recovery. When gas prices go up, everything goes up.”

Debt elimination tips:

Raise your credit  score. Pay your bills on time, pay down your debt and limit your credit  applications. This will this help you qualify for the best terms and  interest rates on loans and save thousands of dollars over your  lifetime.

Set up a plan for daily spending. Save for the bigger purchases and occasional splurge without resorting to plastic. If  married, make sure both spouses have input. Eat out less or use coupons, and immediately apply the money you saved to your credit card balance.  If you have multiple credit cards with balances, pay off the balance  with the highest interest rate and then move to the next-highest rate.

Set up an emergency fund. All couples should have an emergency fund of six to eight months’ worth of living expenses held in a safe place such as a money-market fund. Make savings consistent and untouchable by  setting up an automated deposit from your paycheck into your savings  account.

Monitor your accounts. Even if you divide up  bill-paying and investing duties, both parties should be able to easily  access accounts to know what is going on with your money.

Source: Bill Hardekopf of Lowcards.com

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Bankrate: Only 54% of Americans Have More Emergency Savings than Credit Card Debt

Only 54% of Americans have more emergency savings than credit card debt, according to a new poll released today by Bankrate.com. One in four Americans (25%) has more credit card debt than emergency savings and 16% have neither credit card debt nor emergency savings.

Bankrate’s monthly Financial Security Index held at 97.3, unchanged from January and tied for the highest level since June 2011. Any reading below 100 indicates a lower level of financial security compared with 12 months earlier.

Despite four straight months of improving sentiment, consumers’ overall financial situation is still seen as negative. Twenty-seven percent of Americans report a lower level of financial security now versus one year ago and 24% report a higher level. Thirty-eight percent of Americans are less comfortable with their savings now compared with one year ago; only 14% are more comfortable.

“Emergency savings remains a problem area for many Americans, which leaves them only one unplanned expense away from having high-cost debt,” said Greg McBride, CFA, Bankrate.com’s senior financial analyst. “Long-term unemployment, stagnant wage growth and rising household expenses are all contributing to this trend. As difficult as it may be to boost savings, having an adequate emergency savings cushion is critical to maintaining financial stability, and Americans need to find ways to sock away more cash for a rainy day.”

Additional findings included:

Job Security

Consumers are slightly positive, with 20% feeling more secure than one year ago and 19% feeling less secure (up from 17% in January).

Savings

Consumers have reported less negativity about their savings in each of the past three months, with fewer feeling less comfortable and more feeling about the same as 12 months ago.

Debt and Net Worth

Both were little changed from January and maintain essentially neutral readings.

Credit Card Debt vs. Emergency Savings

Households with income of $75,000 or more per year, college graduates and retirees are the most likely to have more in emergency savings than credit card debt.

Parents are the most likely to have more credit card debt than emergency savings.

Those most likely to have neither credit card debt nor emergency savings are households with income of less than $30,000 per year, those with a high school education or less and the unemployed.

In a similar Bankrate poll conducted in February 2011, 52% of Americans had more emergency savings than credit card debt. Twenty-three percent had more credit card debt than emergency savings and 19% had neither credit card debt nor emergency savings.

The new study was conducted by Princeton Survey Research Associates International (PSRAI) and can be seen in its entirety here: http://www.bankrate.com/finance/consumer-index/survey-shows-savings-triumphs-debt.aspx.The PSRAI February 2012 Omnibus Week 1 obtained telephone interviews with a nationally representative sample of 1,006 adults living in the continental United States. Telephone interviews were conducted by landline (603) and cell phone (403, including 174 without a landline phone). The survey was conducted by Princeton Survey Research Associates International (PSRAI). Interviews were done in English by Princeton Data Source from February 2-5, 2012. Statistical results are weighted to correct known demographic discrepancies. The margin of sampling error for the complete set of weighted data is plus or minus 3.7 percentage points.

About Bankrate, Inc.Bankrate is a leading publisher, aggregator and distributor of personal finance content on the Internet. Bankrate provides consumers with proprietary, fully researched, comprehensive, independent and objective personal finance editorial content across multiple vertical categories including mortgages, deposits, insurance, credit cards, and other categories, such as retirement, automobile loans, and taxes. The Bankrate network includes Bankrate.com, our flagship website, and other owned and operated personal finance websites, including CreditCards.com, Interest.com, Bankaholic.com, Mortgage-calc.com, CreditCardGuide.com, Nationwide Card Services, InsuranceQuotes.com, CarInsuranceQuotes.com, InsureMe, Bankrate.com.cn, CreditCards.ca, NetQuote.com, and CD.com. Bankrate aggregates rate information from over 4,800 institutions on more than 300 financial products. With coverage of nearly 600 local markets in all 50 U.S. states, Bankrate generates over 172,000 distinct rate tables capturing on average over three million pieces of information daily. Bankrate develops and provides web services to over 80 co-branded websites with online partners, including some of the most trusted and frequently visited personal finance sites on the Internet such as Yahoo!, AOL, CNBC and Bloomberg. In addition, Bankrate licenses editorial content to over 500 newspapers on a daily basis including The Wall Street Journal, USA Today, The New York Times, The Los Angeles Times and The Boston Globe.

www.bankrate.com

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Debt could derail recovery

The trove of statistics and reports released last week point to an economy on the mend.

U.S. homebuilders are feeling increasingly optimistic about their battered industry. Consumer spending is on the rise. America’s factories are humming again. Stocks, in turn, have been climbing.

Not so fast, cautions Bruce Bittles, chief investment strategist for the wealth management firm Robert W. Baird & Co. and a devil’s advocate.

It’s not that Bittles disagrees with the upbeat but backward-looking numbers coming out of Washington lately.

“Things are starting to feel better, and the stock market is a representation of that,” he said during an hourlong talk in Charleston last week for Milwaukee-based Baird’s local advisers and clients.

But peering down the road to recovery, the veteran market watcher has spotted some dangerous potholes ahead. He’s more than a bit “suspect” that the fragile rebound will have legs.

“I’m very skeptical about the next year or two,” he said. “I don’t think we’re out of this yet.”

One big concern for Bittles is consumer spending, which drives two-thirds of the economy. While shoppers have been feeling more confident and throwing more money around lately, especially on big-ticket items such as cars, he’s worried that the spree will be short-lived.

Overall wages have been flat for 18 months and in the red for the past nine months when inflation is factored in. That suggests that personal savings are helping fuel the spending uptick.

“That’s never a good sign,” Bittles said.

The flip side of that same coin is Americans need to save more, as they have through much of the downturn, he added.

Four-letter word

Market experts such as Bittles often are asked by investors what keeps them awake at night.

The threat of war? Inflation? A spike in oil prices? All valid concerns, for sure. But Bittles’ biggest fear goes to the issue that brought the global financial system to its knees in the first place.

“It’s the excess debt in all corners of the economy that keeps me up at night,” he said.

Bittles described debt as “that four-letter word,” literally and figuratively. He called the growing stockpile of taxpayer IOUs “an anchor” on growth because the mounting cost of paying it down “saps everything out of the economy.”

“That’s why we can’t have a sustained boom like we have in years past,” he said.

Greece is the current poster child for spending more than it could pay back, but Bittles says the U.S. is heading down the same path. Where it ends, no one knows.

“Nothing’s been addressed,” said Bittles, who is based in Nashville. “We just keep kicking the can down the road, but the can is getting heavy.”

How heavy? The estimated $15.3 trillion national debt has swelled to about 9 percent of the Gross Domestic Product. That’s on par with Spain.

“And we’re worried about Spain,” Bittles marveled.

Game over?

For all his skepticism, Bittles holds out hope that the debt crisis will get addressed in due time, saying the so-called Great Recession changed the mood of the country.

“I think the game is over,” he said.

He noted that households tightened their belts when the economy tanked, as did businesses.

“Individuals get it. Corporations get it,” he said.

Next up were state and local governments.

Now, it’s Uncle Sam’s turn to slay the debt monster.

Bittles predicted that meaningful reforms could gain traction within three years.

“It’s not going to happen overnight,” he said.

In fact, it’s going to get worse before it gets better. Case in point: Congress last week agreed to extend the temporary cuts to the payroll tax, which helps pay for Social Security. At the same time, an aging U.S. population is driving 10,000 people a day into that federal safety net.

“It doesn’t make any sense,” Bittles said.

But the issue isn’t going away.

Bittles said the powers-that-be in Washington, like a drunk who’s ready to sober up, are finally taking the first small but crucial step to deal with it:

“Admitting you have a problem.”

John P. McDermott

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Pennsylvania is among the safest states to fall behind on credit card bills

Not that you should. Not that you’d ever want to. But if someday you happen  to fall behind on credit card payments, Pennsylvania is among the safest places  in the country to do it.

It is one of four states — the others being North Carolina, South Carolina  and Texas — where debt collectors cannot garnish your wages if you default,  according to Clayton S. Morrow, a consumer protection attorney in  Pittsburgh.

Elsewhere, collection agencies may seek a court order requesting that your  employer siphon off 25 percent of your disposable income, after deductions for  taxes and Social Security. That is, after your employer has siphoned off any  alimony, family support, criminal restitution or student loans on which you’re  also delinquent.

But there are plenty of other means, within the federal Fair Debt Collection  Practices Act, for collection agencies to recover the money. However, some debt  collectors — intentionally or unwittingly — cross the line.

“You have what I call ‘rogue collectors’ that operate outside the law, out of  somebody’s basement and their address is a P.O. box,” Mr. Morrow said.

The Federal Trade Commission investigates debt collectors to identify and try  to correct violations of the Fair Debt Collection Practices Act; therefore, it  behooves consumers to educate themselves about the law, said Jeffrey L. Suher, a  Monroeville attorney who specializes in the debt collection act and the Fair  Credit Reporting Act.

Last spring, the FTC announced its largest settlement ever in a debt  collection case. West Asset Management Inc. agreed to pay a $2.8 million civil  penalty for, among other violations, misrepresenting itself as a law firm,  threatening to arrest or imprison debtors, debiting consumers’ bank accounts,  imposing credit card charges without authorization and revealing consumers’  debts to friends, employers or family members.

In its 2011 report to Congress, the FTC received more than 140,000 consumer  complaints regarding unfair, deceptive and abusive debt collectors, 4 percent  more than the previous year.

Not every complaint alleged illegal behavior. The commission also noted the  number of complaints might not accurately reflect perceived violations since  many consumers file complaints only with the debt collector or the creditor or  they file with another enforcement agency. According to the report, a  significant number of consumers “may not be aware that the conduct they have  experienced violates the [Fair Debt Collection Practices Act].”

With that knowledge gap in mind, it’s important to know what collection  agencies — which buy credit card debt in bulk or get a percentage on recovered  credit card debt — can and cannot do.

Debt collectors may:

• Mail you notices, usually with a 30-day warning that collection calls may  commence.

• Call you a few times per day between 8 a.m. and 9 p.m.

• Call a friend, relative or neighbor to confirm your location.

• Threaten to sue you during the first four years of your debt.

• Sue you and, if they get a judgment in their favor, freeze your bank  account.

• Continue to call you as long as you remain in debt.

Deb collectors may not:

• Harass you with repeated or continuous calls.

• Use obscene, profane or abusive language.

• Call you before 8 a.m. or after 9 p.m.

• Leave you a message regarding your debt.

• Threaten to show up at your work.

• Call your work if you’ve informed them your employer prohibits such  calls.

• Threaten to garnish wages if you work in Pennsylvania.

• Disclose your debt to your employer, coworkers, neighbors, friends or  family members.

• Call after you’ve notified them you have retained a lawyer.

• Misrepresent the amount, status or character of your debt.

• Demand a larger payment than is permitted by law; for example, by  requesting interest, fees or expenses you do not owe.

• Fail to identify themselves as a debt collection agency.

• Threaten violence or damage to your property.

• Threaten to have you arrested. Failing to pay a debt is a civil matter.

• Threaten any behavior it does not intend to pursue, such as a civil suit,  seizure of property, criminal prosecution, getting the debtor dismissed from a  job, ruin a person’s credit rating.

• Threaten to sue past the four-year limit, although no limit exists on how  long they can try to recover the money.

• Threaten to sue you if you make your first payment as a result of  collection calls made after the four-year statute of limitations expires,  effectively deceiving you, unlawfully, into restarting the four-year clock for a  lawsuit.

Consumers have a right to:

• Request a statement of the debt in writing. The collection agency must  provide it before moving forward with any further requests.

• Be informed if the debt collector has passed its four-year window to sue  you.

• Submit a “cease communication” request in writing, stating you don’t want  to receive further notice or you don’t intend to pay. The debt collector must  cease collection attemptsbut may still sue you within the four-year statute of  limitations.

• Sue the debt collector if they violate the laws stated above.

Mr. Morrow suggested that individuals who receive collection calls make note  of any statements that seem “disrespectful, undignified, unfair, or untrue” and  jot down the date, time and name of the representative.

Mr. Suher offered these tips:

• First, find out who owns your debt. If you’re dealing with a debt buyer, he  said, they often don’t have the documents they need to know how much the  consumer owes and inflate the amount.

• Do not ignore a lawsuit. If you receive a notice to appear in court, show  up.

• Once a year, request a free credit report. Debt can legally remain on a  credit report for 7 1/2 years after default. Whether you make your payment or  not, the debt must come off the credit report.

Gabrielle Banks

 

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CFPB Takes Aim at Debt Collectors, Credit Reporting Agencies

A new proposed rule would bring debt collectors and consumer reporting firms under federal supervision

A controversial government regulator set up after the 2008 financial collapse is taking aim at debt collectors and credit reporting agencies, proposing a rule that would bring the industry’s largest players under federal supervision for the first time ever.

“Consumer financial products and services have become more complex over the years and they have expanded well beyond traditional banks,” said Consumer Financial Protection Bureau director Richard Cordray, in a statement on the bureau’s website. The new oversight from the CFPB would change that, applying the same supervision process to financial services providers outside the banking industry.

The impact of such a rule could be sweeping—about 30 million Americans currently have debt being pursued by collections agencies and the three largest consumer reporting agencies have information on more than 200 million Americans, according to the CFPB.

“These are [firms] involved in the financial system who have not been traditionally regulated,” says Ira Rheingold, executive director of the National Association of Consumer Advocates, adding that while the Federal Trade Commission has historically handled regulating debt collectors and credit reporting agencies, it has had limited reach.

The CFPB wants “to go after the big actors involved in industries that really affect the financial services marketplace and clearly both debt collections and credit reporting are two of those places,” he says.

The details of the new oversight are still murky, but it could allow the CFPB to go into theses business and examine their books and evaluate their practices. “They could do a compliance review, which was never really done before,” Rheingold says.

It could also mean the CFPB has the authority to set rules governing the practices of the industry. “It’s a very important announcement and something that we’ve needed for a very long time but didn’t really have because the FTC was hamstrung,” Rheingold says. “They didn’t have quite the same authority as the CFPB has.”

Under the proposed rule, only debt collectors earning more than $10 million annually would be subject to supervision. Those businesses amount to about 4 percent of companies in the industry, but account for more than 60 percent of debts collected each year.

The rule would also cover credit reporting, which is used to evaluate applications for credit cards, mortgages, auto loans and other types of credit. Agencies making more than $7 million a year would be subject to CFPB supervision, only about 7 percent of all agencies, but those companies cover about 30 consumer reporting firms and about 94 percent of proceeds earned from consumer reporting.

Bottom line, it’s an excellent development for consumers, Rheingold says.

“These are industries that need supervision,” Rheingold says. “There’s probably no other industry that gets more complaints than the debt collection industry and then credit reporting is just so central to every decision these days.”

The proposed rule is open for comment for 60 days during which the public is encouraged to weigh in on the details. The rule must be issued by July 21, according to the CFPB.

By  Meg Handley

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Debt collectors, credit agencies get new scrutiny

WASHINGTON (CNNMoney) — For the first time in history, debt collectors — the guys who hound you over unpaid bills — are about to get a tough federal regulator scouring their own books.

The Consumer Financial Protection Bureau on Thursday released a new proposal to regulate the largest debt collection agencies and consumer reporting agencies, which includes credit bureaus that sell consumer credit reports.

“Our proposed rule would mean that those debt collectors and credit reporting agencies that qualify as larger participants are subject to the same supervision process that we apply to the banks,” said Richard Cordray, director of the consumer bureau. “This oversight would help restore confidence that the federal government is standing beside the American consumer.”

The move could impact consumers nationwide. Some 30 million Americans have debt under collection, and the average unpaid debt was around $1,400, according to the bureau.

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With so many consumers struggling with unemployment and debt, Cordray said that more Americans are at the mercy of debt collectors and credit reporting companies, which employers are increasingly consulting before making hires.

Cordray said that employers’ use of credit reports in hiring decisions “may not always be fair for consumers, but it reflects the reach and scope and importance of the consumer reporting field.”

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And that’s why the bureau has decided to target those who gather and crunch consumer financial data, as well as those who chase unpaid bills. The consumer bureau will also be announcing what other kinds of nonbanking financial firms it plans to scrutinize in coming months, Cordray said.

With Obama’s recess appointment of Cordray to director of the consumer bureau, new powers kicked in for the bureau regulating the largest nonbanking financial firms, including payday lenders and for-profit student lenders.

Extreme debtors

While the bureau generally has the ability to create and enforce rules for all debt collectors and credit reporting agencies, it has special oversight powers over the largest participants, thanks to the Dodd-Frank financial reform act. The bureau can march into the offices of the largest nonbanking entities and look at their books to make sure they’re giving consumers a fair shake.

Cordray called the bureau’s supervision power “more effective” when it comes to helping consumers, as opposed to the “blunt instrument” of filing lawsuits — a recourse against firms that don’t abide by the bureau’s enforcement powers.

The new proposed rule lays out which debt collectors and credit reporting firms are subject to closer scrutiny. The consumer bureau will gather comment and finalize the rule by July 21.

For debt collectors, it’s a smaller piece of the market, since so many debt collectors are small companies.

The rule released Thursday would put about 175 debt collectors with more $10 million in receipts under the consumer bureau’s closely watched list. The bureau says that would cover roughly 4% of about 4,500 debt collection companies in the United States. However, that 4% makes up 63% of the outstanding debt these firms are after.

For credit reporting firms, the bureau will have a broader reach. They will be able to regulate and scour the books of firms with more than $7 million in receipts –some 94% of the outstanding debt covered by the firms, including Equifax, Experian and TransUnion.

By Jennifer Liberto

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