Bill helps consumers against debt buyers

For years, Minnesota has been known for having one of the friendliest climates in the nation for companies that profit from buying and collecting old consumer debts.

But that could soon change if two state legislators have their way and the Minnesota Legislature goes along.

A draft bill to be introduced later this month by Rep. Joe Mullery, DFL-Minneapolis, and Sen. Ron Latz, DFL-St. Louis Park, would require debt buyers filing collection lawsuits to produce an assortment of documents proving that borrowers being sued actually owe the unpaid debts. A failure to attach the documents to a lawsuit or court summons could lead to penalties of as much as $2,500 per violation, and consumers would have the right to sue for damages.

The proposed legislation would also ban a practice known as "re-aging," in which debt buyers try to collect on old debts. Under current law, debt collectors can renew long-delinquent debts -- even when the statute of limitations has expired -- by persuading consumers to make small payments, which renews the default date.

"If someone comes up to you and says, 'pay me,' the first question out of your mouth should be, 'why?'" Mullery said. "You should have to explain why and let me know what this is all about. That's what this all boils down to."

Taken together, the changes would make it harder for debt buyers to pursue debts -- particularly in cases where the amounts can't be verified. That, in turn, could provide some relief to thousands of families struggling to pay their bills amid the worst economic downturn in decades. However, by making recoveries of bad debts more difficult, industry experts warn that it could drive up losses on old debts and make credit less accessible to the vast majority of consumers who have not defaulted on their debt payments.

"Based on a preliminary reading, this could have very significant implications as to the flow of credit to consumers," said David Cherner, legal counsel and director of state government affairs for ACA International, a trade group based in Edina that represents the collections industry.

Though collecting on past-due accounts has become more difficult during the downturn, the industry remains highly profitable. The big debt collection firms, such as Portfolio Recovery Associates Inc. of Norfolk, Va., make 20 cents or more in profit for every dollar in revenue they collect. By comparison, retail giant Wal-Mart Stores Inc. of Bentonville, Ark., makes less than 6 cents for every dollar in revenue.

Records aren't complete

But national consumer groups have long argued that the practice of buying and selling huge portfolios of debts opens the door to mistakes.

When debt buyers acquire portfolios, the data come in computerized spreadsheets with the borrower's name, Social Security number and basic information about the account. In many cases, the records are not complete; information about past payments or settled accounts is not transferred. As a result, debt buyers pursue consumers who have already repaid the amounts being sought, consumer advocates argue.

"The farther away you get from the original creditor, the less likely the information is accurate," said Ron Elwood, staff attorney with the Legal Services Advocacy Project in St. Paul, who wrote the legislation in collaboration with the legislators and state attorney general's office, among others.

In addition, the bill would make it impossible for debt buyers to revive a statute of limitations by collecting on an old account. Any legal action must also include a signed affidavit stating the debt has not passed the statute of limitations.

Relatively friendly laws

Though a number of other states have passed legislation requiring greater disclosure by debt buyers, Minnesota would "definitely be out in front on this issue" if the legislation passed, said Gail Hillebrand, a senior attorney with the Consumers Union who tracks state collections laws.

But some consumer attorneys say the bill does not go far enough in addressing this state's relatively friendly laws on debt collection.

Minnesota is one of just a handful of states that allow collections firms to initiate a lawsuit against a debtor simply by serving a summons and without actually filing documents with the court -- a practice known as "hip pocket filing." Many consumers are unaware they have been sued until it's too late, and the collections firm has won a default judgment.

Ultimately, Doroff prevailed in court, but only after spending $3,000 in legal bills. "The case should never have gone to court," he argued, "because they never had legitimate information. ... Having to prove that this is what you actually owe should not be a radical proposition."