Last summer, Sandra Goodwin was sued by Jefferson Capital Systems for $5,562 in overdue debt. But Goodwin had never heard of or done business with the company.
“The paperwork said I was being sued,” said Goodwin, a former Madison resident who now lives in Stoughton. “I mean, I panicked.”
Goodwin sought free legal advice from Stacia Conneely, an attorney at the Madison branch of the nonprofit law firm Legal Action of Wisconsin. Conneely determined Jefferson Capital had purchased Goodwin’s debt — stemming from an online class she signed up for but never took — from LifeWay Credit Union.
Goodwin’s debt is a small part of the multi-billion-dollar debt-buying industry that recently won a legislative victory in Wisconsin. Such companies buy and sell the right to collect debt, but consumer advocates say the result is sometimes a bill that the consumer may not recognize for an amount that cannot be verified from a company they have never heard of.
Wisconsin consumers have filed more than 2,000 complaints over the past four years with the state Department of Financial Institutions against debt collectors, including such debt-buying companies, outstripping complaints against payday lenders and auto loan-title lenders combined, a Wisconsin Public Radio analysis found. Many of these complaints were about threats or other improper telephone behavior, and some were about attempts to collect debt from the wrong person.
When a creditor such as a credit card company decides it cannot collect, the debt can be sold for pennies on the dollar to a third-party debt buyer. Then, debt buyers try to collect through traditional methods, such as phone calls, or they can sue for repayment.
According to a 2013 Federal Trade Commission report, however, 90 percent or more of people sued never show up in court. If a defendant fails to appear, the judge often issues a default judgment, allowing the creditor to garnish wages and put liens on real estate or other property.
Unlike most states, some consumer debt in Wisconsin is erased after six years. Nationally, the FTC found that slightly over 12 percent of the debt purchased was more than six years old, which would put it beyond the statute of limitations in Wisconsin.
Organizations including the FTC, the U.S. Consumer Financial Protection Bureau, the National Consumer Law Center and Human Rights Watch have all called for stronger regulation of debt buyers, especially in court proceedings.
A bill signed into law March 1 by Gov. Scott Walker sends Wisconsin the opposite way, consumer advocates say. The law standardizes but in some cases lowers how much proof debt collectors must present in court at the beginning of a lawsuit.
“It moves in the exact wrong direction,” said Stoughton consumer attorney Mary Fons, who testified against the bill authored by state Rep. Mark Born, R-Beaver Dam.
Representatives from the Wisconsin Creditors’ Rights Association, which pushed the bill, did not respond to requests for comment by Wisconsin Public Radio.
Born also declined comment.
When Born first proposed the measure in 2013, it was one of the few times the state Department of Financial Institutions had opposed a bill during Walker’s tenure, said Peter Bildsten, former secretary of the state Department of Financial Institutions. In an interview, Bildsten said he was “very concerned about the lack of protection here in Wisconsin for borrowers like that.”
The ‘telephone game’
By the time someone is sued by a debt buyer, how much is owed and to whom it is owed may be unrecognizable.
The FTC found that debt buyers often received very little information about the debts they purchased, usually packaged in one spreadsheet with many other debts. And the accuracy of the information is not guaranteed. The likelihood that the information is inaccurate grows as the debt ages.
“It’s sort of like the telephone game,” Conneely said. “It starts here, and by the time it comes around … years later, who knows what you’re going to see and what information is available?”
She said in Goodwin’s case, Jefferson Capital had purchased her debt, which originated from an online school called The College Network.
Goodwin said she never took the online course she signed up for, and she tried unsuccessfully to cancel it. Although she did sign a promissory note in 2011, Goodwin said she was legally blind at the time because of a stroke and did not know what she was signing.
The law firm representing Jefferson Capital did not return messages seeking comment.
Conneely said she is working on an out-of-court settlement.
The debt buying industry is thriving. Third-party debt buyers recovered approximately $55.2 billion in 2013, earning close to $10.4 billion in commissions and fees, according to a 2014 Association of Credit and Collections Professionals report. By the FTC’s count, there are now “hundreds, if not thousands” of debt buyers.
Wisconsin’s online circuit court database shows that between 2003 and March 22 of this year, Jefferson Capital, the company that sued Sandra Goodwin, had filed 2,630 cases against Wisconsin consumers. Nearly 3,000 cases have been filed by major debt buyer Portfolio Recovery Associates — one of nine firms that comprise more than three-fourths of the debt purchased nationwide.
‘Sewer service’ and ‘zombie debt’
In some cases, alleged debtors are never notified of the lawsuit, ensuring a no-show in court and a win for the creditor. In a practice sometimes called “sewer service,” a collector falsifies records saying a summons was served when it was not, figuratively throwing the papers in the sewer. In 2010, New York’s attorney general sued to throw out about 100,000 judgments that had been obtained this way.
Another illegal strategy used by some companies is collecting on expired debt. In Wisconsin, consumer debt generally expires after six years. Wisconsin and Mississippi are the only states where certain debts are completely extinguished once they are past that statute of limitations.
Debt that is past that date but which creditors continue to pursue has been referred to as “zombie debt.”
It is a violation of the federal Fair Debt Collection Practices Act to file an action in court to collect an expired debt. But Fons confirmed that creditors sometimes do secure judgments on these so-called zombie debts “because they (companies) don’t get caught very often.”
From 2011 through 2015, the Wisconsin Department of Financial Institutions received 2,351 complaints about debt collectors, including third-party buyers, Wisconsin Public Radio found.
At the federal level, Wisconsin consumers have filed more than 1,100 complaints with the Consumer Financial Protection Bureau since July 2013 about all kinds of debt collectors. Americollect, a Manitowoc-based collections agency that uses the slogan “ridiculously nice collections,” was the most complained-about company with 44 complaints. “Debt was paid” and “debt is not mine” were common reasons cited in the complaints.
Debate surrounds debt buyer law
The new law signed by Walker standardizes but in some cases loosens the required proof at the beginning of a
lawsuit for these kinds of legal actions under the Wisconsin Consumer Act. Creditors and third-party debt buyers now must provide a single billing statement as proof at the beginning of a lawsuit.
Under the previous standard, they were required to show all documents “evidencing the transaction,” which could include the initial contract and a record of any charges and additional fees or interest.
Born said in a press release after the Assembly passed his bill in November that the legislation “closes a loophole that has been exploited by bad actors to avoid paying debts.”
University of Wisconsin-Madison finance professor Jim Johannes, who testified in favor of the bill, said in an interview that the new law “provides clarity for the courts.”
“Previously … the courts could interpret it any way they wanted to,” he said.
Johannes said he believes the new law will protect consumers while preventing people from getting out of paying their debts.
Conneely said the new law has created a different type of loophole — one that benefits creditors. Now, the required billing statement can be drawn up any time the creditor chooses. It may not include crucial information about the account’s history, she said.
Editor’s note: This story was provided by the Wisconsin Center for Investigative Journalism.