The Debt Collection System: How It Really Works

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jan 21, 2020

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Most of us have a general idea of how the debt collection system works. However, what really happens can be quite different than our preconceived notions. In fact, according to one consumer debt collection expert, credit card companies follow a “corporate philosophy” when trying to get us pay up.

The Corporate Philosophy of Debt Collection

In a recent interview, Bud Hibbs, a debt collection consumer advocate and consultant for over 25 years who has written several books, is approved to teach CLE courses through the State Bar of Texas and has appeared in numerous radio and television programs including the Oprah Winfrey Show, explained this philosophy. He said, “Citibank, for example, has a network of attorneys around the country and a certain percentage of cards that are defaulted on go directly to these attorneys and lawsuits are filed. The credit bureaus, Experian in particular, has a program that supposedly is able to tell Citibank and other creditors the probability of you and me paying if we default.” He provided the following example:

Let’s say John Doe is on one side and Jane Smith is on the other side and both of them defaulted on a credit card debt. However, one of them works for an automobile manufacturer and the other one works in a business that’s not being harmed right now. So, they both defaulted, but the one that has the least potential of paying is sold to a junk debt buyer.

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Debts Are Being Sold – Cheap

Hibbs says that the debts with the least potential of payment are being sold cheap. He explained, “Right now, Citibank is selling them for five percent of their face value and the junk debt buyer, called Unifund out of Cincinnati, makes a determination of who they’re going to sue or who they’re going to sell and then they, in turn, sell it to more junk debt buyers. So, what’s happening to the consumer is that their credit report is suffering two, three, sometimes four or more hits from various creditors.”

Too Many Cases Go to Default Judgment

Hibbs told us that several years ago, the collection industry set up a network of attorneys who do nothing but go out and file lawsuits and attempt to have the cases go to default judgment so that they don’t have to be proven. He continued, “A judge told me about a year ago in a pretty good sized county here near Dallas that in one month just over 1,200 civil cases were filed at that courthouse and out of that, over 1,000 of them were debt collection cases. Unfortunately, he said that of the 1,000 that were filed, more than 80 percent went to default judgment.”

Is It Actually Debt Collectors Bringing the Lawsuits?

Hibbs says that just because you get a judgment and get sued, that doesn’t mean you’re getting sued by the [original] debt collector. He explained:

In the majority of cases, you’re getting sold by a junk debt buyer and, unfortunately, the majority of these cases probably would never pass the litmus test for legal validation in most courts. Hence, what myself and the people I’m associated with do is try to educate people. It’s not about whether or not that person owes the debt; it’s about the rule of law. In the majority of cases, the rule of law would not allow these cases to proceed had the consumer stood up and said, ‘Hey, wait a minute. I’ve got a lawyer. I’m contesting this. What you’ve got doesn’t meet the legal requirements.’

If you are being harassed by a debt collector, contact an attorney whose practice focuses on issues relating to the Fair Debt Collection Practices Act (FDCPA) to discuss your situation. Consultations are free, without obligation and are strictly confidential. To contact an experienced debtor’s rights lawyer, please click here.

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