Imagine that you loan someone $10,000 with the understanding that they will pay you back on a monthly basis with interest. After a while, they fall behind on their payments, so you call them to discuss their financial status and encourage them to make a payment. But they dodge all phone contact and you’re not sure they are even getting your messages. No return phone calls. No contact. Nothing. Then you receive a letter in the mail that says something like this: “Pursuant to my consumer rights under the Fair Debt Collection Practices Act, I hereby demand that you cease and desist from any further attempt to contact me by telephone. Any further attempts at telephone contact will result in my taking legal action against you for violating my rights under Federal law.”

What would you do in this situation?

1. Meekly go away and make no further attempt to collect?
2. Ignore the demand and continue calling anyway?
3. Turn it over to a collection attorney?

The smartest thing to do in this situation would be to file a lawsuit against the debtor. When you look at it this way, it seems obvious that sending a cease communication notice to a creditor is a pretty dumb thing to do. It makes no sense at all if your goal is to work out mutually agreeable settlement arrangements with your creditors. Yet there are hundreds of debt settlement companies out there still using this obsolete and dangerous technique, not to mention countless debt information websites that recommend this approach and even provide sample letters.

When I first started doing debt negotiation in 1997, I worked hard to get the creditor to substitute my phone number for that of the client, so cease communication notices were rarely necessary because the creditor could contact me for an update any time they wanted to. I would only use cease communication notices with truly abusive creditors, the ones who refused to respect the rules and continued to harass or abuse the client even though they had received my power-of-attorney to speak on the client’s behalf.

Fast forward a few years. In the process of developing the operational procedures for a large debt settlement operation that handled thousands of clients, it became obvious that we would need an army of people just to field the auto-dialed calls from the creditors. Instead of this unworkable solution, we made the decision to coach consumers on how to screen the calls, report abuse, and generally tough out the collection process until we could negotiate realistic settlements on their behalf. This worked fine, and cease communication notices were usually unnecessary. Unfortunately, many other companies took the easy way out and simply sent out “C & D” letters to every creditor in the client’s file. This was done automatically, and without any analysis with respect to the frequency of the calls to the client or the nature of those calls. The result? A bunch of really angry creditors, a big increase in lawsuit activity (what other choice was the creditor given?), and a lot of unhappy clients.

Sadly, years later many companies and websites are STILL using or recommending this technique. Type “cease communication notice” into your favorite search engine and be amazed. I just did it and turned up more than 1.5 million hits!

Sending a letter like this is the exact OPPOSITE of the approach that I teach. What works best is communication in good faith. This is simply a matter of common sense. I’m not saying that you should subject yourself to abuse or harassment. But in that type of situation, a complaint letter is often more effective than a cease communication request anyway. Obviously, you also need to take measures to manage the volume of collection calls, which is simply a matter of screening. But it’s important to keep your creditors informed, let them know you haven’t disappeared or tried to skip out on your obligation, and that your intentions are to work things out when you have the resources to do so. Patient persistent explanation of your situation will win the day in the end.

It’s pretty simple, really. If you want to settle with your creditors, talk to them once or twice per month until you work out a deal. If you want to get sued, send a cease communication notice.

If you’re in a type of business that’s subject to government regulation (designed to protect consumers from some of the more abusive practices of your business model), and you don’t like one or two of the laws, just spend a bunch of money lobbying Congress and presto — no more pesky consumer protection laws to worry about. That appears to be what’s going on in the latest Congressional chicanery designed to stick it to the consumer.

The purpose of the legislation in question (already passed in the House and presently under consideration in the Senate) is to make check diversion companies exempt from the Fair Debt Collection Practices Act. A check diversion company is basically a collection company that partners with local District Attorney offices to go after people who’ve written bad checks. Essentially, these private debt collectors are allowed to pretend they work for the public DA when calling or dunning consumers for restitution on bounced checks. Until now, these outfits were regulated under the FDCPA like any debt collector. If this legislative amendment passes, such companies will be exempt from debt collection law. The industry was already rife with deceptive practices and abusive fees. Now, of course, it will get worse — much worse.

Yes, of course you should never write a bad check, and anyone who does it on purpose is an idiot that deserves to get hounded by debt collectors. But this debate is not about the need for personal responsibility. Rather, it’s a debate about the too-comfortable relationship between public officials and private enterprise. Ask yourself whether it makes any sense at all to:

1. Allow private debt collection companies to pretend they work for the DA’s office, using DA letterheads and threatening criminal prosecution when no evidence of fraud has been presented or documented.

2. Allow DA offices to receive compensation from said private companies.

3. Allow check diversion companies to harass consumers with no regulatory restraint on tactics or techniques.

4. Punish (through excessive fees and bogus threats of criminal prosecution) financially challenged consumers who may make the occasional mistake in balancing their checkbooks, or who run their budget so close to the bone that slip-ups are bound to occur once in a while.

The National District Attorneys Association, according to its president, Paul Logli, supports the exclusion of check diversion programs from the FDCPA in order to “protect prosecutors and check-diversion companies from lawsuits.”

Excuse me? Why do we need to be protecting collection firms from lawsuits? Aren’t they big boys? Can’t they stand the heat? What a silly argument. Sure, okay, DAs are overworked by definition. But out-sourcing and allowing private companies to impersonate DA staff? Come on. What’s wrong with this picture? Did I mention that the DA offices also make a profit on the check diversion deals? This whole deal smells pretty rotten.

You know, I often tell my stressed-out clients that we don’t have debtor’s prisons here in the U.S. anymore. I’m starting to wonder how long it will be before I can no longer say that.

An interesting article appeared last week under the title, “Bankruptcy Law Does Have Supporters.” Well, no kidding. Of course the new law has supporters. How else would it have passed Congress? I’m sure most of the executives in the credit card industry think it’s a pretty good bill. They should know. Collectively, they spent millions of dollars lobbying to get it passed.

Basically, the article in question is a litany of pronouncements by experts (?) who support the new law. But just “follow the money” and you immediately see what’s going on here. With the exception of a law professor from Georgetown University, who likes the “consumer protection” aspects of the bill (oh, brother!), virtually every other authority cited in the article represents the business community in one form or another. Absent are quotes from ANY individual, organization, or association that works with debt-strapped consumers on a regular basis.

To prove my point, take a look at the parade of pro-bankruptcy-reform authorities cited in the article:

A director from the U.S. Chamber of Commerce. Check.

The head of a market research firm that recently published a report on the widespread “abuse” of bankruptcy. Who does the firm conduct its research for? The lending industry. Check.

A spokesperson for the American Bankers Association. Check.

A lobbyist for the National Retail Federation. Check.

Head of a trade association of consumer credit and finance companies. Check.

You get the idea. All of the voices in support of the new law are pro-business. Might these folks be just a little biased? Where are the quotes from the people in the trenches? You, know, like the judges who actually try these bankruptcy cases in their courts? Why aren’t they quoted as supporting the new law? Or bankruptcy attorneys? Couldn’t they find any bankruptcy attorneys who like the new law? Apparently not. And there is a reason for that.

Yes, abuses occasionally happen in the bankruptcy system. People sometimes try to game the system. But — surprise, surprise — abuses will occur under the new law too. The bottom line is that the old system was not broken and did not need fixing. It worked fine. Was it perfect? No. Will the new law correct those imperfections? No. Will it introduce new and unnecessary problems?

At the time, Judge Frank Monroe of Austin called the new law a trap for consumers, characterizing some of its provisions as “inane, absurd, and incomprehensible to any rational human being.” I guess he just doesn’t know what he’s talking about…

In my previous post, I discussed the annual report on the Fair Debt Collection Practices Act issued by the Federal Trade Commission. As noted, the FTC receives more complaints about debt collection than for any other industry. We can expect it to get worse, however, if the collection industry gets it way on a key issue currently under review. Since sweeping changes to rules for telemarketing went into effect in 2003, debt collection firms have also been prohibited from using automatic dialing systems to call consumers’ cell phone numbers. But the industry’s trade association (ACA) is trying to get the Federal Communications Commission (FCC) to change this rule.

If the industry gets its way, we’ll see the number of complaints increase big-time. Currently collectors can only call cell phone numbers by placing the calls manually, which is very inefficient. In fact, many collection agency telephone systems are configured so their collection reps can ONLY handle calls that are placed via auto-dialer. So if the rule is changed, consumers who are behind on their bills can look forward to getting bombarded with cell phone calls in addition to calls placed to the home or workplace.

The ACA claims that inability to auto-dial cell phones will be “extremely detrimental to the industry and consumers” and “creditors will lose billions” if the rule is not changed.

What nonsense. Inconvenient to the collection industry, sure, but detrimental to consumers? Are there any consumers out there who think it will be beneficial to allow collection agencies to auto-dial their cell phones? The only people who think this is a good idea are debt collectors and auto-dialer equipment vendors.

The National Consumer Law Center has submitted a recommendation to the FCC against changing this rule.

It will be interesting to see the outcome on this debate, which has the potential to affect millions of stressed out indebted American consumers. Meanwhile, the message is clear: Don’t list your cell phone number on any credit-related applications!

The Federal Trade Commission has released its annual report on the Fair Debt Collection Practices Act for 2006, which documents complaint patterns and enforcement actions by the FTC during calendar year 2005. Consistent with recent years, the latest report shows that consumers complain more about debt collection than any other industry. “Last year, consumer complaints to the Commission about third-party debt collectors increased both in absolute terms and as a percentage of all complaints that consumers filed with the Commission during the course of the year.”

Here’s a link to the full report at the FTC website.

There are no real surprises here. The 66,627 complaints about debt collection activity received in 2005 represent a 14% increase over 2004. And of course, those 66,627 complaints are a drop in the bucket compared to what’s really going on out there in the world of collections. The simple fact is that people usually do not file a complaint even when it’s justified. Mostly they just take their lumps. So we have no real way of knowing the true scope of the problem, only that it’s getting worse instead of better, as measured by the FTC’s statistics.

Also, it’s important to note that the Fair Debt Collection Practices Act technically only applies to THIRD-PARTY debt collectors, meaning collection agencies or collection attorneys. The FDCPA does not apply to the in-house collectors employed by original creditors (like the major credit card banks). Even though the FDCPA does not apply to original creditors, the Commission still collects complaint data on in-house collections activity. In 2005, the FTC logged 23,605 complaints about in-house collectors, bringing the overall total of debt collection-related complaints to more than 25% of ALL complaints received in 2005. So the collection industry beats every other industry hands-down in terms of complaints logged.

The number one type of complaint received about third-party collectors is that they misrepresent the “character, amount, or legal status of consumers’ debts.” No surprise there, either. If a debt collector is flapping their gums, the odds are pretty good that they are either lying outright or saying something misleading in order to scare the consumer on the other end of the phone. But in this year’s report there was a big jump for this category of complaint, from 31.6% in 2004 to 42.7% in 2005. I feel that this has to do with the growing presence of debt buyers in the marketplace. And debt buyers routinely add what I call “phantom” interest to the accounts they purchase. In other words, they may buy a debt a year after chargeoff by the original creditor and then back-date interest charges to the time of chargeoff even though they did not own the debt at that time. This serves to greatly inflate the debt during the collection process, with the aim of driving up collection percentages and increasing portfolio return rates. So it’s no wonder that consumers feel they’ve been bamboozled by the debt buyers. This will only get worse as debt buying continues to displace contingency-based collection systems.

At least the FTC is proposing to Congress that legislation be passed requiring debt collectors to itemize their fees and other charges upon request. I doubt such a bill will pass anytime soon, but it would be hard to argue against such a measure, which certainly seems reasonable on the face of it, and comes recommended by the Federal Trade Commission. We can only hope, although I won’t be holding my breath on this one.

In several recent articles and blog posts, I have taken a strong position against bogus “debt elimination” programs. Unfortunately, these scammers seem to be getting bolder by the day.

In the past few weeks, I’ve actually seen some of the perpetrators issue press releases. Talk about a fast track to getting on a “world’s dumbest criminals” show! It’s only a matter of time before authorities shut down these clowns like they did with the Dorean Group (see my blog post of April 10th), but in the meanwhile thousands of unsuspecting consumers are getting soaked for big money.

I won’t post the links to the press releases here in this blog because I don’t want to help the scammers by giving them free backlinks and thereby helping them obtain traffic from the search engines. This morning I surfed a link in one of the press releases, which took me to one of the cheesiest-looking debt websites I’ve ever seen.

Here’s what the website says: “Now you can discharge 100% of your Credit Card Debt without Bankruptcy, Consolidation, or Refinancing. Yes, actually walk away from this debt!” The site also claims that this is legal and ethical.

You know, maybe I’m taking the wrong position thinking that consumers are innocently being bilked in this scam. Maybe the scammers and the victims deserve each other. I mean, really, how dumb do you have to be to think it’s “ethical” to walk away from your debts? There’s an old saying: “You can’t cheat an honest person.” Perhaps the folks who get conned into this scheme have a little larceny in their hearts and deserve what they get.

On the other hand, I understand how vulnerable people are when they are buried in credit card debt. It must be really tempting to drink the kool-aid and believe the nonsense pitched by these kooks.

Anyway, I was interested to see that one of the scammers actually posted documents providing “proof” that the “no money lent” system really works in getting debts erased. These folks claim to have “eliminated” nearly $150 million of debt. So I took a look at the “proof.” It consisted of nothing more than a few documents showing that the creditor withdrew a case or that a case was dismissed. In a couple of instances, the “proof” was in the form of notices from arbitration forums. Leaving aside the fact that arbitration awards or notices are not formal legal documents (and therefore are equal in value to toilet paper in terms of proving anything at all), the remaining actual court documents prove exactly nothing. Why? Because there are numerous reasons why a collection lawsuit might be dismissed or withdrawn, and none of those reasons have anything to do with the bogus legal theories espoused by these clowns. Such reasons include prior settlement of the debt out of court, the creditor’s inability to locate the debtor, a debtor stipulating to judgment, and even instances where a legitimate dispute against the creditor was demonstrated by the debtor. In other words, there are lots of reasons why collection lawsuits do not always proceed to the point of judgment. But these documents of withdrawal or dismissal do not prove anything relative to claims made by the scammers for their magic “system” of erasing debts.

The boldness of these scammers continues to amaze me. I recently spoke with one consumer who had been pitched by a “debt elimination” scam sales agent. The sale rep actually suggested that the consumer (who was still current on her obligations at that point) OPEN A NEW CREDIT CARD ACCOUNT solely for the purpose of paying the scammer’s outrageous fees, with the intention of immediately defaulting and never making any payments at all. Folks, that’s FRAUD, pure and simple.

So, my message for the day to the con artists who peddle this scam is this: Keep it up! Keep painting a great big red bull’s-eye on your back by issuing press releases and encouraging consumers to commit fraud. It’s only a matter of time before some state Attorney General takes aim. I can’t wait to see the documents produced by the discovery process in such a case, which is sure to happen sooner or later. It should make for some seriously fun reading.

Of course, when that happens, the other scammers will have an easy answer. The inevitable attack by the FTC or state AGs will all be a part of the “banking conspiracy” to keep the “truth” from the American people, the government is part of the conspiracy, etc. That’s what those two ripoff artists from the Dorean Group are still claiming, while they sit in jail awaiting trial for wire fraud and other criminal charges …