3 Ways the System is Rigged Against Consumers

The other day I met with a family who was barely getting by – large family, large amount of debt, and underemployed for eighteen (18) months.  For eighteen (18) months the husband had toiled at a job he was overqualified for, for pay that no-where near met their household needs.  But this is 2014, why are people still struggling?  The recession technically ended in July 2009.  But here we are nearly five and a half years later and families are still barely getting by.

While most keep it together when they are meeting with me in my office, I know that the prolonged battles with debt and the inability to make ends meet is soul-crushing.  And how could it not be?  Worrying every day whether the rent will be paid or if the power will shut off can really suck the enjoyment out of life.

And things don’t seem to be getting better, at least for most Americans.  Median household wealth fell 35% from 2005 to 2011¹⁾ Wikipedia “Great Recession”.  In 2009 forty-seven (47%) of the American public owned zero percent (0%) of the nation’s wealth – meaning that their debt exceeded their assets.²⁾ Inequality for All Many families find themselves asking the question “will it ever get any better?”

I believe there are three factors (among many) that are keeping those who suffered financial setbacks in the Great Recession from moving forward and improving their financial situation.

#1 – The Rise of the Junk Debt Buyers

The modern-day way that debt collection is processed bears little resemblance to the way that creditors historically lent money and collected on debt.  Nowadays once a debt is charged off by the original creditor the debt is then placed into labyrinthine system of the junk debt buyers.

Debts are often bought and sold many times over.  The Federal Trade Commissioned has labeled this current method of collection on debt a “broken system”³⁾ Federal Trade Commission, “Repairing a Broken System. Protecting Consumers in Debt Collection Litigation and Arbitration,” July, 2010.  More than a billion consumer contracts are purchased each year by junk debt buyers with an average purchase price of 4.5 cents on the dollar.

As the debt buyer industry has grown problems have developed due to the fact that the alleged debtors and the debt buyers have no pre-existing business relationship with each other.  Further, as the Federal Trade Commission noted, the transfer of a single debt is fraught with peril as (1) debt buyers receive few underlying documents about the debts, (2) debt buyers rarely receive dispute history from the original creditor, and (3) the accuracy of the information in the sellers’ documents is not guaranteed.⁴⁾ Federal Trade Commission, “The Structure and Practices of the Debt Buying Industry,” January 2013.

In days past a creditor would attempt to collect on a debt and then if determined that payment would not be forthcoming the creditor would charge-off the debt, take the account as a loss for tax purposes, and move on. Now the debt seems to live on forever.  It changes hands for years and many times ends up in litigation.

I meet with families on a daily basis who are dealing with a debt collection lawsuit by a junk debt buyer on an account that has had no activity in six (6) plus years.  The timing is often cruel in that the lawsuit seems to rear its head just as the consumer if finally getting back on their feet.

#2 – Re-Aging of Debt on Credit Reports

The information on your credit report and the associated three-digit score can propel you to great opportunities or keep you mired in financial distress.  And despite its importance the information that creditors place on your report is often flawed with very little if any oversight.

Negative information on your credit report (which drives down your score) is only supposed to be reported for seven (7) years.  However, a common tactic in the debt collection world is to re-age the debt from the time when the account went delinquent with the original creditor up to the time when the debt collector first acquires the account.  Left unchecked this can create an endless cycle where old debts never die and certainly never leave your credit report.  This depresses the score and leaves families in the spot of never being able to overcome a past blemish on their credit report.

#3 – Overwhelming Student Loans that Don’t Go Away in Bankruptcy

Student loan debt is a one trillion dollar problem in the United States (that’s $1,000,000,000!).  I routinely meet with families that are dealing with combined student loan debt of over $100,000 and too often the degrees that such a large sum purchased are in no-way situated to repay the student loans.

Of particular concern is the rise in private student loans that come with high interest rates and aggressive collectors.  These student loans, even though nothing more than super-sized credit cards, enjoy a special place in America’s bankruptcy laws.  They typically don’t go away – ever.  Even people that do successfully obtain a bankruptcy discharge find themselves unable to truly get a “fresh start” because of unmanageable student loan payments.

A friend of mine works in the financial aid department of a large for-profit university.  He often tells me of the moral dilemma he finds himself in of signing people up for private student loans he knows they will never be able to pay.  We all have been told that education is the key to financial stability.  Ironically it may be that very drive to become educated that will weigh us down in overwhelming debt and stop us from ever getting ahead.

There is a push in Congress to make private student loans dischargeable in bankruptcy, but until then many families will be saddled with mortgage-like amounts of student loan debt.

The good news is there are solutions to these problems.  The bad news is the system is complicated and can be exhausting, frustrating, and expensive to navigate.

There are no easy solutions.  But that is not an excuse for inaction.  These problems (and many others) must be dealt or I’m afraid that a large portion of our population will find themselves unable to fully participate in the economy and the gulf of income inequality will continue to grow – which, in the end, helps no one.