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Regulators Criticize “Broken” Debt Collection System

In the wake of increased allegations of abusive debt collection practices, the Federal Trade Commission recently announced its desire for states to enact tougher reforms to crack down on the debt collection industry.

According to the Wall Street Journal, the FTC received more consumer complaints in 2009 about third party and creditor debt collection than any other facet of American financial life except for identity theft.

In response to this disturbing trend, the agency recently released a report that strongly criticizes the country’s “broken” debt collection system.

In the report, the FTC pushed states to enact new laws that would give indebted consumers the freedom to defend themselves against debt-collection litigation, instead of having to accept default judgments.

In a summary of the FTC-sponsored reforms, a recent article in the Minneapolis Star-Tribune listed some of the other key changes recommended by the FTC:

• More evidence required: States should require collection agencies to provide more information during debt collection lawsuits, including the name of the creditor seeking payment for debts.
• Lift the veil: Arbitrators and the forums in which they operate should offer more transparency during debt-collection proceedings. Moreover, these arbitrators should also take measures to eliminate bias.
• Hands off exempt cash: Both federal and state laws should be altered to prevent the seizure of exempt sources of income in debt disputes, including Social Security payments and food aid.
• Sorry, too late: States should also be more vigilant in preventing collectors from suing over debts that have passed the states’ statutes of limitation.
• Thaw consumer accounts: States should also change laws to make it more difficult to freeze debtors’ bank accounts.

Another key reform idea addresses one of creditors’ favorite debt-collection ploys: mandatory arbitration. The FTC says that consumers should have an actual choice in whether their disputes go to arbitration in debt collection cases. Too often, consumers unwittingly consent to mandatory arbitration in the event of a debt dispute.

In the report, FTC Commissioner Julie Brill specifically mentioned the abuse of mandatory arbitration in debt collection disputes.

Brill said a temporary ban on such practices “should remain in place until the arbitration process can be shown to be fair, transparent and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek.”

While many of these reforms sound like no-brainers, they show the existence of large holes in the debt-collection process. The FTC’s renewed emphasis on regulation is welcome news for embattled consumers.

Until such reforms are passed, consumers should learn more about the debt collection process in order to protect their own financial rights. If you're being harassed by creditors, you may want to speak with a bankruptcy lawyer about how to put an end to the calls.