In January 2013, the Federal Trade Commission (“FTC”) published a study titled “The Structure and Practices of the Debt Buying Industry.” The full report can be found here. It makes very interesting reading, and confirms a few things I’ve always suspected.
The reason this information appeals to me is that in some instances, homeowners involved in some form of distressed housing event, such as a short sale, are unable to get the lender or servicer to waive the unpaid balance of the debt, i.e. the difference between the lender’s net recovery in the short sale and the full amount of the debt due [often including thousands of dollars of accrued interest].
When asked by clients what they should do, I tell them the decision is theirs…but to me the choice is clear. Here’s why:
- This is no reason not to complete the short sale. If you don’t complete it, you can expect a mortgage foreclosure months or years down the road. It’s better to get the mortgage – and the late payment reporting – behind you. Only then can you begin to repair your credit.
- If Congress does extend the mortgage forgiveness law for 2014, which should happen after the mid-term elections [and be applied retroactively to January 1, 2014], I’d want to get the tax forgiveness now – there is no telling what year the foreclosure might occur, and if the debt forgiveness law isn’t extended into 2015 or 2016, it would become a taxable event.
- The bank or servicer handling the short sale is likely not the one that will be pursuing you. It will be some low-life debt collection company, months or years down the road – if at all. But fear not – the total unpaid debt is not in play – rather, the promissory note will be sold for pennies on the dollar to some debt buyer who will either try to collect it themselves, or resell it on an arbitrage.
- According to the FTC report above, the average amount paid for this debt was 4¢ on the dollar! This means that if one’s remaining unpaid debt after the short sale was $25,000, it would likely be sold for $1,000. Putting that into perspective, it means that an offer of settlement from the borrower of $2,000, gives the debt collector a 200% return. Not a bad day’s work to write a harassing letter or make a rude phone call.[1]
- Also according to the FTC report, the debt is sold by the original creditor to the debt buyer AS-IS, with no representations or warranties as to its validity or collectability. Based upon my experience, the wisest thing to do is the following:
o Notify the creditor in writing within 30 days of first contact, telling them that you ‘dispute the debt’ under the Fair Debt Collection Practices Act, and demand the name and address of the original creditor. All further collection activities must cease during that period. According to the FTC report, not all debt purchasers even have that information.
o If you’re so inclined, have your attorney write a letter to the debt collector with more specific requests or claims.
o Chances are that the debt collector, who is only looking for “low-hanging fruit” will crawl back under the rock from whence he came. Debt collectors are more interested in recovering money through threats and intimidation – not costly lawsuits.
- Lastly, under no circumstances should a borrower pay the debt collector something as an offer of “good faith.” The statute of limitations on contracts such as a promissory note is six years from the date of the last payment. First, check when you last paid the debt – if you know. Then start counting from one to six on the calendar. It’s possible the debt is already uncollectible; but if it is collectible, a token payment will just “re-up” the statute of limitations. In other words, it starts the running of the statute all over again.
- If you want to settle the debt, fine. Just make sure that there is a written commitment from the collection company that the debt will be deemed fully satisfied, and that it will not submit any further negative reports to the credit reporting agencies.
[1] Remember that in these situations, financial weakness is a strength. This debt is unsecured, meaning it can be discharged in bankruptcy at the drop of a hat. The collector knows this. Secondly, he knows that if he ramps up the volume, or does something to offend you, the debt could be quickly discharged. A few pennies on the dollar are better than a goose egg. [Caveat: I do not recommend bankruptcy unless it is absolutely unavoidable. It should not be done preemptively in anticipation of possible collection. It should only be considered if the debt or debts cannot be reasonably settled without mortgaging the next five years of your life.]
