Once-ignored Consumer Debts are Focus of Booming Industry

In 1996, when Heather Scott’s marriage split up, she defaulted on $3,000 she owed on her Discover credit card. “It was either that or feed my kids,” the Phoenix woman says. Until recently, she probably could have walked away from her credit-card debt with little more than a damaged credit report. But an increasingly aggressive debt-collection industry is going after people, like Ms. Scott, who used to fly below the radar.

For six years, she heard nothing about her Discover debt. Then, in 2002, she was sued in small-claims court in Phoenix. A company called Asset Acceptance Capital Corp. had bought her Discover debt and wanted to collect. The 35-year-old single mother of two, who says she couldn’t afford a lawyer, didn’t show up in court. Asset won a default judgment of about $9,500, including more than $2,000 for the company’s legal fees. For the past year, the company has been taking about $100 out of the $625 paycheck she receives every two weeks as an administrative worker for the state of Arizona.

Speaking generally, Asset makes no apology for pursuing people who failed to pay their bills and says it treats them all fairly. The company has now agreed to settle with Ms. Scott. She will pay an additional $3,000, for a total of $6,111, or 36 percent less than the court judgment.

Asset’s hard-hitting strategy of going after consumers in small-claims courts has affected tens of thousands of people around the country. In the process, the company is helping reshape the burgeoning business of profiting from bad consumer debt.

Most home and car lenders have never hesitated to chase debtors who fall behind on payments. But many other consumer lenders, such as credit-card issuers and businesses ranging from health clubs to utilities, traditionally didn’t tail debtors for more than a few months. These companies have feared bad publicity and have wanted to avoid the costs of pursuing what often are relatively small debts.

As the number of these debts grew, a new breed of collector sprouted, eager to buy up consumer debt that creditors had given up on. Now, as more Americans are juggling more debt than ever before, the newcomers have grown into a multibillion-dollar industry that is scraping the bottom of the barrel to go after debtors who previously would have been left alone. Unlike old-fashioned collection agencies, which pursue debtors on behalf of a client company and keep a set percentage of what they gather, the newer debt-buying companies typically acquire large portfolios of bad debt at a discount.

The king of the debt buyers is Asset Acceptance, based in Warren, Mich. It scoops up the oldest, least-desirable debts that creditors have already charged off as losses. Sometimes, Asset chases debtors after as many as three previous collection firms have failed. Asset and its rivals can make a profit because they keep costs low, paying as little as two cents on the dollar for debt. Asset adds a legal component to the strategy, employing an army of outside lawyers to file thousands of small-claims suits each year. “These debts have already been through an arduous process – they’ve had the kitchen sink thrown at them – so we need to go beyond our predecessors to be successful,” says Asset’s chairman, Rufus H. (“Bud”) Reitzel.

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