By Ylan Q. Mui for the Washington Post
Monday, November 22, 2010
The Federal Trade Commission is seeking to revise the protocol surrounding two of life's touchiest subjects: debt and death.
Debt collection has become an increasingly controversial practice as more Americans default on loan payments. Government data show the charge-off rate on consumer loans spiked to 6.71 percent during the second quarter - the highest level in at least 25 years. (Five years ago, the charge-off rate - loans written off by their lenders as uncollectable - was 2.4 percent.) Meanwhile, debt collection ranked second on the FTC's list of most common consumer complaints last year after not even cracking the top 20 two years ago.
The rise in debt collection has spawned a niche market devoted to recouping money from those who die with unpaid bills. The FTC began investigating the practice several months ago and found confusion among collectors over whom they were allowed to contact and what they could say, said Joel Winston, the agency's associate director of financial practices.
"The debt doesn't disappear when the person dies," he said. "It's still a valid debt, and the collector can still collect it."
But the question is: From whom?
The federal Fair Debt Collection Practices Act limits the people that collectors can contact to those with authority to pay the debt - typically a spouse or family member, and possibly a third-party executor of an estate. But in a proposed policy statement, the FTC said changes to court procedures have widened the pool of those who may be able to pay to include a host of other legal representatives.
Some consumer activists have criticized the FTC proposal as giving too much leeway to debt collectors. In addition, they have questioned details such as use of the word "spouse" vs. "widow" or "widower," arguing that marriages end upon death. Just whom debt collectors can contact is a particularly sensitive issue because the calls often come during what can be a time of high stress for friends and family of the deceased.
"Presumably we're dealing with elderly people at the most vulnerable time that you could imagine," said Richard Rubin, a consumer rights lawyer in Santa Fe, N.M.
Locating those who can pay the debt creates another challenge. Often, collectors may contact several friends or relatives in their attempt to find the right person. Current law allows collectors to only ask for "location information" without revealing that a debt is owed. The FTC is considering relaxing that rule for those who are deceased.
But that could pave the way for collectors to persuade unobligated consumers to pay the debt, consumer groups say. In its investigation of the practice, the FTC listened to thousands of phone calls and found debt collectors often operating in a gray area, Winston said.
"Without actually saying anything inaccurate, a collector can kind of maneuver the consumer into paying something they didn't have to pay," he said.
The FTC proposal states that collectors appealing to consumers' "moral obligation" to close the debt could violate federal law. In addition, it emphasized that collectors cannot imply that those with authority to pay the debt must do so out of their own pockets. All debts should be paid out of the deceased's estate.
"We are determined to ensure that the collectors play by the rules," Winston said.
But consumer groups said the language used in the FTC's proposal is too loose and could have the opposite of the intended effect.
"The FTC should strengthen protections for grieving families and friends, not open the door to debt collection efforts that often aim to exploit the vulnerability of the bereaved," Robert J. Hobbs, a lawyer with the National Consumer Law Center, said in a statement.