As debt collectors seek new ways to collect old, often uncollectible debt and banks look for new sources of revenue, it seems the perfect solution has been discovered.
The banks allow debt collectors to use their license with Mastercard while they receive fees and high interest rates for the credit card profits.
It is a way for banks that shut down their subprime credit products during the “credit crunch” to get back into the subprime market. The banks can now re-enter the subprime market but with fewer risks because the debt collection firm will cover losses to banks if borrowers default.
Debt collectors create assets out of thin air
Consumers may not be aware that every state has a statute of limitations on debt. The statute of limitations determines how long you can legally be sued for a debt. Once the statute of limitations has passed, consumers can no longer be sued for a debt and essentially the debt becomes uncollectible. You may or may not believe you have a moral obligation to pay an outstanding debt, but in eyes of the law, you are no longer legally responsible.
Junk debt buyers purchase these old debts for pennies on the dollar knowing they are well out of the statute of limitations. The debt collection firm issues a new credit card, with a pre-existing balance, and now they instantly turn a profit on an uncollectible, worthless debt.
What’s the catch?
In some states, once you agree to pay an old debt, the statute of limitations is revived and you again become legally responsible. By putting the old debt on the credit card offer, the worthless debt is now a viable new debt.
As a condition to get the new credit card the consumer must agree to pay a certain amount on the old debt. The amount the consumer agrees to may only be a portion of the old debt; however, it is a substantial amount more than the debt collector paid for the debt. Instant profit is made by the debt collector because they literally pay “pennies on the dollar” for old debts.
Some of the banks partnering with debt collectors call the program “Balance Transfer Card Programs.” This should not be confused with typical “balance transfers” offered by banks where consumers are lured with low interest rates to move credit account balances to a new credit card. The debt collectors' “balance transfer card programs” involve consumers moving expired, old debts onto the new credit card.
The Federal Trade Commission declared some of the offers deceptive because they failed to clearly explain to consumers they have no legal obligation to pay anything on an old debt because the obligations had expired under the statute of limitations.
In 2011, Monterey County Bank, agreed to a $3 million settlement with the FDIC without for such deceptive practices even though they did not admit or deny any wrongdoing.
In 2008, the Federal Trade Commission accused CompuCredit of deceptive practices which included the failure to disclose their credit card program was really a debt repayment program. CompuCredit agreed to return more than $114 million to customers.
Jefferson Capital, CompuCredit, Genesis Financial Solutions and Tighorn Financial Services are some of the major players in the “Balance Transfer Program” according to the Wall Street Journal. All of their Balance Transfer Programs in effect work the same, old debt is transferred onto new credit card offers and those credit card offers typically have high interest credit terms.
Is it worth it?
Consumers with few credit options and low credit scores may see this as a good way to re-enter the credit card industry and improve their credit scores. But the issue resides with transparency and disclosure. Many consumers do not realize they are signing up to pay old debts and that the statute of limitations on that debt may be revived.
Once a debtor agrees to make just one payment on an expired debt, the clock restarts and the debt is re-aged. This may sound fairly innocuous; however, if the debtor defaults on the new credit card, the debt collector can resort to commonly used debt collection practices as well as file a lawsuit to recover the debt.
Consumers who were once freed of expired debt under the statute of limitations can end up dragging old debt into their future. The desire and sometimes need for a credit card is certainly understandable. A better alternative might be a secured credit card or an unsecured credit card that can help re-establish credit.