Evidence of Assignment: Why Debt Buyers Have Proof Problems

Assignment is the foundation of the debt buying industry, and the industry is built on sand. Or a swamp. Because assignment is also the industry’s weak spot, and the reason why most—if not all—debt buyer lawsuits should fail.

In order to collect a debt legally, a debt buyer must prove it has the right to collect it. To do this, it must show an unbroken, valid chain of assignment back to the original creditor. Most debt buyers cannot do this.

The smoking gun

Think of a chain of assignment like a chain of evidence in a criminal case. In order to connect the smoking gun—with the culprit’s fingerprints on the trigger—to the crime scene, the police and prosecutor must be able to account for its whereabouts at every moment since the detective put it into an evidence bag at the crime scene. If they lose track of it, the evidence is no longer reliable. In order to prove that the gun—and fingerprints—in court are the same found at the scene, everyone who was in possession of the gun must come into court to testify, from the detective to the forensics expert to the guy from the evidence room.

The same thing must happen with a debt; the evidence of the debt is the smoking gun, and the contract from the original creditor to a debt buyer (and from one debt buyer to the next) is part of the proof of where the debt has been.

Debt buyers’ proof problems

Debt buyers could prove up the chain of assignment; it just goes against their business model. That business model is to file (tens or hundreds of) thousands of lawsuits without checking to see whether those lawsuits have merit, and hoping to intimidate most consumer-defendants into paying up without asking any more questions.

And most do, so the business model works.

But most consumers should win their debt buyer lawsuits, because debt buyers cannot produce any competent evidence to support their claims.

The evidence problems start with the original creditor. Until recently, few kept copies of credit applications with the consumer’s signature, or even a complete set of account statements. Some creditors have improved their record-keeping, but those records rarely travel with the debt as it is bought and sold. So debt buyers generally do not have those records when they collect, and most file lawsuits without bothering to get this basic evidence.

In part, this is because requesting proof before suit would probably slow down the debt collection freight train. Also, debt buyers apparently have to pay for that proof, which would add expense to delay.

Even if debt buyers did get the evidence from the original creditors, there remains the problem of proving its whereabouts.

Generally, debt buyers produce only a bill of sale to “prove” the sale. The bill of sale is a generic document that never mentions the debt at issue. That makes it no good proof of anything. It generally refers to an exhibit with the list of accounts sold—which is never attached. At best, a debt buyer may produce a single line from a spreadsheet (the exhibit is rarely an actual document).

Finally, when a debt buyer does produce what seems to be adequate proof, watch out for robo-signing, which has long been business as usual in the debt buying industry.

Challenging the evidence of assignment

If challenged with well-drafted discovery requests and a competent consumer attorney, most debt buyer lawsuits should fail. You can find some forms to get you started, but you are better off consulting with a consumer lawyer as soon as you receive a call or summons from a debt buyer.

(photo: http://www.flickr.com/photos/jeremybrooks/5094512279/)

  • dean

    This is a matter of law, not ethics, debt buyers often file suit without having the ability (in most cases) to prove their case, this is unlawful. If you are being sued you have the right to answer that suit and ask the simple question (show me proof that I owe you the debt). They may ask you if you owe such and such (original creditor) money for charges you made, and the answer is yes you do. Then they may tell you that they are now the owner of that debt and you owe them. You, answering under oath and not speculating should answer no, because you have not been shown proof that this debt is owned by this debt buyer, this debt buyer by law must show you and the court proof.
    Do your homework understand your consumer rights and a little about the law will go along way. This other person advising you to just pay it because you owe it needs to grow up, or maybe we should stop by his home and say ‘I’m here to collect on a debt you owe Bob, my name is Jim he sent me to collect for him” but be sure to only take cash.

  • jon

    When Capital One assigns debt to a collection agency, e.g., does the original contract typically include an oligation to creditor and/or its assignees?

    • http://caveatemptorblog.com Sam Glover

      You would have to go back and review your contract, but I’m pretty sure every credit card contract includes an assignment clause.

  • Nathan

    How is it legal for a credit card company to charge off a debt, receive a tax break as a loss (assumed by the debtor’s tax payments as income), then be potentially paid back in full or in part through collections. I’m assuming it’s through creative accounting and tax code favoring the credit industry. Am I missing something? If the debtor pays a tax consequence for the charge off… Can that be reimbursed if paid in full?

    • http://caveatemptorblog.com Sam Glover

      They’re not getting a tax break, really. They’re just writing it off as a loss (which it is) in order to prevent creative accounting by floating all those negative-balance accounts on their books. If they get money later, it’s booked as income on which they have to pay taxes.

  • Dutch Maynard

    Thank you, Mr. Glover! It’s great that good men like you are willing to take the time to help people being harrassed by debt buyers. Consumers and courts should be aware that, for example, Midland funding LLC and its publicly traded parent corporation, Encore capital Group, Inc., have paid more than $1.8 Billion to obtain more than 33 million customer accounts with a face value of about $54.7 Billion (an average of 3 cents on the dollar) according to Encore’s 2010 Form 10-K. Encore and Midland buy electronic portfolios containing billions of dollars of old, charged-off debtor from credit card companies, banks, telecommunications firms and other creditors including Bank of America, JPMorgan, Chase, Citibank, Wells Fargo, HSBC, Providian and Verizon Wireless, to name some of the Sellers. Several of these banks, including Bank of America, JPMorgan, Chase, and Citibank, also provided Midland with financing to pursue its debt acquisitions and collections. Again, for example, Encore currently has a $410 million revolving credit line to acquire consumer debt from many of the same banks that have sold debt to Midland, including JPMorgan, Chase, Bank of America and Citibank. [see http://www.ag.state.min.us/consumer/pressrelease/110328debtbuyers.asp. You might also appreciate http://www.nedap.org/pressroom/documents/DEBT_DECEPTION_FINAL_WEB.pdf–this relates to the process where debt is sold again when collection effors have proven futile. Again, sincerely, thanks for your comments. –Dutch Menard

  • Shannon

    dave – I’m in the middle of one RIGHT now. Tell me more.

  • dave

    I quit paying 15 grand in credit cards on purpose and have beat 2 lawsuits on my own 1 is still pending. I think forums like this are a great way to for people to learn about the debt collection process .

    • http://caveatemptorblog.com Sam Glover

      You don’t say whether you were paying on debts owned by debt buyers or original creditors. The bottom line is that if your creditors were trying to collect on debts they couldn’t prove they had the right to collect, good for you.

    • matt

      Thanks for increasing rates/fees for those that actually pay their debts.

  • Debt Buyer

    If you are an honest person who really feels an obligation to pay back money that you borrowed, then dealing with a debt buyer is GOOD for you. The debt buyer has purchased your acount for a deep discount. That means they are able to work with you by reducing the amount due and offering payments you can actually afford. For example, we generally cut the debt in half and allow payments at 0% interest. Every penny paid goes to eliminate the debt.

    The problem is that websites like this are out there advising folks to be dishonest and try to get out of paying legal obligations. This makes everything harder for everyone. Because of websites like this, many consumers reject reasonable settlement terms hoping that the court will not enforce the agreement and they can skate on their debt. Accordingly, we have to hire an attorney and sue. We always win since we have the chain of title, etc. The consumer is the loser since he/she no longer gets the 50% off with no interest deal.

    My advice, work with the debt buyer and pay back the money that you have borrowed. Work out terms that you can afford. Feel better about your self and get your credit back!!

    • Sam Glover

      Unfortunately, it is not a question of “dishonest folks.” The problem is debt buyers who can’t prove they have the right to collect the debts they say they own. All it would take is a few extra steps so that consumers can be sure they will really resolve the debt by writing a check. When that happens, I’ll stop advising consumers to litigate.

    • Joe

      It is my position that debt selling/buying be made illegal. It is a morally corrupt practice at its very foundation. Once a debt is charged off by the original creditor, thus given tax credit, the obligation to pay or collect is over…on moral and ethical grounds at the very least. Because base corruption exists within the business activity of Third Party debt collection, the need for informed consumers and skilled consumer legal advocates must equally exist. In light of this, I support Mr. Glover’s efforts, as much as I support the AG’s efforts in fighting debt collection corruption.

      • matt

        So the government should just pick up the tab for 100 percent of the default with a tax credit, and a past due debt should just go away? Yeah, that’s sustainable.

    • Cloviscolley

      You did not borrow money!!!!! You were extended CREDIT!!!!!!! Big difference. Loaning credit is against the law. In equity a plaintiff cannot come into court and ask for equity when it has not given any. If you are into paying back someone that scammed you that is fine but lets call a spade a spade. Being an honest person has not one iota to do with this. 

      • http://samglover.net/ Sam Glover

        While I certainly agree with you that Debt Buyer is dead wrong, and that we’re not discussing honesty here, I don’t understand the rest of this comment.

        There is no such thing as “loaning credit,” at least not in anything close to this context. Lenders loan money, not credit.

    • Jack

      It is the original creditor who is owed the money, not a debt buyer. If the original creditor chooses not to bring a lawsuit against the debtor that is their choice. I would argue the the original creditor should sue the debtor to retrieve the money borrowed. The debt buyer is a baseless UN-American industry who could care less about due process under the law. A debtor did not barrow the money from a debt buyer and slavery is a violation of 13th Amendment to the United States Constitution.

      • matt

        Except under U.S. law, debts are alienable. It’s the same concept as selling a mortgage…

    • David Smits

      You’re an idiot. Do yourself a favor bottom feeder, get a real occupation.

      • matt

        You do realize that if debt just…went away….the price for responsible consumers would go up exponentially?

        • http://samglover.net/ Sam Glover

          Probably not exponentially. The original creditor sells debt for pennies on the dollar. If debt just “went away” after charge-off, their cost would go up proportionally. Assuming it all went back to the consumer, that would increase the cost of debt by a few percentages points. That’s significant, but not exponential.

          In any case, nobody is arguing that debt should just go away. What I am arguing is that debt collectors should collect debt responsibly. In the case of debt buying, debt buyers need to insist on getting the necessary paperwork to prove they have the right to collect.

          This is a real problem. Some sellers of debt sell the same debts more than once. Some collectors “steal” debt and collect on it — except that what they collect doesn’t actually go to pay off the debt.

          You can say people should pay their debt, but in order to do that, they need to be able to know for sure that they are actually paying someone who actually owns the right to collect. Too often right now, they aren’t, which means the debtor and the legitimate creditor both get screwed.

          • matt

            “It is my position that debt selling/buying be made illegal. It is a morally corrupt practice at its very foundation. Once a debt is charged off by the original creditor, thus given tax credit, the obligation to pay or collect is over”

            That sounds like an argument that the debt should just go away. Joe (poster below) will be disappointed to find out that he is “nobody”.

            It’s more than the consumer being forced to absorb the cost of the debt previously paid by debt buyers. If debt was no longer collected, it would (strongly) encourage more (all?) consumers to default.

            I don’t think anyone has argued that debt buyers should not be obligated to prove ownership of the debt. However, debt buyers are being blamed for the consumers negligence in not pursuing their own legal remedies–collectors are somehow at fault for the consumer neglecting to show up in court.

          • http://samglover.net/ Sam Glover

            I don’t necessarily agree with Joe, but arguing that “debt selling/buying be made illegal” is not the same as arguing that debt should just go away. Original creditors can collect themselves instead of selling their debts (and many do).

            As for whether collectors are somehow at fault for a no-show, that’s not the argument. Debt buyers are at fault if they file a complaint without evidence to back it up. That’s a violation of Rule 11, and should result in sanctions on top of dismissal regardless whether the consumer shows up. The only reason that doesn’t happen is that consumers don’t show up (often because they weren’t properly served).

          • matt

            You’re making a presumption that debt buyers are winning cases without sufficient evidence when no one is showing up to question that evidence. On what basis are you assuming that the debt collectors are winning these cases inappropriately?

            Debt buyers certainly shouldn’t be filing complaints if they don’t think they have a valid claim, but they also aren’t obligated to represent the consumer.

            Are consumers not properly being served or are they neglecting to respond to a claim on the debt which they have neglected to pay? I’m sure there are cases of both, but I’m willing to bet the later is more common than the former.

            It seems that all of the assumptions are being made in favor of the consumer.

          • http://samglover.net/ Sam Glover

            I’m not making presumptions (or assumptions, for that matter). Debt buyer cases and the debt buyer industry were my primary focus for over five years, during which I helped hundreds of consumers. I have researched this in detail for this article for the William Mitchell Law Review. I’m a firsthand witness, in other words, and I can tell you that debt buyers have been winning tens if not hundreds of thousands of cases they shouldn’t.

            But if you don’t want to take my word for it, there is a more current report on the debt buyer market in the New York Times.

          • matt

            It seems like you’re assuming that your clients are a fair representation of the entire market. That’s like a doctor believing EVERYONE is sick because everyone that makes a doctor’s appointment is sick.

            It’s just as reasonable to say that most people who are unfairly targeted attain an attorney and get the claim dismissed.

            I look forward to reading your article, because I do think there is merit to your concern–I just get the feeling that the merit is magnified by society’s tendency to identify with the underdog.

            The NY Times Article was very entertaining, but hardly applicable to the entire industry.