When a consumer defaults on a loan, collectors may try to inflate the debt with interest and fees -- even though card issuers generally stop charging interest after they have written off the debt. In one example, a collector tried to charge Montana resident Tim McCollough $5,500 in additional interest on an unpaid $3,800 credit card balance. Consumer advocates recommend that debtors question these claims.
McCollough won a six-figure judgment in 2011 against collection law firm Johnson, Rodenburg & Lauinger LLC for their abusive practices. About $50 billion in unpaid credit card debts are sold each year, and a January report by the Federal Trade Commission found they are frequently sold with little information about their origins. This makes it more difficult to tell if the amounts are even correct, or whether collectors are going after the right person. Debt buyers are not subject to the Truth in Lending Act, and may charge interest on an unpaid debt without sending the consumer monthly statements.
In 2005, the 7th U.S. Circuit Court of Appeals affirmed that a debt buyer had the right to keep charging interest rates of over 18 percent to two consumers, which supports the principle that the owner of a debt "stands in the shoes" of the original creditor. Some states, however, question debt buyers' ability to charge interest rates above the state statutory limit. The U.S. Fair Debt Collection Practices Act stipulates that collectors can add fees or interest only if the amount is "expressly authorized by the agreement creating the debt or permitted by law," which consumer advocates say requires a copy of the original card agreement to prove.
Advocates say that consumers negotiating with a collector should remember that a debt buyer's claims for interest could be inflated or even baseless. Consumers should never ignore claims, but first determine the amount of their debt at charge off (the "principal amount"). This could be the basis for negotiating with a collector to settle the debt.