Debt buyers, specialized debt-collection companies, purchase defaulted consumer debt from creditors such as credit card companies for pennies on the dollar. Debt buyers then attempt to collect the debt, often by suing borrowers in court. Unfortunately, because debts are typically sold to debt buyers without fully verifying the accuracy of the borrower's identity, amount of the debt, or status of repayment, the information used as a basis to collect from consumers may be faulty. As a consequence, borrowers can find themselves facing a default judgment from court on a debt that they do not in fact owe.
Two states—North Carolina and Maryland—have tried to address these issues through substantive reforms to debt-collection processes in their respective courts. At the time these reforms were being debated, the debt-buying industry claimed that these regulations would result in less credit being made available in those states. However, our analysis of the change in new credit card extensions in North Carolina and Maryland after reforms took effect does not show any negative impact to consumer credit. Specifically, we find that:
- Credit availability in North Carolina and Maryland appears to follow national trends rather than being impacted by regulatory changes.
- North Carolina and Maryland consumers seeking new credit cards generally fared better than consumers in peer states.
- Sub- and near-prime consumers in North Carolina and Maryland fared at least as well as those nationally and in peer states regardless of debt-buying reforms.
State and federal officials should continue to strengthen the rules and laws for debt collection and debt buying to better protect consumers. Debt collectors should be required to possess and review full documentation about a borrower and the borrower's obligations before pursuing collections or a lawsuit. In addition, court rules should be strengthened to ensure adequate evidence is presented for a debt collector to prevail in court.