In 2013, debt collection is big business -- really big
Julie Orr has plenty of reasons to bounce a check.
In just a few years, she's gone from running a successful advertising business to being a single mom on disability. Hers is a dilemma of American life: A leg injury keeps her from working, but she can't afford the surgery without health insurance.
Yet Orr says her woes didn't lead her to write a bum check at the grocery store. "Sure, we've fallen on tough times," says the 54-year-old from Riverside, California. "But I've never bounced a check before in my life. I've always been on top of my finances."
Accidentally overdrawing one's bank account isn't a crime. It is, however, a hyper-lucrative business, allowing banks to collect $30 billion a year in overdraft fees while their customers frantically swim back to the surface. Such is the bounty of faulty math.
So Orr was shocked when she received a letter from the Riverside District Attorney's Office accusing her of fraud.
In May, she wrote a check for $91 at an Albertson's grocery store. A few days later, while reviewing her bank account, she noticed that the check had bounced. Orr headed back to Albertson's to make good on her payment. But she was told that the store had already placed her in collections. It was out of the grocer's hands.
A month later, Orr received a letter from the district attorney's office. It inexplicably accused her of intent to commit fraud, noting that she was now eligible for "up to one year in the county jail." The only way to avoid criminal charges: participate in the county's "voluntary" bad-check restitution program.
"The letter really made me think I'd go to jail if I didn't," she says.
But the DA wanted more than Albertson's $91 back. Though California law restricts the penalty on bad checks to $25, the letter demanded $333.51, which included $175 for a "voluntary" financial-accountability class she'd have to take.
Orr didn't even consider arguing her innocence. She just wanted the problem solved. So she called the 1-800 number on the letter to make arrangements to pay in cash at the sheriff's department. When she was told she could only send a check to a P.O. box, Orr grew suspicious.
"That's when I asked if I was actually talking to someone in the DA's office," she says. "And they said no, that they were a company being paid to represent the DA."
In fact, Orr had contacted Corrective Solutions, a private company from San Clemente. According to its website, it handles bad-check cases for 140 district attorneys nationwide – jurisdictions that oversee 65 million people, from Colorado to Florida, Michigan to Washington.
Consider it the privatizing of justice. Instead of investigating bad-check complaints, prosecutors simply pass them along to Corrective Solutions. The company then uses official DA letterhead to threaten jail time if consumers don't pay up. Corrective Solutions also runs the "voluntary" financial-accountability classes, and prosecutors get a cut of the profits while barely lifting a finger.
Unfortunately, the entire system runs on a one-size-fits-all presumption of guilt. No one's bothering to investigate whether the check writer was working a scam or merely suffering from a momentary lapse of mathematics.
Orr e-mailed Corrective Solutions, saying she'd be happy to repay the $91 plus a $50 fee. But she wanted to skip the "voluntary" class. She simply couldn't afford it.
Corrective Solutions didn't respond ― but the threatening letters kept coming.
"When no one wrote me back, I'd had it," Orr says. "I'd tried everything, even calling the district attorney's office directly. No one could help me. I just don't see how this is right, or even legal."
Immunity From Deception
Debtors' prisons were outlawed in 1833, when America decided it was counter-productive – and a waste of time and money – to imprison people for being broke. Despite myth to the contrary, most people avoid their bills simply because they can't pay them, not because they're on the make.
"There was a [federal] study done in 1974 about why people didn't pay their debts," says Bob Hobbs, deputy director of the National Consumer Law Center. "And the number of people who could but didn't pay their debts was .4 percent.... The most typical reasons were they lost their jobs, got divorced. Some overspent, but were encouraged to. Others got cheated, and so on and so forth. Some people had even died. It's not right, but it's life. And it's the cost of doing business."
So Congress passed the Fair Debt Collection Practices Act in 1978, barring collections agencies from threatening jail time and deceiving consumers.
"We have members that collect on behalf of the government, from federal student loans to meter fines," says Mark Schiffman of the Association of Credit and Collection Professionals, the industry's largest trade association. "We can't put the logo of a government agency on our letterhead. We can't say we're from the Department of Education. We have to say that we're 'ABC,' a company working on behalf of the Department of Education."
Yet Congress created a loophole in 2006, granting what amounts to immunity from deception charges for collection agencies working on behalf of law enforcement.
Corrective Solutions paid handsomely for the bill. Between 2003 and 2006, the company spent more than $660,000 on lobbying. It also slathered donations on key senators like Connecticut Democrat Christopher Dodd, who would later leave office after accepting a sweetheart deal from a mortgage company.
The exemption essentially allowed companies like Corrective Solutions, BounceBack and Check Diversion Program to operate above the law. They can send out notices on DA letterhead, threaten people with jail time and rake in upwards of $200 in fines per person. And it's all perfectly legal.
"While the rest of us are playing by the rules, they aren't," Schiffman says.
Consumer advocates and legal experts were naturally horrified. "You don't hand out guns and badges to just anyone," says Adam Levin, the former consumer-affairs commissioner of New Jersey. "And this is effectively creating a gun-and-badge situation for people who frankly not only don't deserve it, but have a long history of abusing it."
Paul Arons, a Washington state consumer-rights lawyer, agrees. What's startling, he says, isn't the shady tactics of companies like Corrective Solutions; it's the fact that district attorneys, charged with protecting the public good, are abetting the deception.
"Check collectors have a long history of running scams like pretending they'll have people arrested, or that they are with government agencies," says Arons. "I was shocked to find out that prosecutors were actually authorizing check collectors to do this in district attorneys' names."
Congress did include a small caveat in the 2006 bill that was supposed to protect citizens. "The prosecutor must determine that probable cause exists to charge a person with a crime before the program sends the letter," Levin says. Unfortunately, they're universally blowing this off.
Take the Riverside DA's office. Chief Deputy Vicki Hightower says her program is meant to target bad-check writers who intend to defraud victims, not well-meaning people who accidentally bounce a check.
"We understand the concerns people have," Hightower says. "That's why we review the checks before they go to Corrective Solutions. And while the correspondence that goes out has our logo, it does say that the program is administered by a third-party vendor."
Yet her words don't appear to match the facts on the ground. In order to open a bad-check case in Riverside, merchants only need to provide the check writer's information, along with the promise that they tried contacting them at least once. But Riverside's own records show that it is routinely threatening jail time for people who've done nothing criminal.
During the first ten months of 2012, Corrective Solutions sent out 8,973 letters on Riverside's behalf. Just 23 of those cases were deemed worthy of prosecution.
Florida's Miami-Dade County is even more lax. There, merchants' complaints go directly to Corrective Solutions, which then decides which ones merit prosecution.
"Our office has set the intake criteria for checks to be accepted into the program," says Assistant State Attorney Marie Jo Toussaint. "This criteria insures that only checks which have violated our Florida statutes are eligible for this pre-arrest diversion program."
Again, the records say otherwise. Of the 1,863 cases opened by Corrective Solutions, only 106 were actually filed in criminal court.
"There is no question that defrauding someone is a crime," says Kara Dansky, an ACLU lawyer. "But in these circumstances, there is no evidence that's what happened. People could have written a check on accident, with no intent to defraud. But the DA isn't investigating that.... Instead, debt-collection companies are using the auspices of the DA's office to threaten someone with jail when there is no investigation."
Bankruptcy: The Industry's Double Standard
Corrective Solutions had good reason to buy immunity from Congress. At the time, the industry was losing one class-action lawsuit after another.
In 2004, Kristy Schwarm was a stay-at-home mother of five in Ukiah, California, with another child on the way. Over the course of one week, Schwarm wrote a check to Walmart for $69.26 and one to FoodMaxx for $83.41, and made an ATM withdrawal, according to court records.
Unfortunately, the ATM withdrawal overdrew her account, racking up seven rejected checks and 21 overdraft fees totaling $560. "It had a snowball effect, leaving the account continually overdrawn, even though I made several deposits," Schwarm says in court documents. Her bank erased most of the fees.
But a few months later, Schwarm received a letter from the Mendocino County district attorney. She'd been accused of fraud and was ordered to repay the checks, along with penalties and a "diversion fee."
"I was in a panic," Schwarm said in court documents. "I had never been in trouble with the law before.... I assumed that I must be in a lot of trouble if I was getting a letter from the district attorney that I could be arrested."
Schwarm called the number on the letter, assuming she was speaking with someone from the DA's office. She promised to pay as soon as she could. But with her husband out of work and eight mouths to feed, she just kept falling further behind. A year later, she still hadn't paid her debts. The letters and phone calls kept coming.
Then she was pulled over in a traffic stop with her six kids in the car. Schwarm was sure it had to do with the letters. "I was terrified. I thought...my children were going to see me get handcuffed and taken away. I was giving my children instructions on calling their father to come pick them up when I found out that I was just being warned for not coming to a complete stop at an intersection."
By that point, she was so deep in debt that she filed for bankruptcy. Only after she consulted an attorney did she discover that it wasn't the DA sending her all those letters. It was an Arkansas company called District Attorney Technical Services. "The real district attorney had not investigated me or considered filing charges against me."
Meanwhile, the letters kept coming, threatening her with arrest. She eventually became part of a class-action lawsuit filed by Arons against the company's owner, Henry Craighead.
The suit claimed that District Attorney Technical Services illegally disguised itself as a government entity in order to extort penalties and fees. In 2011, a federal court awarded 36,000 victims nearly $750,000 in damages.
But it was too late. That same year, Craighead declared bankruptcy himself and only paid $160,000. He's now retired and living comfortably in Oregon, says Arons.
"That's what they do," Arons says. "Whenever we win one of these cases, they declare bankruptcy in order to avoid paying out damages. It's absolutely maddening."
The exact same thing had happened a year earlier, when Arons won a similar suit against American Corrective Counseling Services. A federal court ruled that, despite the company's claims of immunity, it had misrepresented itself, made false threats of prosecution and charged exorbitant penalties.
Once again, Arons's clients were unable to collect on their victory. American Corrective also declared bankruptcy, saying it couldn't repay investors ― despite having herded $47 million in fees over the previous four years.
A few months later it was back in business, re-formed as Corrective Solutions and "free and clear" of all liability, according to court records.
Today it's the biggest bad-check collector of them all.
A Payday for Prosecutors
Mike Wilhelms is president and CEO of Corrective Solutions. His LinkedIn profile boasts a photo of a fresh-faced surfer boy in charge of over 200 employees. The California counties of Los Angeles, San Bernardino, Riverside and Orange are his biggest customers, all within driving distance of his palm-tree-lined headquarters in San Clemente, where it's clear that business is booming.
Consumer-rights lawyers estimate the company sends out around 2 million letters annually. (The company did not respond to repeated interview requests.)
The Corrective Solutions website does its best to imply that it's an arm of law enforcement. A slide show gently fades in and out with statements about "holding offenders accountable for their actions." An interactive map shows its 140 contracts with DAs nationwide.
Nowhere does it say that most of these "offenders" have never been investigated or formally charged with a crime.
The site boasts dozens of quotes from pleased prosecutors, who sing praises of reduced caseloads and crime rates. Yet Contra Costa District Attorney Robert Kochly offers the most telling endorsement, noting he's grateful for "more revenue to my office."
District attorneys don't pay a cent for Corrective Solutions' services. Instead, the company pays them to run their bad-check programs. All a prosecutor must do is hand over official letterhead, along with a list of bad-check writers and a bit of "case criteria."
Between 2005 and 2008, Los Angeles County raked in more than $1 million. Miami-Dade made over $375,000.
When asked whether Miami-Dade's program was little more than a moneymaking scheme, Toussaint balks.
"Diverting such cases out of the criminal justice system gives an individual with no prior record an opportunity to avoid having a criminal record," she says. "It makes the victim receiver of the worthless check whole, and it is done with no cost to the taxpaying citizens of our community. Pre-trial diversion programs also allow the courts to focus on other types of criminal activity."
But while prosecutors claim they use collection agencies to decrease caseloads, some companies actually promise to expand them – for the sole purpose of generating more money.
Take BounceBack, the industry's second-largest player. It owns Check Connection, and makes no bones that generating fees is mission one.
"Is your program suffering from diminishing checks?" asks the company's website. "Visit Check Connection to learn how you can substantially increase the number of checks in your bad check program."
The site offers examples from places like Palm Beach County, Florida, which switched to BounceBack in 2006 after "merchants and other victims were complaining that they felt intimidated by the people administering the program. Check writers complained of strong-arm collection tactics."
Since then, Palm Beach has "passed the $1.5 million mark."
BounceBack won't discuss its business practices, believing it's been unfairly vilified by the media. "The press usually doesn't take anything that we say seriously, so we've begun to decline to make comments," says company vice president Gale Krieg.
Still, prosecutors eagerly rise to the industry's defense.
"They're not just some debt-collection company," Louis Alvarez, head of the Los Angeles DA's check program, says of Corrective Solutions. "What they are doing is trying to help us recoup money for victims."
The real victims, at least in Alvarez's mind, aren't math-challenged consumers, but merchants who lose more than $120 billion annually to bad checks, according to the Federal Reserve. He argues that Corrective Solutions is simply helping his overburdened and underfunded office get restitution -- while "rehabilitating" check writers who are likely guilty of fraud.
"We do get people who made a mistake, but a good majority of the students who take our class say that they just procrastinated and didn't intend to pay until they saw the mail from the DA's office."
Yet once again, internal records dispel any notion of rampant criminality. In 2011, Correction Solutions sent out 33,202 letters on behalf of L.A. County. Fewer than 1 percent of those cases were actually recommended for prosecution.
"They've prosecuted more glue sniffers than bad-check writers in a lot of these counties," Arons says. "This is not an overwhelming problem. The feds keep stats on this, and only one in every 200 checks doesn't clear. And of those, about half clear on redeposit, so we're talking about .5 percent of all checks written."
It's hard to fault prosecutors for ridding themselves of a nuisance. Fraud charges require investigations, and most prosecutors have nowhere near the manpower to handle them, admits Scott Burns, executive director of the National District Attorneys Association.
"The real issue is that prosecutors' offices are, almost across the board, underfunded, while suffering hiring freezes and, in some offices, up to 30 percent cuts in personnel," he says. "The only logical thing is to prioritize those cases and those issues that are the most important."
But by ridding themselves of a headache, they're creating a new one for consumers, who are presumed guilty without investigation or chance of appeal.
That's the basic sentiment of Ed Griffith, spokesman for the Miami-Dade Office of the State Attorney. He believes that if a check writer ignores contact by a merchant, that's proof enough of a crime. "Your failure to make good on that check is an issue of intent. The opportunity to make good and not take advantage of that opportunity speaks to your attitude."
Griffith argues that even innocent mistakes merit sentencing to financial-accountability class. "Even if someone says that their child overdrew their account, we believe putting them in a diversion program is the right move."
Yet some believe the classes are just a ruse to generate fees. "Their financial-responsibility class is nothing more than learning how to balance a checkbook," says Adam Levin, New Jersey's former consumer-affairs commissioner. "It's garbage. If people aren't passing a bad check with intent, they shouldn't be going to a class. And if they are, they shouldn't be going to a class; they should be going to jail. Don't tax overburdened consumers with a course that is effectively worthless."
Dansky agrees. "There are far better ways of dealing with the problem. If the cases are truly baseless, then the prosecutors shouldn't be involved, period. Merchants can use debt collectors directly without getting prosecutors involved."
Guilty Until Proven Innocent
Joseph Ridout has a hard time believing that so many scam artists have chosen careers in bad checks.
"We believe that very few of the recipients of these letters intended to defraud the merchant," says Ridout, who works for Consumer Action, a San Francisco nonprofit. "It's just people who overdrew their checking accounts with a check. The curious thing is that it's a moment in time when banks have destigmatized overdrawing your account with a debit card. What's the difference?"
In fact, it was banker scheming that landed Carole Hirth in trouble last year. More than a dozen major banks have paid multi-million-dollar fines for reordering purchases and delaying deposits solely to generate overdraft fees. In Hirth's case, PNC was holding her direct deposits until it withdrew her outgoing charges -- effectively overdrafting her account so it could charge extra fees.
She knew none of this at the time she wrote a $393.86 check to Dominick's, a Chicago grocery story. The 59-year-old was in the hospital being treated for Crohn's disease when the check bounced. For some reason, the store never tried to redeposit it, which most merchants do. If it had, says Hirth, the check would have cleared. Instead, the Safeway-owned chain sent her a letter.
"I had been back from the hospital for just four days when I checked the mail and thought, 'Oh, my God,'" she says.
Hirth went straight to Dominick's, wrote a new check and paid a $35 bounce fee. She considered the problem fixed.
But four months later, she received a letter from the Cook County state's attorney. It said that she'd been accused of deceptive practices and that she faced up to a year in jail and a $2,500 fine. The only way to avoid this fate was to pay $649.86, which included penalties and a diversion course.
"I already paid them," Hirth says. "I contacted [the grocery store's] ethics department and said this was just wrong. I spend enough money there. I told them they should work with me. I told them to look up my Safeway card. I've been shopping with them for the past thirty years!"
Safeway said there was nothing it could do. She'd have to contact the state attorney's office.
Hirth called the 1-800 number on the letter but got nowhere.
"They accused me of committing a fraudulent act. They said that if I don't pay everything and take their class, I could be arrested and end up in jail. He was very, very mean. I told him that I didn't understand how that could happen. I said I'd already handled it, it should be cleared up, but he just went on and on and on."
Hirth wrote another letter to Safeway, begging the grocer to contact the prosecutor's office on her behalf. The letters and phone calls kept coming.
It wasn't until she got in touch with Arons that she discovered she wasn't being threatened by Cook County. It was Corrective Solutions, which has contracts with 21 counties in Illinois.
In 2010, yet another class-action suit was filed against the company, this time on behalf of 600,000 victims in California and Pennsylvania. In November, it agreed to pay a $3 million settlement. But because the class was so big, each victim would receive less than $3 dollars. A federal court refused the settlement, ordering both parties back to negotiations.
"The litigation has been hard," says Bob Hobbs, deputy director of the National Consumer Law Center. "Either these companies declare bankruptcy, or they just drag these things on forever and no one gets paid."
Will the Feds Step Up?
As the case languishes in court, advocates hope Congress will finally close the 2006 loophole.
They received a glimmer of hope in October, when President Obama's new Consumer Financial Protection Bureau announced that it would be overseeing debt collectors starting this year. For the first time in history, the feds will require those making over $10 million a year to supply regular reports to ensure they're not deceiving and threatening consumers.
Still, Moira Vahey, an agency spokeswoman, declined to comment on how it would deal with the bad-check programs.
For now, the only oversight comes from those making money on the deals: the district attorneys themselves. And they show little interest in policing the industry.
Take the Minnesota company once known as Financial Crimes Services. In 2009 it was sued for violating the Fair Debt Collection Practices Act. The company agreed to pay $75,000 in penalties and court costs.
Last year, it changed its name to Check Diversion Program, and it's still operating throughout Minnesota and Wisconsin. "We're not a debt-collection company, but a diversion program," says CEO Scott Adkisson. "We send out approved letters. And it's the DA's decision who gets them, not ours. We just manage the program."
The evidence suggests otherwise. In Minnesota's Goodhue County, the program is run by the Red Wing Police Department, which referred inquiries back to Adkisson. Minnesota Attorney General Lori Swanson would not respond to interview requests, either.
Levin believes this lack of oversight may be the key to dismantling the programs: If prosecutors aren't reviewing the cases, collection agencies aren't legally eligible for immunity.
In the meantime, victims like Orr, Schwarm and Hirth have little recourse but to hire lawyers, paying thousands to defend themselves for bouncing $50 checks at the grocery store.
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