Post by caseagainstfaith on Jan 2, 2012 15:30:18 GMT -5
No one was more surprised than Thomas Carpenito with the credit-card invitation that landed in his mailbox earlier this year.
The 27-year-old deli owner from White Plains, N.Y., had about $10,000 in old debts and a credit rating 200 points below "good." He recalled thinking the post office had delivered the letter to the wrong house.
Far from a mistake, the offer was part of a controversial and growing partnership between debt collectors and banks that profits both. To get the new credit card, Mr. Carpenito agreed to repay $400 on a seven-year-old debt that had expired under New York's statute of limitations.
"It was totally worth it," he said. Having no credit cards made Mr. Carpenito feel "like dirt," he said, especially when out on dates. His new credit card, stamped with the MasterCard Inc. logo, was offered by Jefferson Capital Systems LLC, the debt-collection arm of CompuCredit Holdings Corp., in Atlanta.
[More from WSJ.com: The Investing Landscape for 2012 Could Be Rough]
CompuCredit, a leader in the business, collected about $15 million in newly resurrected debts and fees by issuing credit cards to people with banged-up credit in the first nine months of this year, according to a securities filing. It also has drawn scrutiny by federal authorities for allegedly deceptive practices.
Many U.S. banks, hungry for new revenue streams, are eager partners. They receive fees and higher-than-average interest rates by granting debt collectors access to their license with MasterCard. The debt companies typically agree to cover losses to banks if borrowers stop paying.
Some lenders say borrowers have a moral obligation to pay their debts even if they are no longer legally responsible. Others are leery about subprime borrowers. But the debt-driven credit cards show some banks tiptoeing back into subprime lending after suffering big losses during the financial crisis.
Collectors aren't afraid of the risks in issuing new credit cards because they instantly turn a profit on virtually worthless debts—purchased for pennies on the dollar—when people agree to start making payments on them. The credit-card agreements essentially create assets out of thin air.
The cards, born a decade ago, are gaining new momentum as debt-collection firms look for new ways to collect, said William Weinstein, chief executive of Weinstein & Riley, a Seattle debt collector.
No one knows how many of these credit cards, usually stamped with the MasterCard logo, are in people's wallets. MasterCard declined to comment.
People who stop paying bills earn lousy credit ratings but eventually are freed of old debt under statutes of limitations that vary by state and range from three years to 10 years from the last loan payment.
But if a debtor agrees to make even a single payment on an expired debt, the clock starts anew on some part of the old obligation, a process called "re-aging."
So if borrowers again fall behind on their payments, debt collectors can turn to their usual tools: letters, phone calls and lawsuits. By restarting a debt's statute of limitations, the collectors have years to retrieve payments.
Regulators scrutinize offers to see whether they clearly state that borrowers are agreeing to repay part—or in some cases all—of an expired debt if they agree to a new credit card.
The pitches usually come in the form of a letter.
"Make your fresh start today," said one Emblem credit card offer viewed by The Wall Street Journal. A sentence near the top of the offer said, "This communication is from a debt collector."
The 27-year-old deli owner from White Plains, N.Y., had about $10,000 in old debts and a credit rating 200 points below "good." He recalled thinking the post office had delivered the letter to the wrong house.
Far from a mistake, the offer was part of a controversial and growing partnership between debt collectors and banks that profits both. To get the new credit card, Mr. Carpenito agreed to repay $400 on a seven-year-old debt that had expired under New York's statute of limitations.
"It was totally worth it," he said. Having no credit cards made Mr. Carpenito feel "like dirt," he said, especially when out on dates. His new credit card, stamped with the MasterCard Inc. logo, was offered by Jefferson Capital Systems LLC, the debt-collection arm of CompuCredit Holdings Corp., in Atlanta.
[More from WSJ.com: The Investing Landscape for 2012 Could Be Rough]
CompuCredit, a leader in the business, collected about $15 million in newly resurrected debts and fees by issuing credit cards to people with banged-up credit in the first nine months of this year, according to a securities filing. It also has drawn scrutiny by federal authorities for allegedly deceptive practices.
Many U.S. banks, hungry for new revenue streams, are eager partners. They receive fees and higher-than-average interest rates by granting debt collectors access to their license with MasterCard. The debt companies typically agree to cover losses to banks if borrowers stop paying.
Some lenders say borrowers have a moral obligation to pay their debts even if they are no longer legally responsible. Others are leery about subprime borrowers. But the debt-driven credit cards show some banks tiptoeing back into subprime lending after suffering big losses during the financial crisis.
Collectors aren't afraid of the risks in issuing new credit cards because they instantly turn a profit on virtually worthless debts—purchased for pennies on the dollar—when people agree to start making payments on them. The credit-card agreements essentially create assets out of thin air.
The cards, born a decade ago, are gaining new momentum as debt-collection firms look for new ways to collect, said William Weinstein, chief executive of Weinstein & Riley, a Seattle debt collector.
No one knows how many of these credit cards, usually stamped with the MasterCard logo, are in people's wallets. MasterCard declined to comment.
People who stop paying bills earn lousy credit ratings but eventually are freed of old debt under statutes of limitations that vary by state and range from three years to 10 years from the last loan payment.
But if a debtor agrees to make even a single payment on an expired debt, the clock starts anew on some part of the old obligation, a process called "re-aging."
So if borrowers again fall behind on their payments, debt collectors can turn to their usual tools: letters, phone calls and lawsuits. By restarting a debt's statute of limitations, the collectors have years to retrieve payments.
Regulators scrutinize offers to see whether they clearly state that borrowers are agreeing to repay part—or in some cases all—of an expired debt if they agree to a new credit card.
The pitches usually come in the form of a letter.
"Make your fresh start today," said one Emblem credit card offer viewed by The Wall Street Journal. A sentence near the top of the offer said, "This communication is from a debt collector."
finance.yahoo.com/news/bringing-expired-debt-back-to-life.html
I guess banks are making sure to not leave any stone unturned in their quest to bring in more money. Hopefully this gets shut down since most of the affected people are ones that have debt that is expired and are now "re-aging" the debt. This is comparable to crack dealers and rehabilitation centers teaming up to keep their businesses going.
