Consider this unnerving situation: You apply for a loan only to learn that your credit report is marred by a delinquent debt — one that you have already paid or maybe don’t recognize.

You could be a victim of unscrupulous debt collectors who have placed invalid or fake debts on your consumer credit reports to coerce you to pay them. The tactic is called illegal “debt parking,” or sometimes “passive debt collection.”

The Federal Trade Commission recently took action against a Missouri collection company and its owners, alleging that they collected more than $24 million from consumers, largely by placing “bogus or highly questionable” debts on their credit reports.

“The defendants used this illegal ‘debt parking’ to coerce people to pay debts they didn’t owe or didn’t recognize,” Andrew Smith, director of the FTC’s bureau of consumer protection, said in prepared remarks about the agency’s settlement with the company, Midwest Recovery Systems.

The FTC said in a related blog post that the case was its first legal challenge to debt parking under the Fair Debt Collection Practices Act.

In debt parking cases, collectors don’t contact the consumer before reporting the debt to credit bureaus. That means people learn about the debt only when it is flagged as they are applying for a mortgage or a car loan or even a job.

Because they don’t want to lose the loan or the job offer, consumers may feel pressured to pay off the “bad” debt quickly.

Midwest Recovery received thousands of complaints from consumers each month, the FTC’s complaint said. When the company itself investigated the complaints, it found that as many as 97% of the debts were inaccurate or not valid, the agency said.

That’s not surprising, according to the FTC, because many of the debts that Midwest Recovery was pursuing had been obtained from other companies, including payday lenders, that the agency has previously sued for illegal practices. (Debts are often sold, sometimes multiple times, to different collection agencies.)

The debts that Midwest Recovery sought to collect included payday loans, some of which were “fabricated from consumers’ sensitive financial information,” the complaint said.

The debts also included “significant quantities” of medical debt, which often causes confusion because of the complex system of insurance coverage and cost sharing associated with health care bills. More than 43 million people have medical debts on their credit reports, and medical debts make up more than half of the debts reported by collection companies, the FTC said.

In one example cited in the complaint, a consumer applying for a mortgage was told that a $1,500 medical debt placed on his credit report by Midwest Recovery had lowered his credit score, putting his loan approval at risk. The borrower contacted the hospital and learned that he owed just an $80 copayment, which he then paid. Despite the finding, the FTC said, Midwest Recovery refused to remove the larger debt and threatened the consumer with a lawsuit if he didn’t pay.

In some cases, the company appears to have re-reported debts that it had removed from the consumer’s credit reports — sometimes after the borrower paid the company and was assured that the debt would be struck from the credit report.

The settlement with the FTC, filed in U.S. District Court for the Eastern District of Missouri, prohibits Midwest Recovery and its owners from debt parking and from pursuing consumers for debts without a “reasonable basis.” Midwest Recovery must also contact the credit reporting bureaus, which maintain consumer credit reports, and ask that all debts reported by Midwest Recovery be deleted.

Midwest Recovery and its three owners, Brandon M. Tumber, Kenny W. Conway and Joseph H. Smith, “neither admit nor deny” the allegations in the complaint, according to the settlement. A lawyer representing the company and Tumber did not respond to a request for comment. Attempts to reach the co-owners at a phone number listed for Midwest Recovery were unsuccessful.

The settlement includes a financial judgment of $24.3 million, but the payment is partly suspended because of Midwest Recovery’s “inability to pay,” the FTC said, so the company must pay about $57,000. One of the owners must also sell his stake in another debt collection company and pay that amount to the FTC. If the defendants are found to have misrepresented their ability to pay, the full judgment is due.

The settlement will be final when the judge officially enters the order, an FTC spokesman, Jay Mayfield, said.


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