"Nobody thought there'd ever be such a thing as a debt industry," says Robert Manning, director of the Center for Consumer Financial Services in Rochester, N.Y. "Now we're seeing a set of issues emerge about American insolvency laws, entrepreneurship, and the whole social and moral underpinnings of who gets loans, and why.
"This is the bottom of the food chain," he adds. "They have power to freeze accounts, create collateral damage, and see who responds."
Hundreds of such "junk debt" firms – ranging from mom-and-pop operations to multinational companies with 100 employees or more – buy millions of discharged accounts from lenders each year. (These are bad loans that a bank has written off as a loss for tax purposes.)
They then run computerized "skip traces" that use Social Security numbers to locate debtors, then cajole them into waiving the statute of limitations on old debts and paying up.
Junk debt companies can legally try to collect. Thirty-year-old consumer protection laws give consumers certain rights, but they don't guarantee that debt collectors must inform people of those rights – creating what the FTC's Julie Bush calls a "gray area" that can be exploited by collectors.
"There's no requirement that [debt collectors] indicate that the debt is older than the statute of limitations," says Ms. Bush.