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Consumer Debts Are Focus of Booming Industry

In 1996, when Heather Scott's marriage split up, she defaulted on
$3,000 she owed on her Discover credit card. "It was either that or
feed my kids," the Phoenix woman says. Until recently, she probably
could have walked away from her credit-card debt with little more than
a damaged credit report. But an increasingly aggressive
debt-collection industry is going after people, like Ms. Scott, who
used to fly below the radar.

For six years, she heard nothing about her Discover debt. Then, in
2002, she was sued in small-claims court in Phoenix. A company called
Asset Acceptance Capital Corp. had bought her Discover debt and wanted
to collect. The 35-year-old single mother of two, who says she
couldn't afford a lawyer, didn't show up in court. Asset won a default
judgment of about $9,500, including more than $2,000 for the company's
legal fees. For the past year, the company has been taking about $100
out of the $625 paycheck she receives every two weeks as an
administrative worker for the state of Arizona.

Speaking generally, Asset makes no apology for pursuing people who
failed to pay their bills and says it treats them all fairly. The
company has now agreed to settle with Ms. Scott. She will pay an
additional $3,000, for a total of $6,111, or 36% less than the court

Asset's hard-hitting strategy of going after consumers in small-claims
courts has affected tens of thousands of people around the country. In
the process, the company is helping reshape the burgeoning business of
profiting from bad consumer debt.

Most home and car lenders have never hesitated to chase debtors who
fall behind on payments. But many other consumer lenders, such as
credit-card issuers and businesses ranging from health clubs to
utilities, traditionally didn't tail debtors for more than a few
months. These companies have feared bad publicity and have wanted to
avoid the costs of pursuing what often are relatively small debts.

As the number of these debts grew, a new breed of collector sprouted,
eager to buy up consumer debt that creditors had given up on. Now, as
more Americans are juggling more debt than ever before, the newcomers
have grown into a multibillion-dollar industry that is scraping the
bottom of the barrel to go after debtors who previously would have
been left alone. Unlike old-fashioned collection agencies, which
pursue debtors on behalf of a client company and keep a set percentage
of what they gather, the newer debt-buying companies typically acquire
large portfolios of bad debt at a discount.

The king of the debt buyers is Asset Acceptance, based in Warren,
Mich. It scoops up the oldest, least-desirable debts that creditors
have already charged off as losses. Sometimes, Asset chases debtors
after as many as three previous collection firms have failed. Asset
and its rivals can make a profit because they keep costs low, paying
as little as two cents on the dollar for debt. Asset adds a legal
component to the strategy, employing an army of outside lawyers to
file thousands of small-claims suits each year. "These debts have
already been through an arduous process -- they've had the kitchen
sink thrown at them -- so we need to go beyond our predecessors to be
successful," says Asset's chairman, Rufus H. ("Bud") Reitzel.

Financially, Asset has been a huge success. It employs 1,600 people,
up from 37 in 1996. It owns 16 million accounts, including $4.2
billion in debt bought just last year. Revenue has grown an average of
57% a year since 1999, topping $160 million last year. The company's
operating earnings, which reflect a reorganization related to Asset's
initial public offering in March, grew on average by 58% a year, to
$54.8 million last year. A group led by Bear Stearns Cos. took Asset
public on the Nasdaq Stock Market at $17 a share. It closed Friday
afternoon at $18.90, down 24 cents.

Asset's rising fortunes reflect those of the booming debt-buying
industry, as growing numbers of creditors -- from credit-card issuers
to phone companies to hospitals and gyms -- turn to selling their bad
debts as a source of revenue. In 1993, $660 million of charged-off
credit-card debt was sold, according to the Nilson Report, a trade
publication. Last year, the number reached $57.3 billion.

In the past two years, three debt buyers -- Portfolio Recovery
Associates Inc., Asta Funding Inc. and Asset -- have issued shares to
the public for the first time. Encore Capital Group Inc., a debt buyer
in which Wall Street veteran Nelson Peltz has a major stake, moved
from over-the-counter trading to the more prestigious Nasdaq Stock
Market last year. Encore's shares have soared to $18.52 as of Friday,
compared with 30 cents in the beginning of 2002.

Asset and other debt buyers say they frequently offer to resolve debts
for far less than what they are owed, benefiting consumers. Asset
further asserts that by buying old debt, it indirectly encourages new
lending and the lowering of borrowing costs. "We are the good guys,"
Mr. Reitzel says.

His company's new collectors go through four weeks of training that
drills them in federal debt-collection laws, and executives say their
employees are so sincere that some debtors send collectors gifts and
cards for Christmas. Some attorneys who have represented consumers
against Asset say the outside lawyers the company hires are generally
professional in their dealings.

Small Claims

But there is more to the story. According to some lawyers and
advocates for consumers, Asset uses the relaxed rules of small-claims
and municipal courts to file suits that contain little documentation
of the debts it seeks to collect. These courts typically allow for
quick judgments when legally unsophisticated defendants fail to
contest the suits, the critics say. Once it obtains judgments, Asset
can use the full weight of the legal system to enforce its victories,
primarily by seizing assets or garnishing wages.

When individuals fight back against the company in court, consumer
lawyers and advocates say, Asset often drops its suits, not wishing to
engage in expensive legal skirmishing. The upshot is that poorer and
less sophisticated debtors are more likely to face a judgment for
Asset, these lawyers and advocates say.

Asset counters that it tries to collect from all of its debtors before
going to court. The company denies that its methods are harder on the
unsophisticated. It says that all of its legal actions are backed by
the "documentation necessary" and that it informs consumers quickly
when they have been sued.

"Frankly, a debtor is a debtor," the firm said in a written response
to questions. "If a person has the resources to pay their past
obligations, we will pursue the matter to the fullest extent."
Collections that include filing suit generate roughly a third of the
company's revenues and have been important to its overall strategy,
Asset said. But legal actions aren't its "primary objective." The
company said it has assisted millions of consumers in resolving past
financial obligations, adding, "We firmly believe that our corporate
mission is to treat our customers respectfully -- a critical component
of our success."

What Asset has discovered -- and what other debt collectors are
realizing -- is the power of small-claims and municipal courts. Set up
to help individuals quickly settle minor disputes, these courts
generally offer cheaper filing fees and often require plaintiffs to
gather less evidence to get suits started. These courts also sometimes
impose less onerous requirements for giving defendants notice that
they are being sued. And judges overseeing small claims typically plow
through dozens of cases a day -- far more than conventional judges --
making it more likely that a plaintiff will walk away with a quick
default judgment.

Judi Norwood received a call from an Asset attorney in July. Back in
1999, when she graduated from Arizona State University, she says she
couldn't find a good job and defaulted on what she owed on her MBNA
credit card. She says she doesn't remember the amount. Ms. Norwood
fended off collectors for several months, and then, when she didn't
hear anything for a few years, she thought a bad period had ended.

She married, had a son and now works as a waitress at a steakhouse
near Florida's Gulf Coast. Her husband is a surveyor. They lived with
his parents to save money and had put aside $5,000 for a down payment
on a small home of their own when the call came from Asset -- less
than a week before they were scheduled to close on their new home. She
says the Asset attorney told her the company would sue unless she paid
off the old MBNA debt, which Asset said had grown to nearly $7,000,
including interest. That's nearly twice the credit limit on her old
MBNA card, Ms. Norwood says.

She and her husband decided to go ahead with their home closing and
fight Asset in court. She says she has retained an attorney who
believes the four-year Arizona statute of limitations applies to her
debt and has expired. Asset says the five-year Florida statute
applies. Ms. Norwood says she refused a recent Asset offer to settle
the case for $2,000 and that she received the company's legal papers
on Oct. 15.

While Asset appears to be following the letter of the law, its
practices concern some legal experts, who say small-claims court was
never intended for this kind of litigation. "The consequences of
small-claims court is the same as any other court, and now [a company]
has the full panoply of remedies to collect," says Richard Alderman,
director of the Center of Consumer Law at the University of Houston
Law Center. Because conventional courts typically have more safeguards
for defendants, he adds, debt-collecting companies should be forced to
file their suits there, "before we start garnishing wages, taking away
property, and doing things on a wholesale manufactured basis."

Asset says it goes to great lengths to keep track of and obey laws
that vary greatly from state to state. It also says it doesn't always
file suit in small-claims courts. In Michigan, for example, attorneys
are barred from appearing in small-claims court, so Asset's lawyers
use more traditional courts, a company spokesman says.

Many veterans in the debt-buying industry say that other things being
equal, women are more likely to repay than men. A former manager of
one of Asset's regional branches says Asset's computer system flags
accounts on which women are the primary debtors. Another category that
gets highlighted is debtors who have previously promised to pay.

But Asset denies focusing on women. The company says it doesn't know
whether women repay more readily.

Six years after her divorce and default on her credit-card debt, Ms.
Scott of Phoenix heard from an Asset lawyer that she was about to be
sued. Unable to pay for her own lawyer, she says she went to a free
legal-services agency where a lawyer told her there was no point in
showing up in small-claims court. That was bad advice, which Ms. Scott
says she followed.

Asset won a default judgment of $7,731 in February 2002, a sum that
included interest costs and $2,035 for Asset's legal expenses and
court fees. Two months later, Asset offered to settle for $3,290. Ms.
Scott says she didn't have it. By August, Asset had withdrawn the
offer, and the total bill had risen to $9,537. Then, last month, Ms.
Scott offered to pay the company another $3,000 that a relative agreed
to lend her. Asset accepted the settlement. "I had to get it behind
me," Ms. Scott says.

Court Skirmishes

Some former debtors and lawyers who have skirmished with Asset say Ms.
Scott may not have had to pay the company anything if she had gone to
court and contested its claims.

Asset acknowledges that, when buying a pool of debt, it typically gets
a bare-bones list of debtors' names, their social security numbers,
the amounts creditors were owed and the date of last activity. To
acquire more information would require creditors to dig deep into
their files, which would cost Asset dearly. In many instances, where
debts have already changed hands, industry executives say it is very
difficult to obtain definitive documentation.

As a result, if a debtor can plausibly argue in court that the amount
Asset is seeking may be incorrect, a judge may dismiss the case for
lack of evidence, some consumer attorneys say. "They usually don't
have the documentation," says Glen Chulsky, an attorney in Dover,
N.J., who now represents individuals but previously did work for
debt-collection firms.

Jason David Fregeau, a lawyer in Longmeadow, Mass., says he has faced
off against Asset seven times in recent years, and each time the
company has settled because it lacked documentation. "I have yet to
see them prove their case," he says.

Asked about these assertions, the company says it has acted
appropriately. Asset confirms that it is often hard to prove old debts
and that consumers are challenging its documentation more often.

Asset executives say the vast majority of debtors know they owe money,
and those complaining about court proceedings are merely trying to
escape from paying. "If a person has a plausible or legitimate reason
why they cannot pay, or if the debt is fraudulent, then we will work
with them to resolve the issue," the company said in its written
statement. "However, from our experience, we find that most people
accept their responsibility and pay their past obligations."

Paul Zecchino says Asset appeared out of the blue, suing him three
years ago in connection with an old Citibank credit-card debt for
$6,000. Astonished by the amount Asset was demanding, Mr. Zecchino, a
freelance writer in Englewood, Fla., consulted with lawyers and
responded to the court that he lacked knowledge of Asset's claims. He
asked that the company provide evidence. Asset never responded, Mr.
Zecchino says, even when he offered to settle the case for a smaller
amount. The suit was eventually dismissed.

Idalberto de la Torre appeared in a Miami small-claims court in
November 2003 to contest Asset's suit against him. The company
demanded $1,800 in old Providian Financial Corp. credit-card debt,
plus another $900 in legal fees. Mr. de la Torre, an administrator for
Delmonte Fresh Produce Inc., hired an attorney and was able to produce
copies of credit reports that he says showed that Asset's records were
wrong. Asset agreed to drop its suit.

Asset farms out legal cases to an army of lawyers who earn a
percentage of everything they collect. The company is one of the few
debt buyers to maintain a big in-house legal staff, as well.

At its headquarters, one group of workers does nothing but manage
lawsuits. "We're making sure the attorneys are getting things done,"
says President Brad Bradley, gesturing to workers typing busily in
their cubicles. The company won't say how many suits it files, but
industry veterans estimate that the figure reaches into the tens of
thousands a year. Asset says the suits it files are only a fraction of
the 16 million accounts it is currently processing. The company added
in a written statement that it believes itself to be "at the low end
of the industry when it comes to legal collections."

The debt-buying industry suffered a big setback in the late 1990s,
when the then-biggest player Commercial Financial Services Inc.,
collapsed in an accounting scandal. But the industry bounced back as
consumer debt continued to increase.

A doctor's son from Mount Clements, Mich., Asset's Mr. Reitzel, 70,
started a finance company in 1962 that loaned people money to buy
carpets and vacuum cleaners. He visited borrowers' homes every Friday
for payments. In the 1970s, he began buying bad debts from other
companies but struggled to find sellers. "We'd go around to karate
schools, I'm not kidding you," says the businessman. The
savings-and-loan debacle of the late 1980s gave him his first big
break. With his wife helping out in the office, Mr. Reitzel and Mr.
Bradley, his son-in-law, drove around the country, buying up S&L loan
portfolios and loading boxes of documents into a U-Haul truck.

While today the company says it sues only recalcitrant debtors, Asset
has internal quotas to encourage employees to refer cases to the
lawyers. Newer collectors are expected to refer two or three debtors a
month, while the quota for those with more than a year's experience is
12, a former employee says. Asset said in a written statement that
collectors are asked to turn over accounts because otherwise they
would tend to continue working on them, decreasing the overall
efficiency of Asset's collections efforts.

Asset's success with lawsuits has inspired rivals to follow it into
the courtroom. Portfolio Recovery Associates, a Richmond, Va., debt
buyer whose shares skyrocketed after it went public in 2002, says 29%
of its second-quarter revenues were generated by legal collections, up
from 25% the year before.

Asset employees say they pride themselves on their civility. One
worker consoles a debtor, saying, "Oh, I know, I know it. Welcome to
the club."

"You catch more flies with honey than vinegar," the Asset employee
says later, "and we spread a lot of honey."