The return of debtor's prison: collection agencies use the criminal justice system to pocket credit card debts.

• Author: Beato, Greg

ACCORDING TO Michael Klozotsky, managing editor of the trade publication insideARM.com, debt collectors contact consumers approximately four billion times a year. With so many contacts, there are bound to be complaints. In 2009, the Federal Trade Commission (FTC) received 88,190 consumer complaints about third-party debt collectors. More than 2,500 of these involved collectors who used threats of violence, or actual violence, while plying their trade. Another 11,505 involved false threats of arrest or property seizure. Approximately zero involved one of the more egregious aspects of debt collection: the way the industry outsources collection efforts to the civil court system, using taxpayer money and government force to strong-arm nickels from low-level deadbeats.

"In 2007, third party collection agencies returned over $40 billion to original creditors via collection efforts," Klozotsky tells me. He's making a case for the virtues of debt collection, and this is his most persuasive talking point: Those recovered billions increase the availability of credit to all consumers and help keep interest rates in check.

But the persistent phone calls and dunning letters that collection agencies deploy on debtors only pack so much punch. More and more, creditors are retaining the services of attorneys to file lawsuits on their behalf in civil court. At an FTC roundtable in 2009, Ira Leibsker, a Chicago collection attorney, estimated that there were "probably tens of millions of lawsuits" underway at that time. That same year, a single company, Encore Capital Group, filed 375,000 suits in the United States. According to "Debt Deception," a report published by the Legal Aid Society and several other advocacy organizations in May 2010, the 26 largest debt buyers in New York City filed 457,322 lawsuits from January 2006 through July 2008.

This huge infusion of cases exposes thousands of individuals to a process that overwhelmingly favors plaintiffs. Indeed, in debt collection cases, you're basically guilty until proven innocent.

Part of the problem stems from the way the debt buying industry has evolved over the last 20 years. As recently as the early 1990s, many credit card issuers made little effort to collect on their past-due accounts. If a cardholder missed a payment or two, in-house collection efforts would generally follow. But when a cardholder hadn't made a payment in 180 days, issuers tended to "charge off" the delinquent account against...