The Fraud Examiner

Phantom Debt: The Dark Side of Debt Collection
 

Jordan Underhill, J.D., CFE 
Research Specialist, Association of Certified Fraud Examiners                                 


In 2016, the Federal Trade Commission (FTC) secured its largest litigated judgment — $1.3 billion against Scott Tucker and several of his companies in relation to a massive payday lending scheme. Tucker operated an online payday lending empire that relied on fraudulent conduct to generate huge returns on loans.

For example, Tucker’s company would inform users that the loan amount plus a 30% finance charge would be debited from their bank account on their payday. Instead, the loan automatically renewed several times, resulting in the withdrawal of the finance charge and the rolling over of the principal. This turned a $390 loan (a $300 principal plus $90 in interest) into a loan that could generate more than $600 in interest alone.

Tucker’s businesses used misleading disclosures and did not adhere to their advertised payment schedules. Additionally, customer service representatives dismissed customer complaints and aggressively collected fees using threats of lawsuits, wage garnishment or bad credit reports. Tucker’s operations collected more than $1.3 billion in illicit fees and interest charges over four years (the FTC reached this number after subtracting the original loan amounts and finance charges that consumers agreed to pay).

The conduct of Tucker and his associated companies is notable not only for the extensive damage it caused consumers, but also because it is a variation of a commonly perpetuated fraud scheme: phantom debt collection.

 

What are phantom debt schemes?

Phantom debt schemes vary wildly, but generally involve the attempted collection of debt that either doesn’t exist, has already been discharged or has been artificially (and illegally) inflated. These schemes run the gamut, from outwardly criminal (e.g., an individual cold-calling people trying to collect an imaginary debt) to having a veneer of legitimacy (e.g., Tucker’s operation).

Scammers often go to great lengths to shake down victims, frequently engaging in conduct that is prohibited by consumer protection laws such as the Fair Debt Collecting Act. This includes making false statements (e.g. threatening jail time if an individual does not pay), harassment (e.g. using profanity or repeatedly calling an individual), unlawful communications with the victim (such as calling them at work) or making unlawful contact with third parties (e.g. relatives, co-workers). Calls to employers or other third parties can be especially damaging because the collectors often inform the party of the “debt” and threaten legal action against the victim.


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