By Vicki Turetsky
Center for Law and Social Policy
Over the last decade, an unregulated industry related to the alternative financial services industry has grown rapidly, primarily around the internet, to aggressively and sometimes deceptively market child support collection services to mostly low-income single mothers who cannot afford an attorney.
Some of the largest private collection agencies often fail to deliver any genuine services. Instead, they strip income from low and moderate-income families that could have been spent on housing, childcare, clothing and school expenses, or saved for their children”s education. They trap custodial parents in perpetual contracts.
They also exploit the child support indebtedness of low and moderate-income non-custodial parents through the use of predatory and abusive tactics that increase their debt levels and often destroy their credit histories and interfere with parenting relationships.
A number of private child support companies bring to the table a history of consumer complaints, bar association ethics complaints, and litigation filed against them. However, the Federal Trade Commission has determined that child support collection agencies are not covered by the Fair Debt Collection Practices Act, because they collect child support debt, not consumer debt. While not all states will share data with or redirect payments to private collection agencies, industry pressure routinely exerted on state legislators and administrators to “play ball’ with the companies is enormous.
CLASP has an extensive file of state consumer complaints and lawsuits filed over the past decade by mothers, fathers, grandparents, employers, states, and courts around the county against some of the largest private child support collection companies. CLASP continues to receive complaints on a regular basis from custodial and non-custodial parents, legal services programs, and state legislators about the predatory practices of this industry. From these recent complaints, it does not appear to CLASP that these predatory practices have changed much from a decade ago, but rather that the problems are more widespread.
The complaints routinely allege that companies make money in four illegitimate ways: (1) promising help with back support, but instead pocketing a fee from ongoing monthly support; (2) taking a cut of support collected by state child support agencies; (3) demanding payments from grandparents; and (4) coercing payments from non-custodial parents that are not owed or authorized by state law.
The complaints reflect an offensive and disturbing picture of deceptive advertising, misleading contracts, fee gouging, harassment and abuse, posing as the government, dunning grandparents, inflating and fabricating debts, undermining creditworthiness, and abusing legal process.
Custodial parents sign a contract with these companies, frequently agreeing to pay a third or more of collected support until all debt is paid off–essentially a perpetual contract. Rather than undertaking collection activities, however, private collection companies often take their exorbitant fees from ongoing monthly support coming to the parent before signing the contract or from support collected through the efforts of a state child support agency. Often, custodial parents have no idea that the company is operating a scam.
In other cases, companies use abusive and coercive collection practices against low and moderate-income non-custodial parents and their relatives. Like the custodial parents who sign up for services, the non-custodial parents targeted by the companies appear to be of modest means. They have low-level jobs and have limited educations. Often, they have a second family.
The companies interfere with the parents” employment relationships, make unauthorized foreclosure threats, harass mortgage companies, and repeatedly pull down credit records. They sometimes call the grandparents and threaten them with jail unless the grandparents pay up. These companies often inflate child support debts by charging unauthorized interest on decades-old debts and extort payments that the companies know that parents do not owe. They undermine regular payments being made by the parents and sabotage these parents” often tenuous toe-hold in the mainstream economy.
The complaints fall into several patterns relating to various private collection companies:
Advertisements carried on cable T.V. and the internet and in tabloid publications offer custodial parents risk-free services to collect unpaid arrears. Sometimes, the company tells them that it has a special “in” with a state that gives it an advantage in collecting support. The complaints indicate that the parents who sign up are typically low-income, less educated mothers, although a significant number are custodial fathers. They are usually receiving ongoing monthly support through the state, but are seeking help collecting old arrears. Often parents have children finishing high school and hope to collect money for college. The company pitch plays on the parents” financial distress, desire to pay for college, and anger at the other parent. What the companies do not tell parents is that free and often more effective services are available from state child support agencies, or that very old child support debt is usually uncollectible and often discharged by state statutes of limitations.
Contracts reviewed by CLASP appears only to authorize fees for arrears collected by the company, but it actually says that the company can take a fee from any and all collections, whether or not the company did the work. Custodial parents are threatened with a lawsuit when they try to get out of the contract. At the time they sign up, parents are required to sign a power of attorney or “change of address’ form, which directs the state to send future collections to the company. The contract terminates when all arrears are paid off, but this rarely happens, because on-going monthly support payments are applied to the arrears balance, leaving the current month unpaid.
While private collectors promise to increase the income of custodial parents, in fact they often decrease family income by skimming off a third or more from income that parents would get without the company”s help. Parents understand that that they will have to pay the basic fee if the company collects back support, but they do not understand that the company will take a cut from ongoing monthly support, tax offsets, and other support collected by a state. Many complaints follow the belated discovery that the company has not made independent collection efforts, but instead has skimmed off the fee from state-collected support or an ongoing payment stream. While a commonly repeated company slogan is that “something is better than nothing,’ the reality for many custodial parents is that when they sign the contract, they receive less money, not more. The fees charged are disproportionate to the minimal work performed by the company.
Minimal collection activities
Contrary to representations, the company appears from the complaints to conducts few independent locate and collection activities. Parents receiving state child support services are required to sign a disclosure form directing a state to provide information about the non-custodial parents” location, employment, income and assets. When the custodial parent is not receiving state child support services, she is sometimes told that she must produce full locate information before the company will attempt to collect. When the company does take action, its methods are often illegal or abusive–and minimal in cost.
Illegal payroll withholding tactics
The public child support program automatically institutes and processes payroll withholding for all support orders issued in the states after 1994 (whether or not parents are participating in the program). Private parties also may institute withholding, but only if they have a court order authorizing income withholding. However, employers are required to send all withheld support to the state for more accurate interstate record-keeping. Instead of obtaining a court order, the company sends employers bogus withholding orders that direct employers to send the money directly to the company. The company threatens employers when they object to the company”s demands to “bump’ legitimate withholding orders producing ongoing income streams to families. As a result, the military payroll department (DFAS) made a decision several years ago not to honor the company”s withholding efforts.
Harassing and abusive tactics
The company calls non-custodial parents several times a week at home and work, calls their church pastors, leaves flyers in the neighbors” mailboxes, calls them names, threatens them with jail, menaces them in a way that they have become concerned for their physical safety, repeatedly pulls down their credit reports, puts liens on their houses, and threatens the mortgage holders. The company represents itself as a government agency, uses a misleading name (e.g., “Child Support Enforcement’ or “Child Support Bureau’) or uses official-looking documents. The company refuses to cancel the contract, even when the custodial parent is afraid that the non-custodial parent may harm her or the children. Instead, the company tells the custodial parent to get a restraining order.
The company telephones the grandparents and tells them that they will put their sons in jail tomorrow unless they provide a credit card number or certified check immediately.
Inflated and non-existent debt
The company pursues decades-old debts barred by the state”s statute of limitations, and inflates those debts by charging tens of thousands of additional dollars as “interest,” even when state law does not authorize the interest charges. The company continues to harass the parent even when non-custodial parents say they do not owe the money, and provide documentation (such as a zero-balance account statement from the state child support agency, adoption papers, or cancelled checks). Even though the company knows they do not owe the money, it continues to pursue them, and will not respond to calls or letters. The company makes no effort to verify debt, but instead tries to extort a settlement.
The company delays sending on the child support for weeks. The company will not account for the collections it made or the fees it deducts. It will not respond to calls or letters. It refuses to cancel the contract, even when custodial parents do not think it has performed as promised. Instead, the company threatens a lawsuit for a third of the unpaid arrears. Often complaints are pleas to the state child support agency to help them uncover the source of payment and sort out the accounting.
These complaints reflect a growing national problem with the business practices sometimes used by private child support collection companies. The industry is dominated by companies that sometimes exploit the financial vulnerability and personal frustrations of parents, often leaving both parents worse off. Their practices are divisive and profoundly anti-family. These practices can financially and emotionally devastate mothers and fathers, worsen already fragile family relationships, increase the risk of domestic violence, strip away income and financial good standing, subject non-custodial parents to fraudulent collection efforts, and undermine the credibility of legitimate child support enforcement efforts. These practices are not permitted to be used by state child support programs or private attorneys, and would be illegal if used by consumer debt collection companies.
According to a March 2002 U.S. General Accounting Office report, there are 38 private collection companies in 16 states that collect child support under a direct contract with custodial parents. Almost a third of the companies are located in Texas. Other states with several companies include Arkansas, California, Colorado, Indiana, and Ohio. Most companies told the GAO that they handled cases in every state in the country. On average, the private companies charge custodial parents 29 percent of collected support, while some of the largest companies charge 34 percent. About half of the companies impose additional fees and charges in addition to the percentage fee.
The GAO found that the private companies have not demonstrated that they do any better on collecting support than state child support agencies. As a result of significant state improvements over the last few years, states have a higher collection rate than the private collection companies nationwide. The GAO found that the main edge held by private companies in enforcing support is that the companies pressure relatives to pay the support owed by non-custodial parents, and use collection tactics that are prohibited to state child support agencies, private attorneys, and private collection agencies that pursue consumer debt.
Although there may be an appropriate role for private child support collection companies that are committed to customer service, use legitimate collection practices, and help parents obtain overdue child support that they might not otherwise receive, the industry currently operates without regulatory controls or accountability. The growth of this unregulated industry undercuts basic social policies promoted by the public child support program, and threatens to unravel major reforms underway within the program–including improving performance and interstate coordination, reorienting the program from welfare cost recovery to family support, implementing realistic strategies to deal with debt, helping parents participate in the formal economy, and helping parents stay connected to their children.
Several media stories have highlighted the abusive and deceptive practices used by some of the private collection companies over the years, including Time Magazine, Smart Money Magazine, Children”s Voice, New York Times, New York Daily News, Washington Post, Chicago Tribune, Cleveland Plain Dealer, Gannett News Service, CNN, Fox News, Minnesota Public Radio”s Marketplace, and CBS Market Watch.