Bad Paper: Chasing Debt From Wall Street to the Underworld Read online

  “It’s very much an alpha-male-type thing, wouldn’t you say?” asked Aaron admiringly.

  “Right,” said Brandon. “And they don’t really know, Will he actually punch me in the nose if I…” Brandon nodded his head convincingly. “Yeah, I would. Yeah, I would.”

  “You do prefer conversation first,” suggested Aaron.

  “Correct, absolutely,” said Brandon. “And at the end of that conversation, if you still persist, I will still punch you in the nose.”

  “How do you deal with the women?” asked Aaron.

  “No, but listen, I wouldn’t punch you in the nose for doing anything other than something criminal. Like just because you were good at your job? No, I don’t walk around threatening you.”

  “No, you’re more of an uplifting guy,” Aaron offered.

  “Right,” said Brandon. “I’m a motivator.”

  3

  THE PACKAGE

  If Aaron had doubts about his partnership with Brandon, they were soon dispelled. Brandon quickly began proving his worth—sniffing out inefficiencies in the marketplace like a bloodhound chasing the faintest of scents. By the fall of 2008, Brandon was increasingly interested in a large debt buyer based in Painesville, Ohio, known as Hudson & Keyse. Brandon had been buying paper from Hudson & Keyse for several years, but he had recently noticed that the price of the paper was getting cheaper; meanwhile, rather counterintuitively, the quality of the paper remained high and, in some cases, seemed to be improving. Brandon suspected that the company was in financial trouble—and he was right. An insider at Hudson & Keyse later told me, “There was a desperation to sell paper to raise funds.” At Brandon’s urging, Aaron capitalized on this desperation. On December 16, 2008, Aaron purchased a parcel of debt from Hudson & Keyse containing 8,518 accounts. The parcel had a “face value” of $47.5 million and Aaron agreed to buy it for precisely one penny on the dollar.

  The portfolio of debt that Aaron purchased—which I will refer to simply as “the Package”—was the archetype of the kind of paper that Aaron hoped to buy. The Package quickly proved to be “solid gold,” as Aaron put it. In his estimation, the people at Hudson & Keyse were “total idiots” for parting with it so cheaply: “They left too much meat on the bone.” In fact, Aaron soon went back to Hudson & Keyse looking for more, and began buying similar portfolios on a monthly basis in an arrangement known as a “forward-flow agreement.” This was, for Aaron, the start of a very profitable relationship.

  The Package itself was composed of credit-card debts from a range of original creditors including Bank of America, Washington Mutual, Huntington National Bank, Unity One Federal Credit Union, and many others. Most of the accounts had likely been sold at least once before; and many had probably been sold multiple times. The debtors in the Package hailed from a range of locales across the country, including Ewa Beach (Hawaii), Dutch Harbor (Alaska), Prairie Village (Kansas), and Rock Springs (Wyoming). Some of these debtors owed as much as $29,777 and others as little as $209; some were as young as nineteen, others were as old as eighty-five; some had accounts that had been charged off by the banks as long ago as 1989, others had accounts charged off as recently as 2008. All of their fates were now bound together in the form of a single Microsoft Excel spreadsheet that had been sold to Aaron for one penny on the dollar.

  Debtor #2,991 in the Package was a single mom named Joanna who lived in the suburbs of a large Midwestern city. In 2006, Joanna ran for her life, literally. She fled the home of her abusive ex-boyfriend, who had tried his best to kill her, once even pushing her out of a moving car. She left with their one-year-old daughter in tow, and hunkered down in a small apartment. From the start, it was rocky. Joanna often lived week to week, not knowing how she would pay her bills or put food on the table. She took whatever jobs she could find, and often two at a time. For a while, she worked weekdays as a nanny and then spent weekends doing back-to-back eight-hour shifts as a certified nurse’s assistant at an assisted living facility. She rushed through a frantic routine, as if her own personal needs were just another set of bills that she didn’t have the time or resources to confront.

  To save money, Joanna grew accustomed to wearing the same clothing, year after year, even though her socks and her underwear became faded, threadbare, and torn with holes. As her daughter grew up, Joanna paid for her to take tae kwon do and gymnastics classes. Joanna helped her with homework and took her to the library often. At night, Joanna would clean her apartment, do the laundry, and when the last chore was done—and there was nothing to do but sit and catch her breath—she worried about her debt. Over the previous thirteen years, Joanna had accumulated considerable credit-card debt on her Washington Mutual card. Part of the debt was hers and she bore full responsibility for it; part of it, however, was the doing of her abusive ex-boyfriend. Throughout their relationship, he was periodically unemployed; and, during these times, Joanna used her credit card to pay for things. So did he. According to Joanna, he often used it to cover repairs on his car or, as she recalls it, to “soup up” his computer because he loved to play online games. “He was buying stuff without me even knowing it,” said Joanna. She confronted him but said, if she pushed too hard, he “clobbered” her. “I try not to live in regret,” Joanna told me, “but he screwed me mentally, emotionally, physically, and [now] financially.”

  Throughout the fall of 2006, Joanna’s bank records show that she was trying to pay off her balance and making no further purchases on the card. In September she paid $83, in October she paid $85, in November she paid $39. At this point, she owed Washington Mutual $2,712. After that, she simply stopped paying what she owed. It was not a responsible thing to do, but Joanna says that cash was scarce and she had to pick and choose which of her bills to pay. Meanwhile, the interest continued to accumulate, at a rate of 24 percent; and, by June 2007, she owed $3,206. Joanna didn’t take any of this lightly. She was and is determined to fix her credit—in large part because she fears it may handicap her daughter. “I don’t know how it works,” she admitted to me, “but I don’t want my bad credit to reflect badly on my daughter. Let’s just say she’s smart enough to get a scholarship of some sort and they’re like, No—because your mom is not good enough…”

  In the ensuing years, Joanna received calls from numerous debt collectors about her Washington Mutual card; and then, one day in 2009, she received a call from someone who presented himself as an “officer of the court.” “He said, ‘You need to call me back as soon as you can because they have filed a lawsuit against you and you’re going to be arrested and brought to court for this outstanding balance.’” Joanna immediately went into a panic. “I thought, My God, I’m going to go to jail. Who’s going to take care of my daughter?” This threat wasn’t as outlandish as it sounds. As of 2010, more than a third of all states permitted the jailing of consumers for failing to pay a debt.

  Joanna called the collector right away and explained that, currently, she had just three hundred dollars in her bank account. The collector said that she owed much more than this, but that he would settle for a onetime payment of three hundred. Looking back, this whole exchange seems odd to Joanna, but at the time, she felt so desperate and panicked that she readily acquiesced. This left her with no cash. She borrowed fifty dollars from her brother, and another hundred from her parents, so she could afford gas and groceries for the next two weeks. To save money, Joanna lived on a strict diet of peanut-butter-and-jelly sandwiches. Meanwhile, she never heard back from these collectors, nor did she ever receive a receipt or any kind of confirmation in the mail from them. Little did she know it, but the people who’d called her were collecting on stolen paper—debt that belonged to Aaron but which, somehow or another, had been pilfered from him.

  Roughly a thousand miles away, in a small town in the Southwest, debtor #3,159 from the Package—a woman named Theresa—was facing problems of her own. Theresa defies almost all the stereotypes of debtors. She joined the U.S. Marines in the early 1990s, at the age of
eighteen, and served for the next eight years. Years later, she still talks like a marine, answering all my questions with a “Yes, sir.” Theresa was so determined to live responsibly that, throughout much of her teens, she worked more than thirty hours a week at McDonald’s, earning $4.25 an hour. She saved almost everything she made. When her father lost his job and her parents fell behind on their mortgage payments, Theresa—who was still in high school at the time—bailed them out by giving them the $2,000 that they needed to avert foreclosure. When I asked her how she juggled so much at such a young age, she replied, “Well, I didn’t come from people with money, sir, and I knew that I had to handle my own business.” Theresa was resolved to pull herself up into the ranks of the middle class and, upon joining the Marines, the very first thing that she did was open a 401(k) retirement plan.

  After eight years of service, Theresa got married and settled down into a comfortable middle-class existence. She took a job as the manager of a restaurant and, later on, of a grocery store. Together, she and her husband were making roughly $90,000 a year. They had acquired some credit-card debt—a few thousand dollars’ worth—but they were paying it off consistently in installments of roughly $180 a month. Theresa didn’t like having that debt, but it seemed manageable. At that time, life in general seemed manageable—and that’s precisely when everything fell apart.

  It started at the grocery store, when someone stole her cell phone. Theresa hurried home to call T-Mobile, asking them to activate the chip in her old cell phone. But there was a mix-up, and instead of routing all of her calls to this phone, T-Mobile began routing all of her husband’s calls to the phone. Right away, Theresa received a voice mail that was intended for her husband. The message was short but startling: “I took a shower and I’m waiting for you to come over.”

  “What happened was, I found out that my husband of eleven years had another family somewhere else,” she told me matter-of-factly. “He had a girlfriend and a four-year-old that he had been supporting without me knowing.” Theresa filed for divorce in 2005, but this quickly created a fresh set of problems. “He left me with everything except the truck that he took, and that was fine, except that I now had to pay for everything,” she explained. “I had the credit-card debt. I had the mortgage. I had everything.” Meanwhile, she went from having a dual income of $90,000 to a lone income of roughly $50,000.

  As the direness of her situation became increasingly evident, Theresa got a roommate and eventually took a second job. It still wasn’t enough to cover her bills, however, so she went into triage mode. She would pay her mortgage first, then the monthly bill for her vehicle, then her utilities, and then she would deal with everything else. At the time, she says she had four credit cards—which was close to the national average of 3.5 cards per person. The balances on these cards, she says, reflected both the debt from her married days and new debt that she had incurred to pay for groceries and “other staples” when it got tight. Theresa soon realized, however, that she could not even begin to pay all of her credit-card bills each month, so she made a decision—a bad one, it turns out—to stop paying some of the cards altogether. She opted to keep paying two of them, including her Washington Mutual card. “I don’t remember how I made that decision,” she told me uncomfortably. “It was kind of a bad time.” In July 2006, she owed $4,184 to Washington Mutual. In August, September, and October she continued making steady payments even though she wasn’t using the card to make any purchases.

  Theresa’s decision not to pay her other credit cards proved to be very shortsighted; it had an immediate effect on her credit rating, and, as a result, the interest rate on the two cards that she was paying skyrocketed to the uppermost legal limit, which was just under 30 percent. Theresa tried to keep making payments, but often they were late, triggering more fees. Between January 2006 and April 2007 she incurred eight late fees of $39 each. During this same period, she also came to owe another $817 in interest. The interest, combined with late fees, caused her to go over her credit limit—which, in turn, triggered an over-the-limit fee. Eventually, Theresa stopped paying her Washington Mutual bill altogether because she says she couldn’t even afford the minimum payments.

  “They probably would’ve gotten a lot more money from me if they would have left me at my original twelve to thirteen percent interest rate and worked with me a little bit,” says Theresa. “But what happened was, when they saw me starting to fail, they jacked it up to twenty-nine percent. I guess they were trying to get whatever they could before I went completely under. Well, what happened was they actually pushed me under.”

  In March 2007, Theresa finally got a much-needed break: drawing on her experience in the Marines, she landed a job with the federal government as a Border Patrol agent. As a matter of policy, the U.S. Border Patrol says that debts and “financial issues” may render candidates “unsuitable” for service. Theresa says that initially, when she joined the Border Patrol, her superiors understood her predicament and were sympathetic. “They could see I was working two jobs, I had a roommate, and I could put everything on paper to justify why, at that point, my credit was a mess.” But that would not work indefinitely. Theresa knew that in five years she would be required to undergo a new background check and that she likely wouldn’t be able to justify having such poor credit. The bottom line was that she needed to pay off at least some of her outstanding debts as soon as possible.

  The situation came to a head in 2009 when she began receiving phone calls about her Washington Mutual card from people who claimed to work at a law firm. Like Joanna, she was told that unless she paid off the balance in full, they would take her to court. Theresa worried that such a lawsuit could destroy her career as a federal law enforcement officer. The collectors explained that she now owed more than $6,000, with interest, but they offered her a deal in which she could settle the matter for just $2,700. Theresa says that she set up a payment plan and, over the course of the next six months, the money was withdrawn directly from her checking account.

  Despite everything she had been through, Theresa felt pretty good about the situation. She had finally paid off a fairly substantial debt. There was just one problem: the company never sent a letter to her confirming that she had paid the bill. And, what’s worse, the payment never appeared on her credit report. She spent the next six months trying to understand where, exactly, her money had gone. “I didn’t want the money back,” she told me. “I just wanted somebody to say, ‘Hey, she tried to pay.’” At the time, she was trying to land a new job as a customs agent. “And they’re coming to me [and asking], ‘How come you got so much debt?’ And I’m trying to say, ‘Hey, I paid it. I paid it.’ But I didn’t have any proof.” In the meantime, her credit report would continue to indicate that she had not paid this debt, which meant—among other things—that she would likely have to pay more for a car loan, a mortgage, or insurance.

  “I didn’t know who to turn to for resources,” she told me. “I couldn’t get my money back, and I kept running into dead ends everywhere.” All of this led her to conclude wearily: “There are a thousand ways to rip off desperate people. The more desperate you are, and the less you have, the easier it is.”

  * * *

  It wasn’t an accident that Theresa’s and Joanna’s debts ended up in the hands of thieves. When the original creditor, Washington Mutual, sold their debts it stopped caring about what Theresa and Joanna owed, how they were treated, or the fate of their personal information. The banks’ contracts testify to this indifference. For example, in a series of transactions in 2009 and 2010, Bank of America sold millions of dollars of charged-off debt to a company in Denver called CACH LLC. In the sales agreement, Bank of America said that it would not make “any representations, warranties, promises, covenants, agreements, or guaranties of any kind or character whatsoever” about the accuracy of the accounts it was selling. When Aaron bought the Package from Hudson & Keyse, the contract of sale had similar wording. It stated, for example, that the selle
r was offering no “warranty of any kind” relating to the “validity, accuracy, or sufficiency of information” that was being sold. In other words, there might be problems with the debts, but they were simply being sold on as is.

  And there were problems, dating right back to the original creditor, Washington Mutual. For both Joanna and Theresa, bank records confirm that Washington Mutual issued them significant credits—$456 for Joanna and $701 for Theresa—on the very same day that it sold their debts. It’s unclear what the credits were for. An official at Chase Bank, which acquired Washington Mutual in 2008, speculates that the credits may have been offered as relief—gifts, essentially. On their monthly statements, the credits appeared as payments alongside the words “PAYMENT RECEIVED—THANK YOU.” Whatever the explanation, one thing is certain: when Aaron purchased these accounts, in 2008, neither Joanna’s nor Theresa’s balance reflected these credits. Somewhere along the way, quite possibly at the bank itself, they were simply forgotten or ignored. Such sloppy record keeping may seem surprising, but it is prevalent enough that, in 2009, the Federal Trade Commission (FTC) stated in a report: “When accounts are transferred to debt collectors, the accompanying information often is so deficient that the collectors seek payment from the wrong consumer or demand the wrong amount from the correct consumer.”

  In truth, there was little that Theresa or Joanna could do; they had paid off their debts to the wrong collectors and fallen into the debt underworld. If anyone were going to help them, it wouldn’t be the state attorney general, or the Better Business Bureau, or the FTC, or even the police, but the former banker and the former armed robber who had bought their debts.