Understanding Phantom Debt and How to Avoid It

Phantom debt is a real and serious issue that can have a significant impact on your financial well-being. According to the FTC, scammers use fake debt to trick people into paying for debts they don't owe.

Debt collectors often use high-pressure tactics to get you to pay up, but be aware that these tactics are often a sign of a scam. In fact, the FTC warns that debt collectors are often the ones who are actually scamming you.

If you're being contacted by a debt collector, it's essential to verify the debt first. You can do this by asking for the original contract or a copy of the debt, and also by checking your credit report to see if the debt is listed.

Banks profit from phantom debt by selling it to collection agencies, who then try to collect it from consumers. This can happen even if the debt is invalid or uncollectible.

The debt collection industry is a multi-billion dollar market, with companies like Asset Acceptance Capital Corp. and Midland Credit Management making millions of dollars from phantom debt sales.

Banks can make a profit from phantom debt even if they don't actually own the debt, as they can earn fees from the collection agencies for selling the debt to them.

The BNPL market is growing rapidly, with a projected value of $334 billion in 2024 and almost $700 billion by 2028.

Critics argue that companies like Apple, PayPal, Affirm Holdings, Block, and Klarna Bank are contributing to the problem of phantom debt through their BNPL arrangements.

The average outstanding balance for an Affirm customer was $641, while Block's Afterpay product had a typical customer owing $250.

Klarna, a privately held Swedish bank, reported that its customers owed an average of $150.

A Harris Poll survey found that 43% of users who owed money to BNPL services reported being delinquent on payments.

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28% of respondents said they were skipping payments on other debts to cover their BNPL payments.

More than half of BNPL users said the arrangements encouraged them to spend more than they could afford.

Roughly one-third of users reported being worse off financially, having trouble with budgeting, and being surprised at how much they owed for monthly BNPL payments.

One-third of users have spent more than $1,000 on BNPL purchases.

Almost half are using or have thought about using BNPL to pay bills or buy groceries.

About 42% of households with six-figure incomes said they were behind on BNPL payments.

Affirm argues that BNPL represents a small fraction of credit card volume and outstanding balances, but critics dispute this claim.

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Banks make their money by lending out deposits they hold from customers.

They use the deposits to make loans to other people and businesses.

Banks charge interest on these loans, which is how they generate most of their revenue.

This interest is usually higher than the interest they pay on deposits, making a profit for the bank.

Banks also profit from fees associated with loans, such as origination fees and late payment fees.

If this caught your attention, see: Amortizing Loan Origination Fees

If you believe you're being targeted by a phantom debt collection scam, start by knowing your rights. The FTC and Consumer Financial Protection Bureau enforce federal laws governing debt collectors.

Sending a letter to the caller demanding they stop contacting you can be a good first step. This is not a magic solution, and it doesn't make the debt disappear. Keep a copy of the letter for your files.

You can also try negotiating with the debt collector to reduce late fees and interest or work out a payment plan. If you're still struggling, consider seeking help from a nonprofit credit counseling organization.

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Retiring with student debt can be a challenging and stressful experience. You should know that student debt in retirement can impact your financial security and overall well-being.

Having student debt can affect your ability to enjoy retirement, as you may need to dedicate a significant portion of your income to debt repayment. This can limit your ability to travel, pursue hobbies, or spend time with loved ones.

It's essential to understand that student debt can last for decades, with some borrowers paying off loans well into their 60s and 70s. This can be a long-term financial burden that requires careful planning and management.

Student debt can also impact your eligibility for retirement benefits, such as Social Security and Medicare. If you have outstanding student loans, you may need to consider delaying retirement or reducing your retirement benefits.

Retiring with student debt requires a proactive approach to managing your finances and creating a plan to pay off your loans. This may involve consolidating loans, negotiating lower payments, or exploring income-driven repayment plans.

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BNPL providers typically perform soft checks on credit records for short-term purchases, which don't affect credit scores for now.

This means you can make purchases without worrying about your credit score taking a hit, at least not yet.

Soft checks are often used for purchases with four or fewer installments, making it easier to access credit.

However, this also means you won't be rewarded with higher credit scores when you make all your payments on time.

Borrowers who fall behind on BNPL accounts can still be hit with late fees, and delinquent accounts can be turned over to collection agencies.

The three major credit bureaus - TransUnion, Experian, and Equifax - aren't capable of handling BNPL information, according to lenders, which could potentially harm consumer credit scores.

Related reading: Bnpl Debt

You might be wondering who exactly is trying to collect the debt from you. The good news is that the FTC and Consumer Financial Protection Bureau (CFPB) enforce federal laws governing debt collectors.

A debt collector can be the original creditor, an entity trying to collect on behalf of a creditor, or a third party that purchased the debt from a creditor.

If you're receiving suspicious calls, it's essential to know that sending a letter demanding the caller stop phoning you can help, but it won't make the debt disappear and won't prevent a debt collector from suing you or reporting the debt to a credit bureau.

You can try negotiating with the collector by seeking a reduction in late fees and interest or working out a payment plan.

If all else fails, consider seeking help from a nonprofit credit counseling organization.

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Some states have taken proactive steps to address phantom debt. In 2019, the Illinois state legislature passed a law that prohibits debt collectors from misrepresenting the amount of debt or making false threats.

Many consumers have been affected by phantom debt, with some reporting receiving calls from debt collectors demanding payment for debts they never incurred. In fact, a 2020 survey found that 1 in 5 consumers reported receiving a debt collection call for a debt they didn't owe.

The Federal Trade Commission (FTC) has also taken action against companies that engage in phantom debt practices. In 2018, the FTC charged a debt collection company with making false threats and misrepresenting the amount of debt owed.

Some consumers have successfully fought back against phantom debt by documenting the calls and reporting them to the FTC. In one case, a consumer received a $10,000 settlement from a debt collector after reporting the company's false threats.

Phantom debt can have serious consequences, including damaging credit scores and causing emotional distress.

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