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In Prosecutors, Debt Collectors Find a Partner

Jessica Silver-Greenberg|The New York Times
Sunday, 16 Sep 2012 | 6:13 PM ET

The letters are sent by the thousands to people across the country who have written bad checks, threatening them with jail if they do not pay up.

gavel and money
gavel and money

They bear the seal and signature of the local district attorney’s office. But there is a catch: the letters are from debt-collection companies, which the prosecutors allow to use their letterhead. In return, the companies try to collect not only the unpaid check, but also high fees from debtors for a class on budgeting and financial responsibility, some of which goes back to the district attorneys’ offices.

The practice, which has spread to more than 300 district attorneys’ offices in recent years, shocked Angela Yartz when she was threatened with conviction over a $47.95 check to Walmart. A single mother in San Mateo, Calif., Ms. Yartz said she learned the check had bounced only when she opened a letter in February, signed by the Alameda County district attorney, informing her that unless she paid $280.05 — including $180 for a “financial accountability” class — she could be jailed for up to one year.

“I was so worried driving my kid to and from school that if I failed to signal, they would cart me off to jail,” Ms. Yartz said.

Debt collectors have come under fire for illegally menacing people behind on their bills with threats of jail. What makes this approach unusual is that the ultimatum comes with the imprimatur of law enforcement itself — though it is made before any prosecutor has determined a crime has been committed.

Prosecutors say that the partnerships allow them to focus on more serious crimes, and that the letters are sent only to check writers who ignore merchants’ demands for payment. The district attorneys receive a payment from the firms or a small part of the fees collected.

“The companies are returning thousands of dollars to merchants that is not coming at taxpayer expense,” said Ken Ryken, deputy district attorney with Alameda County.

Consumer lawyers have challenged the debt collectors in courts across the United States, claiming that they lack the authority to threaten prosecution or to ask for fees for classes when no district attorney has reviewed the facts of the cases. The district attorneys are essentially renting out their stationery, the lawyers say, allowing the companies to give the impression that failure to respond could lead to charges, when it rarely does.

“This is guilty until proven innocent,” said Paul Arons, a consumer lawyer in Friday Harbor, Wash., about two hours north of Seattle.

The partnerships have proliferated from Los Angeles to Baltimore to Detroit, according to the National District Attorneys Association, as the stagnant economy leaves city and state officials grappling with budget shortfalls. Lawyers for the check writers estimate that more than 1 million of them are targeted a year. The two main debt collectors — California-based CorrectiveSolutions and of Missouri — return millions of dollars each year to retailers including Safeway, Target and Walmart.

While the number of bounced checks has fallen as more shoppers pay with credit or debit cards, Americans still write billions of dollars worth of bad checks each year. In 2009, $127 billion worth of checks were returned, according to the most recent data from the Federal Reserve. That’s down from $182 billion in 2006.

Because the cases are not fully investigated, there is no way of knowing whether the bad checks were the result of innocent mistakes or intentional fraud. The so-called bad check diversion programs start from the position that a crime has been committed.

Before the first partnerships were rolled out in the late 1980s, merchants who received a bad check typically tried to retrieve the money themselves or through a private collection company, with abysmal results. Those merchants who suspected fraud could send along the checks to their local district attorneys.

The influx of bad-check reports overwhelmed district attorneys’ offices, according to Grover C. Trask, a former district attorney in Riverside, Calif., considered the father of such programs. “It was a way to deal with a fairly serious nonviolent crime going on in the business community, but not overburden the court system or the resources of the district attorneys,” Mr. Trask said.

The programs were quickly challenged by consumer lawyers, who took aim primarily at California-based American Corrective Counseling Services. Facing a barrage of class-action lawsuits, the company reorganized through a Chapter 11 bankruptcy in 2009.

Still, its successor, CorrectiveSolutions, which says it has contracts with more than 140 prosecutors, has been dogged by similar legal challenges, including a class-action lawsuit pending in federal court in San Francisco that claims the company “has constructed an elaborate artifice” to terrify borrowers into paying. CorrectiveSolutions, which did not respond to requests for comment, has contested the claims, court filings show.

For the collection companies, the partnerships offer a distinct financial benefit: the “financial accountability” classes. Typically, a small portion of the class fees, which can exceed $150, are passed on to the district attorneys’ offices. Check writers are led to believe that unless they take the courses, they could end up in jail.

A letter signed by the Santa Clara County district attorney, for example, informed Kathy Pepper that the “bad check restitution program” would allow her to avoid “the possibility of further action against the accused by the District Attorney’s Office.”

Petrified, Ms. Pepper agreed to pay $170 for a class and another $25 to reschedule the class last year after accidentally writing a $68 check in the midst of a divorce last year that upended her finances.

What Ms. Pepper did not know was that her bad check was sent directly from the merchant to the debt-collection company, without any prosecutor determining whether she had actually committed a crime.

'Disingenous' Program?

Under the terms of five contracts between CorrectiveSolutions and district attorneys reviewed by The New York Times, merchants refer checks directly to the company, circumventing the prosecutors’ offices. While the merchants are required, for example, to attempt to contact the check writer, they can send any bad checks to the collection companies if the shopper hasn’t responded, typically within 10 days.

“No one at the district attorney’s office reviews the cases” before the collection company sends out letters, said Priscilla Cruz, an assistant director in the Los Angeles district attorney’s office.

As of July, CorrectiveSolutions had sent out 16,955 letters on behalf of the Los Angeles district attorney, and during that time 635 people attended the program’s classes, county data show. While few people will be prosecuted for not attending the class, there is a possibility of charges, Ms. Cruz said.

While the percentage of targeted check writers taking the classes is low — 4 percent to 7 percent in recent years — the percentage of cases referred for potential prosecution is much lower, about 0.10 percent.

Few bad-check writers are prosecuted, especially for relatively small sums, lawyers say, because it is hard to prove the person meant to defraud the merchant.

Gale Krieg, a vice president at BounceBack, said he has turned down business from prosecutors who won’t agree to at least have all copies of the checks sent to their offices, where prosecutors can determine if a crime has been committed. Mr. Krieg, who said the company has contracts in 38 states, acknowledges the limitations: “Whether they exert oversight isn’t something that we can control.”

Prosecutors point out that people who write bad checks should be held accountable for paying back what they owe.

“I view it as quite a win-win,” said Baltimore County State’s Attorney Scott D. Shellenberger. “You aren’t criminalizing someone who shouldn’t have a criminal record, and you are getting the merchant his money back.” On its Web site, CorrectiveSolutions says that its classes result in low rates of recidivism.

Some officials in district attorneys’ offices have quietly raised concerns that the programs are misleading. A November 2009 county audit of Deschutes County, Ore., titled “District Attorney’s Office-Cash handling over revenues,” wondered whether elements of the program could be “disingenuous.” The prosecutor’s office, which did not return requests for comment, contracts with CorrectiveSolutions to handle its bad checks. Ms. Yartz said she accidentally wrote a check for groceries on her credit union account, rather than her bank checkbook. She had recently moved and was in the process of closing that account.

Even after Ms. Yartz paid $100.05 in February to cover the bounced check, the returned item fee and an administration fee, she got a letter signed by the Alameda district attorney informing her that her remaining balance was $180 for the class. After consulting with a lawyer, she decided to take her chances rather than pay for a class she could not afford, to avoid being punished for a crime she said she did not commit. Ms. Yartz also questioned the need for a class on budgeting and financial accountability: “If I meant to bounce this check like a criminal, why do I need a class on budgeting?”

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