Debt collection has become a big and busy function as credit card chargeoffs climb to record levels, but industry experts say there are perils if the collection is done improperly.

Lawyers for many of the top card issuers discussed the legality of various methods of debt collection in Washington last week at the 11th Credit Card Institute forum.

Speakers said some lenders' collection practices had become unsavory and even illegal as credit deteriorated. (Chargeoffs rose 40 basis points in March.) The growing aggressiveness has resulted in a number of lawsuits on behalf of cardholders, they noted.

Card issuers were warned to police themselves for illegal debt- collection practices, because ignorance of the law is not a viable defense. And some retailing companies are learning that lesson the hard way.

Sears, Roebuck and Co., Montgomery Ward & Co., and Filene's Basement have been hit with class actions claiming the retailers illegally collected debt from bankrupt cardholders.

These retailers' problems do not necessarily portend the same for bank issuers, said Susan Sparks, vice president and associate general counsel of Delaware-based First USA Bank.

Recent lawsuits against banks, however, show they are not invulnerable.

Daniel Hedges, a Charleston, W.Va., lawyer, handles many of the cases filed against creditors who allegedly violate the Fair Debt Collection Act by falsely representing themselves as collection agencies when sending letters to debtors. He often sues for as much as $3,000 per letter.

In some cases, creditors also illegally threaten to sue or reclaim a debtor's property, said a spokeswoman for Mr. Hedges.

The public thinks of card issuers as villains, said Sheldon Feldman, a lawyer in Washington with Weil, Gotshal & Manges. As such, they need to be conversant with applicable laws.

Mr. Feldman said when banks export interest rates to other states, they are still subject to the local laws when they send out collection letters.

Noncompliance can lead to huge penalties. Some courts assess damages of up to $500,000 per class action, or 1% of an issuer's net worth, said Mr. Feldman.

"The laws are there," said Ms. Sparks. "It's just a question of issuers' looking at their practices and following the guidelines." u

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.