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…..

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….

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.

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