Feds Crack Down on 'Phantom Debt Collection' Scheme

— -- Federal and state authorities are cracking down on a multi-million-dollar “phantom debt collection” scheme that allegedly bilked at least $3.8 million from consumers who were tricked into paying off debts they didn’t owe.

The action, brought by the Federal Trade Commission and Illinois Attorney General Lisa Madigan, is part of “Operation Collection Protection,” an ongoing effort against phony debt collection, which has become the number one consumer complaint at the FTC.

“While it may sound unbelievable, it is a very effective scam,” Madigan told a news conference Wednesday in Chicago, where the latest case originated.

The FTC and Illinois are suing six companies and three individuals who used a variety of business names including Stark Law, Stark Recovery and Capital Harris Miller & Associates in what the complaint alleges was actually part of a telephone boiler room operation that hounded consumers nationwide for money they didn’t owe. Federal officials also allege that the operation, based in Westmont. Ill., and Irvine, Calif., sold fake “debt portfolios” to other collection companies, who would then contact innocent consumers.

The scheme netted $3.8 million from more than a thousand consumers since 2011, said Todd Kossow, acting Midwest regional director for the FTC. A judge in Chicago has temporarily frozen the company’s assets while authorities seek a permanent injunction and restitution for consumers. Neither the company nor the named individuals responded to ABC News’ requests for comment.

Kossow said victims had entered personal information into online loan websites. Authorities believe many of these sites were fakes, designed to gather people’s personal information and later harass them for phantom debts. Others applied elsewhere for online loans and received them, but even after they paid off the loans they were still contacted later by the debt collectors; the FTC is investigating how that occurred. Callers allegedly told the consumers they had outstanding debts and threatened them with lawsuits or said that debt collectors would contact their employers or relatives. The debt collectors relayed detailed personal information over the phone, including consumers’ Social Security numbers, full names, addresses and employment information to convince consumers that they were legitimate.

“What they’re really saying to consumers is we know all about you, you owe us money and you better pay it right now. Consumers who may have been skeptical of the call become concerned when they realize the collector has so much information,” Kossow said.

Phantom debt is a growing problem. Last year, the FTC received more complaints -- nearly 900,000 -- about debt collection than about anything else, Kossow said. Debt collection complaints even surpassed identity theft, which had been the top issue for consumers for the past 14 years.

“People are truly fearful of the consequences,” Madigan said. “Sometimes it is much easier to make a payment.”

Joshua Rozman of Tampa, Fla., is one of the named victims in the government’s lawsuit. He said he took out a couple online payday loans when his roommate lost a job and they needed rent money. Rozman said he paid off the short-term loans, but then in June 2015, he started getting calls from Stark Law along with threats that the collectors would contact his workplace.

“It’s not only embarrassing, but something that’s very scary,” Rozman said.

After multiple calls, Rozman set up a payment plan for a debt the collector claimed had reached $800. He sent $230 as an initial payment, but then got suspicious and filed an FTC complaint.

Consumers have rights under federal law when it comes to debt collection. Here are some tips:

- Be wary of anyone who calls out of the blue seeking repayment of a debt.

- Ask the collector to mail you written details about the debt owed.

- You have the right to dispute any incorrect debt claim.

- Get the collector’s name, address and company name and ask for the original creditor’s name.

- “Phantom debts” won’t appear on your credit report, so to see whether you owe any real debt you can get your free credit report every 12 months from each of the three credit bureaus at AnnualCreditReport.com.