Trial periods are designed to last only three months, after which mortgage servicers are supposed to either give homeowners a permanent modification or drop them from the program. According to a ProPublica analysis, about 475,000 homeowners have been in a trial modification for longer than three months.

While the Treasury Department has so far allowed servicers to stretch the trials without repercussions, the government issued little-noticed guidelines in late December, warning that lenience will end at the end of this month. Servicers will have to clear out their backlogs, and those that don’t abide by the guidelines could face “financial penalties,” said a Treasury spokeswoman. But Treasury has been vague on how big those penalties will be.

Although homeowners in the trial modifications have had the benefit of seeing their monthly payments drop (by an average of $522), there are adverse consequences when a trial drags on. A homeowner’s credit score can take a hit. Because a homeowner is not making a full payment, the balance of the mortgage grows during the trial period, putting someone who was behind when the trial began even further behind if it fails. The homeowner can be in worse shape if the modification fails since she’s been making the trial payments instead of saving for the possibility of foreclosure. And last but certainly not least, those homeowners suffer the stress and fear of not knowing whether they’ll be able to keep their homes.

Some homeowners have been in limbo for as long as 10 months – since the launch of the program. Recently, we at ProPublica asked readers to help us find who’d been in a trial period for the longest time. We heard from hundreds of frustrated homeowners, many who’d begun trials last summer. Among them were two — Marlene Colon of Tinton Falls, N.J., and Deb Franklin of Airville, Pa. – who had begun trials last May and were still waiting. Chase Home Finance, a subsidiary of JPMorgan Chase, serviced both their mortgages.

Since the first servicers signed up last April, about 1 million homeowners have been put into trial loan mods. Only 116,297 have emerged with a lasting modification. That number will undoubtedly go up next month, though given the scale of the foreclosure crisis, it will remain disappointingly low. However, if the servicers succeed in reducing their backlogs, an even larger number of homeowners might find themselves dropped from the program and facing the possibility of foreclosure.

Colon, the New Jersey homeowner, and her fiancé sought a modification from Chase last spring after she lost her job and ongoing health issues prevented her from working elsewhere. Although she was glad to see her payment drop from about $1,600 per month to $965, she said it has been a struggle to get any answers since then. “I think they do it to wear us down so we throw our hands up in the air and say we give up,” she said.

She and her fiancé were current on their payments when the trial began and had a high credit score, she said, but they’ve since seen their credit card limits cut. Treasury instructed servicers to report the trial payments as a reduced payment plan to the credit reporting agencies, which can result in a significant lowering of credit scores.

It’s unclear when she’ll get a final answer. Recently, Chase asked for updated copies of her fiancé’s pay stubs, she said, which she says she promptly sent in.

Christine Holevas, a spokeswoman with Chase, said in a statement that Colon’s case was “under review,” but did not give more detail.

As for the tens of thousands of other homeowners in limbo, Holevas said that Chase is “working through its inventory according to U.S. Treasury Department guidelines” and “trying to help struggling borrowers stay in their homes whenever we can.”

She emphasized that “we need the homeowners to get us all the required documents.” As ProPublica has reported, servicers (not just Chase) have a poor track record of handling documents. Homeowners in the program routinely complain about servicers losing paperwork and asking again and again for the same documents.

Colon says her problem has always been getting information from Chase, not the other way around. “I can’t imagine that someone who’s in a bind wouldn’t comply,” she said. “We’ve done everything that they’ve asked of us.”

No other servicer has near as many homeowners in limbo as Chase. A smaller servicer, Saxon Mortgage Services, a subsidiary of Morgan Stanley, has a similar proportion of lingering trial mods – about one-third of its homeowners in trials have been in one for more than six months. But it services relatively few mortgages over all, and has only about 13,000 mortgages in trial modifications. A spokeswoman said that Saxon had “launched a number of proactive programs to work with borrowers to collect all of the documentation required.” Bank of America, by far the largest servicer, has about 12,000 homeowners in a similar position. A spokesman said that the bank was gaining “momentum” in providing permanent modifications. (You can see how all the servicers match up in our interactive chart.)

A Surge in Denials?

Banks and servicers have not only been slow to approve homeowners for permanent modifications, there have also been surprisingly few homeowners dropped from the program – only about 61,481 as of January. Borrowers can be dropped for missing payments, failing to send in documents or simply proving ineligible.

Part of the reason for the trial backlog are the Treasury guidelines. In late December, Treasury initiated a “review period” during which servicers were prohibited from dropping homeowners from the program if they were still in the home. Servicers were supposed to take the opportunity to let homeowners know this was their last chance to send in missing documents or payments. The grace period extended through January.

That means the number of denials should surge this month, which is why many observers, like the blog Calculated Risk, think February’s numbers will be particularly revealing of the modification program’s success.

About two-thirds of homeowners in trials are current on their payments, according to Treasury. That means that roughly 275,000 homeowners are not. However, that doesn’t necessarily mean they will all be dropped from the program – homeowners who stopped making the trial payments after the expiration of the three-month trial period are still eligible for a permanent modification.

Treasury is also pressuring the servicers to make final decisions about homeowners in cases where no documents or payments are said to be missing. About the same time that Treasury launched the review period, it also instructed servicers that they must make a determination about such homeowners by the end of February.

“We have been working very closely with servicers and are confident that they will meet the February deadline for making determinations on borrowers in the trial phase,” said a Treasury spokeswoman.

“We’re identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before,” said Dr. Mark Greene, CEO of FICO, in a statement. “Economic instability is creating unknown risk in lenders’ credit portfolios as well as counter-intuitive trends in consumer behavior.”

The shift to a consumer preference to stay current on unsecured debt, as opposed to secured debt, began last year. In 2009, 0.3 percent of consumers with FICO scores between 760-789 defaulted on real estate loans, compared to 0.1 percent who defaulted on credit cards. In 2005, credit card delinquency risk was three times greater than today. In 2008, the lower to credit cards being just 1.6 times more likely to become 90 days delinquent than were mortgage loans.

The results echo data released by credit info provider, TransUnion, earlier this month. That study from earlier this month, found the share of borrowers who are delinquent on their mortgages but current on their credit cards rose to 6.6% as of Q309 (from 4.3% in Q108). At the same time, the share of borrowers that are delinquent on credit cards but current on their mortgages slipped to 3.6% from 4.1%.

His lender, Bank of America, allowed him to skip payments on his St. Petersburg home for 90 days. But when Parker sought a permanent loan modification, he began a journey as bumpy as anything he had encountered in the air.

“I sent the first e-mail probably last February and didn’t get a response, so I started e-mailing every other day trying to talk to someone,'’ Parker says. “Then it seemed like every time I called them, I was turned over to another caseworker who didn’t have the information I had sent.'’

Five months and some 40 e-mails and phone calls later, Parker got the bank to reduce his payments by about $126 a month. But there was a big tradeoff: His late payments were tacked onto the balance, increasing the amount he owes to $157,805 — $10,300 more than he originally borrowed.

“I’m back to work but I’m paying more for the house than it’s worth now and they (Bank of America) weren’t willing to just pick back on the principal.'’

Parker’s laments are not unusual among customers of Bank of America, the nation’s biggest bank.

A year ago, the Treasury Department announced the Home Affordable Modification Program, aimed at helping up to 4 million at-risk homeowners avoid foreclosure by reducing their monthly payments. Banks receive $1,000 for each modification and up to $1,000 a year, for as many as three years, as long as the borrower remains current on payments.

Even with those incentives, Bank of America has ranked near the bottom when it comes to modifying loans for homeowners delinquent at least 60 days. Through January, 22 percent of the bank’s eligible borrowers had received permanent or three-month trial modifications, compared to 38 percent for J.P. Morgan Chase and 50 percent for GMAC and CitiMortgage.

The Florida Attorney General’s Office says it has fielded 486 complains about Bank of America and a company it took over, Countrywide — more than it has about any other lender. Many of the gripes are from homeowners who have been unable to get modifications despite repeated contact with customer service reps who lose paperwork, give conflicting information or ignore them altogether.

But even those like Parker who get help could be worse off in the long run because the amount they owe has grown while property values continue to fall. With no equity in their homes, many people may just walk away, critics warn.

“Modifications that work are a permanent reduction in principal and interest, and some lenders are doing those but Bank of America is not,'’ says Alan M. White, a professor at Valparaiso University School of Law and an expert on housing issues.

“It’s pretty clear that Bank of America and Countrywide, now one entity, are just unwilling to do modifications on the scale that’s needed. Somehow they’re hoping against hope that property values will suddenly come back.'’

Bank of America, which had a $6.3 billion profit last year, says it has found that reducing interest and extending the life of the loan are the most effective ways to make payments affordable.

It also says that the volume of Florida complaints is misleading because many probably came from homeowners whose loans originated with Countrywide, once a leader in particularly risky forms of loans.

“When you hear Bank of America complaints, it’s really hard to decipher if it’s against a Bank of America-originated loan or a Countrywide loan,'’ says Jumana Bauwens, a bank spokesperson.

• • •

During the real estate mania, Bank of America itself was a major lender in Florida, including the Tampa Bay area. Thousands of those loans have gone into default, though very few bay area homeowners have obtained relief through modifications, court records show.

From 2005 to 2008, the bank issued 62,000 mortgage loans in Pinellas and Hillsborough counties. Since then, it has started foreclosing on more than 4,000 loans.

Last year, though, the bank recorded modifications on only about 50 home mortgages in the two counties.

Not every delinquent homeowner was eligible for a modification. But for those who were, patience and perseverance often proved essential.

In 2006, Martha Kramer borrowed $116,000 from the bank to buy a Largo condo. After losing her property manager’s job and missing three payments, she asked for a modification.

“Every time I called, I talked to four or five people. I was on the phone two hours at a time, getting transferred to another department, repeating the whole story again. People were very nice but they were clueless. The right hand didn’t know what the left was doing.'’

Kramer says it was” easily a year later'’ — April 2009 — before she got a modification that reduced the interest rate and almost halved her base payment to $525 a month. “I can deal with it,'’ says Kramer, who is still unemployed.

But the new terms will make it even harder for her to build equity. The bank tacked part of the late fees onto the principal, meaning she now owes $116,880 on a condo worth about $100,000. And to keep the payments relatively low, the loan is for 40 years, not the once-typical 30 years.

“If they stretch it out further, that’s sort of helping you in that it reduces the monthly burden,'’ says Arnold Heggestad, a University of Florida finance professor. “But unless housing prices start coming back, it’s not going to do much good in the long run.'’

Through January, lenders reported that 28 percent of eligible homeowners nationwide had received permanent or trial modifications in which interest rates were lowered, terms extended or — more rarely — the principal reduced. Bank of America and other lenders have been criticized for stinginess in reducing loan balances, a move that could give homeowners instant equity and more incentive to keep making payments.

By some estimates, 20 percent of American homeowners now owe more than their property is worth.

Bank of America says it is considering “principal forgiveness'’ for certain types of loans, especially those inherited from Countrywide in which payments rose even as housing prices plunged.

Under an agreement with the Florida Attorney General’s Office, the bank has modified more than 12,700 of the Countrywide loans in Florida. It has also increased the number of customer service representatives in the state.

Given his hassles getting a modification, Parker, the fight attendant, says he probably would have let Bank of America foreclose if he hadn’t put so much time and money into restoring his 1920 Mediterranean-style bungalow. Though his payments dropped, he owes the bank more than he used to. And the interest rate, while lower than before, will climb from the current 4.5 percent to 5.625 percent next year.

“Basically, they were happy with me foreclosing, but it was more a pride thing for me. I took a debt and took responsibility for the mortgage and I don’t think I could walk away from that. That’s what I tried to let them know.'’

We now know that the Great Tribulation is exactly 23 years in length, not seven like many of us previously thought. Contrary to what most of us have been taught, the Great Tribulation has absolutely nothing to do with the politics of this world. Instead, it is a spiritual tribulation. The Rapture will occur at the end of the Great Tribulation (again, contrary to what many of us have been taught). We can discover in the Bible that we are currently living in the 23-year Great Tribulation, which means the Rapture is just around the corner.

There was a time when if I had opened a book and read the kinds of things stated in the previous paragraph it would’ve been enough to make me seriously doubt the author’s grasp of truth. I grew up in the church where my parents held teaching and leadership positions. I was a leader in the youth group during and after high school. My best friends have become pastors. I understand the mindset of a typical churchgoer. I know what it’s like to immediately be skeptical of any teaching that contradicts what I’ve grown up believing.

I realize this information does not line up with most people’s current understanding of the end-times timeline. Most churchgoers would probably ask questions like, “What about the antichrist?” and “What about the mark of the beast?” Those are fair questions because what we’ve always been taught about the end-times events seemed biblically accurate. (And we will address those questions in this book.) We can’t fault the theologians of the past for their interpretations of the end-times events. The Bible is filled with confusing language and they did their best to piece it all together, but they were living in a time when the end-times prophecies were sealed by God. Therefore, even the most diligent theologians didn’t stand a chance at understanding them. But now we have reached the time when God has removed the seals and is revealing that much of how we’ve previously understood the end-times prophecies has been completely wrong.

Remember, the Bible is the living Word of God. It is not a dead book that we just read like any other book. The Bible is God speaking to us. We have to ask ourselves, “Do I really take that fact seriously?” Most churches will call the Bible the living Word of God, but in practice we have been taught to study it in a way that is not dissimilar from how we’d study any other book.

I strongly encourage you to set aside a few hours of your life to read this book. I realize it’s not a short book and I know it’s hard to find the motivation to spend time reading something that, so far, appears like it’s going to present teachings that you perhaps don’t agree with. It’s natural to want to close yourself off to it and not take it seriously. It is my hope that, in spite of all that, you will read through this book carefully and then prayerfully consider the information presented within it. I’m not suggesting that you take my word for anything that is written on these pages. In fact, please do not do that. You should examine this material on your own by checking it all out in the Bible.

I am not claiming to have received special information from the Bible that others have not seen. I’m nobody of any significance. God is revealing these previously hidden truths to careful Bible students around the world. A search on the internet will reveal that there are a number of websites out there discussing these very same things. We are all learning from each other because there is just so much new information pouring out of the Bible in our day. There isn’t an “About the Author” page in this book because it doesn’t matter if someone is a college professor or a high school student. God is not a respecter of persons (Acts 10:34), so our level of intelligence or position in the world is irrelevant when it comes to God’s program of revealing of truth to believers.

The Book Has Been Opened

Avoiding the stigma and financial fallout of foreclosure became an obsession for the Walkers. They talked to the banks, found multiple jobs, put their Silver Lake house on the market and tried to stitch together a plan to repay their debts. Finally, they turned to a short sale, chronicled in a popular blog: Love in the Time of Foreclosure.

“We really thought that, worst-case scenario, we will sell the house and break even,” Stephanie Walker said. “But it didn’t work. We went into great losses.”

In a short sale the lender lets a homeowner unload a house for less than what is owed on the mortgage. The transaction recognizes that the home isn’t worth what the owner paid for it after more than two years of falling real estate values.

Such deals are appealing to struggling homeowners because they escape weighty house debts — but they don’t get away unscathed. Their credit scores will be damaged, perhaps less severely than in foreclosure, but still badly enough to limit for years their ability to borrow money. There may be tax consequences. And any money invested through down payments and renovations will be lost.

Lenders, which can withhold approval of a short sale if they don’t like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.

But that resistance is softening. With more Americans losing jobs and missing mortgage payments, banks and investors increasingly are agreeing to short sales as a less costly alternative to foreclosure.

Short sales approved by Fannie Mae and Freddie Mac, which own 57% of U.S. mortgages, nearly quadrupled in the first nine months of 2009 compared with the same period in 2008. At the nation’s largest mortgage servicers, short sales soared 165% to 74,513 in the first nine months of 2009 from the year-earlier period.

Short sales are still few compared with foreclosures, but policymakers are looking at such sales to shrink the number of bank-owned homes on the market.

Late last year, the Obama administration added incentives to get short sales done if a borrower is unable to qualify for a modified mortgage as part of the government’s $75-billion effort to help troubled homeowners. Starting in April, the government will pay incentives to lenders and borrowers when a sale is completed.

Many economists view short sales as a way to address a problem that mortgage relief hasn’t fixed: properties that are “under water,” carrying more debt than the home is worth.

“Making short sales easier would go a long way to freeing up the market,” said Richard Green, director of the Lusk Center for Real Estate. “Right now, if people are under water on their house, they are really stuck.”

Short sales remain difficult. Uncertainty over home prices makes properties hard to value, lenders are understaffed and multiple loans on a home can trip up negotiations among creditors.

The Walkers faced some of these challenges. The couple paid $799,000 for their home in 2006, taking out loans from Countrywide Financial Corp. and National City Corp.

They spent most of their savings and ran up big credit card balances to redo their kitchen and landscaping. Even with her husband’s $240,000 yearly salary, they were stretched thin making combined mortgage payments of $5,000 a month, Stephanie Walker said.

When Bob Walker’s consulting contract was canceled, the couple fell behind on their house payments. They found jobs but their income suffered.

They listed the home for $875,000 but found no buyers. A foreclosure notice arrived. They were offered a three-month payment reduction from Bank of America but couldn’t afford it. A short sale looked attractive.

One factor motivating banks to go along with short sales is that foreclosures typically cost more. Foreclosed properties often sit vacant, susceptible to damage from neglect or vandals. A study by Amherst Securities Group found that prime loans took an average loss of 45% in a foreclosure as opposed to 35% in a short sale.

“The bank or the investor is going to lose money on a short sale or a foreclosure,” said J.K. Huey, senior vice president of Wells Fargo Home Mortgage. “You don’t lose as much if you sell the property when it is occupied.”

Representatives of Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. said their companies had assigned more employees to handle short sales. But the sheer volume of requests has made it difficult to keep up.

“I wouldn’t call it overwhelmed,” said Matt Vernon, the executive in charge of short sales and bank-owned properties for Bank of America Home Loans. “But the volume has certainly stressed our current process.”

Then there’s the problem of second mortgages, which have proved to be a thorny impediment to the housing recovery. The loans were widespread during the boom years as people tapped rising equity or financed a down payment.

Of the 1.2 million U.S. properties in foreclosure, about 34%, or 403,670, have a second loan, according to RealtyTrac. In California, with 280,023 properties in foreclosure, about 46%, or 128,800, have a second loan.

“Those junior liens make short sales much more difficult and they make modification much more difficult,” said Michael LaCour-Little, a finance professor at Cal State Fullerton who has studied the issue. The different banks “often have no incentive to cooperate.”

Sally Quinn’s second mortgage has complicated her short-sale attempts.

She is facing foreclosure on a Glendora town house that she bought as an investment property. Quinn said she has tried to arrange a short sale four times through her lenders, Bank of America and JPMorgan. Buyers, tired of waiting months for an answer from the banks, walked away on three occasions, and the banks rejected an offer from a fourth as too low, she said. She lined up a fifth buyer, she said, but BofA balked.

“It all came crashing down,” she said.

The Walkers also found the short-sale process to be emotionally wrenching. Weighed down with debt and fearful they would be pursued by the bank that held their second mortgage, they filed for bankruptcy protection last summer.

In her blog, Stephanie Walker wrote that the struggle helped them focus on what was important: their love for each other.

As the blog grew in popularity, Walker hosted online question-and-answer sessions and the couple were featured in media reports. The attention helped the Walkers secure a plan for the future. A reader hired them as caretakers of a home in Washington state’s San Juan Islands.

Last month, Walker retired the blog to focus on her next project, a baby due in July, posting: “I don’t want my life to be forever tied to our foreclosure story. It’s just time for me to move on.”

Before the New Year, the Florida Supreme Court adopted a foreclosure mediation program to reach out to borrowers facing foreclosure and possibly clear up the backlog of foreclosure cases in the court system. The Task Force on Residential Mortgage Foreclosure Cases launched in March 2009 in response to the nation’s third highest delinquency rate and its worst foreclosure inventory at the time.

Florida has the fourth highest foreclosure rate in the country through January 2010, according to RealtyTrac. There, one in every 187 homes received a foreclosure notice.

The Task Force proposed the motion and recommended the adoption of the forms. In its proposal, the Task Force stated that many foreclosures set by the final judgment and handled by the clerks of court are “vague last minute” motions to reschedule sales without an explanation.

“It is important to know why sales are being reset so as to determine when they can properly be reset, or whether the sales process is being abused,” according to the Task Force proposal.

The new rule aims to clear up and accelerate a foreclosure process clogged with government incentive programs and civil cases. The Task Force wrote in an August report that the foreclosure pipeline resembled a traffic-jammed highway out of a town under hurricane evaluation.

“Again, this is designed at promoting effective case management and keeping properties out of extended limbo between final judgment and sale,” according to the Task Force proposal of the new rule.

The US Treasury Department launched HAMP in March 2009 to allocate capped incentives to servicers for the modification of loans on the verge of foreclosure. According to the latest HAMP progress report from the Treasury, servicers provided more than 66,000 permanent modifications through December. Participating servicers receive more than $35bn in total capped incentives, but the program could reach as high as $50bn.

Modification rates “turned a corner” in October 2009, according to BarCap analysts, congruent with the rise in HAMP permanent conversion rates. The Treasury recently changed document guidelines for the servicers that go into effect June 1, 2010. After that date, borrowers seeking help through the program must provide certain documentation to enter into a trial modification. At the start of the program, servicers collected the documents during the three-month trial plan, creating a lag time in the permanent conversion rate.

Out of the more than 1m borrowers in HAMP trials, 34% have been on private-label securitized loans – meaning the loans are not held by Fannie Mae (FNM: 0.97 0.00%), Freddie Mac (FRE: 1.16 0.00%) or Ginnie Mae. After assuming a similar conversion rate for non-agency loans, analysts found 22,600 non-agency permanent modifications under HAMP.

“This ties in closely with the 25,000 loans modified in past two months that we see using our custom logic on Loan Performance. A higher number based on our logic also makes sense to us as some servicers have non-HAMP modification programs,” according to the report.

Barclays confirmed the numbers by looking at the independent servicer Ocwen Financial Corp., which has a large portion of its portfolio in non-agency deals. Ocwen provided 5,332 permanent modifications through December, or 71.7% of the more than 7,000 loans in HAMP trials, according to the Treasury report.

Servicers are modifying more modifications for delinquent borrowers, according to the report. In the past, modifications went to more current borrowers. Under HAMP, current borrowers in imminent default are not eligible for the program, but servicers might be migrating toward those loans as pressure intensifies to reach the 3-to-4m borrowers targeted for HAMP, according to the report. Fannie Mae recently released new guidelines to servicers to begin gauging imminent default risk for HAMP.

“The rise in modification rates due to HAMP trial-to-permanent conversions has been restricted to a few smaller servicers so far. We expect mod rates to further increase in the coming months as the bigger servicers start converting the large chunk of loans in trial mods,” according to the report.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale,” the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

Mr. Walsh is taking his own advice, recently defaulting on a rental property he owns. “The sun will come up tomorrow,” he said.

The difference between letting your house go to foreclosure because you are out of money and purposefully defaulting on a mortgage to save money can be murky. But a growing body of research indicates that significant numbers of borrowers are declining to live under what some waggishly call “house arrest.”

Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation.

Some experts argue that walking away from mortgages is more discussed than done. People hate moving; their children attend the neighborhood school; they do not want to think of themselves as skipping out on a debt. Doubters cite a Federal Reserve study using historical data from Massachusetts that concludes there were relatively few walk-aways during the 1991 bust.

The United States Treasury falls into the skeptical camp.

“The overwhelming bulk of people who have negative equity stay in their homes and keep paying,” said Michael S. Barr, assistant Treasury secretary for financial institutions.

It would cost about $745 billion, slightly more than the size of the original 2008 bank bailout, to restore all underwater borrowers to the point where they were breaking even, according to First American.

Using government money to do that would be seen as unfair by many taxpayers, Mr. Barr said. On the other hand, doing nothing about underwater mortgages could encourage more walk-aways, dealing another blow to a fragile economy.

“It’s not an easy area,” he said.

Walking away — also called “jingle mail,” because of the notion that homeowners just mail their keys to the bank, setting off foreclosure proceedings — began in the Southwest during the 1980s oil collapse, though it has never been clear how widespread it was.

In the current bust, lenders first noticed something strange after real estate prices had fallen about 10 percent.

An executive with Wachovia, one of the country’s biggest and most aggressive lenders, said during a conference call in January 2008 that the bank was bewildered by customers who had “the capacity to pay, but have basically just decided not to.” (Wachovia failed nine months later and was bought by Wells Fargo. )

With prices now down by about 30 percent, underwater borrowers fall into two groups. Some have owned their homes for many years and got in trouble because they used the house as a cash machine. Others, like Mr. Koellmann in Miami Beach, made only one mistake: they bought as the boom was cresting.

It was April 2006, a moment when the perpetual rise of real estate was considered practically a law of physics. Mr. Koellmann was 23, a management consultant new to Miami.

Financially cautious by nature, he bought a small, plain one-bedroom apartment for $215,000, much less than his agent told him he could afford. He put down 20 percent and received a fixed-rate loan from Countrywide Financial.

Not quite four years later, apartments in the building are selling in foreclosure for $90,000.

“There is no financial sense in staying,” Mr. Koellmann said. With the $1,500 he is paying each month for his mortgage, taxes and insurance, he could rent a nicer place on the beach, one with a gym, security and valet parking.

Walking away, he knows, is not without peril. At minimum, it would ruin his credit score. Mr. Koellmann would like to attend graduate school. If an admission dean sees a dismal credit record, would that count against him? How about a new employer?

Most of all, though, he struggles with the ethical question.

“I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

That is an attitude Wall Street would like to encourage. David Rosenberg, the chief economist of the investment firm Gluskin Sheff, wrote recently that borrowers were not victims. They “signed contracts, and as adults should also be held accountable,” he wrote.

Of course, this is not necessarily how Wall Street itself behaves, as demonstrated by the case of Stuyvesant Town and Peter Cooper Village. An investment group led by the real estate giant Tishman Speyer recently defaulted on $4.4 billion in debt that it had used to buy the two apartment developments in Manhattan, handing the properties back to the lenders.

Moreover, during the boom, it was the banks that helped drive prices to unrealistic levels by lowering credit standards and unleashing a wave of speculative housing demand.

Mr. Koellmann applied last fall to Bank of America for a modification, noting that his income had slipped. But the lender came back a few weeks ago with a plan that added more restrictive terms while keeping the payments about the same.

“That may have been the last straw,” Mr. Koellmann said.

Guy D. Cecala, publisher of Inside Mortgage Finance magazine, says he does not hear much sympathy from lenders for their underwater customers.

“The banks tell me that a lot of people who are complaining were the ones who refinanced and took all the equity out any time there was any appreciation,” he said. “The banks are damned if they will help.”

Joe Figliola has heard that message. He bought his house in Elgin, Ill., in 2004, then refinanced twice to get better terms. He pulled out a little money both times to cover the closing costs and other expenses. Now his place is underwater while his salary as circulation manager for the local newspaper has been cut.

“It doesn’t seem right that I can rent a place somewhere for half of what I’m paying,” he said. “I told my bank, ‘Just take a little bite out of what I owe. That would ease me up. Isn’t that why the president gave you all this money?’ ”

Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse other than walking away. “I don’t believe this is the right thing to do,” he said, “but I’ve got to survive.”

King is among a rising number of borrowers who are learning that they can be on the hook for years after losing their homes. Amid a crisis that stripped $6.4 trillion, or 28 percent, from the value of U.S. residential real estate since the 2006 peak, lenders are exercising their rights to pursue unpaid mortgage balances. To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors.

“The big dogs get a bailout, and the little man gets no mercy,” said King, 39, referring to the U.S. government’s rescue of banks and other financial institutions.

While there are no statistics on the number of deficiency judgments approved by courts, the Federal Deposit Insurance Corp. tracks the amount banks collect after defaulted loans were written off.

These mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period, according to the Washington-based regulator. Recoveries on defaulted home-equity loans almost doubled to $392 million, the FDIC data shows.

The figures don’t include money retrieved by trusts overseeing mortgage-backed securities, such as the one that holds the loan on King’s former home, or efforts by distressed- asset funds and companies that buy bad loans to profit from collection rights. Judgments such as the one levied against King usually tack on court fees, fines and interest.

‘Next Big Crisis’

Deficiency judgments were rare in the 15 years since the last real estate slump, said Ben Hillard, a former investment banker who now is a real estate and corporate attorney at Hillard & Rogers in Largo, Florida.

“The banks have been too underwater with foreclosures to spend much time on deficiency judgments, but that’s beginning to change,” Hillard said in an interview. “This is going to be the next big crisis.”

Almost 4.5 percent of mortgaged U.S. homes were in foreclosure during the third quarter, the highest rate in the 37 years of tracking the data, the Mortgage Bankers Association said Nov. 19. A record one in every 10 mortgages was at least one payment overdue in the same period, the Washington-based trade group reported.

The Obama administration is seeking to modify as many as 4 million loans by 2012 to prevent foreclosures through the Home Affordable Modification Program, which cuts monthly payments to about a third of borrowers’ income. By the end of December, the program was responsible for more than 850,000 modifications, the Treasury Department said in a Jan. 15 report.

20-Year Window

The federal government spent $230 billion in the year ended in September to support homeowners, according to the Congressional Budget Office in Washington. Those efforts didn’t help people who had already walked away from their houses.

In states such as Florida, courts give mortgage holders as long as five years to seek a deficiency judgment and, if granted, up to 20 years to collect. Usually, they have the option of renewing the judgment if it’s not paid off within 20 years.

About a third of U.S. states, including California and Arizona, prohibit collection efforts on primary residences after foreclosure. In some cases, homeowners waive that protection if they refinance. Most states allow collection on unpaid home equity loans.

Depression-Era Protections

The laws in states that protect some borrowers stem from the Great Depression in the 1930s, when a lack of bidders at foreclosure auctions caused deficiencies that, with added fees and interest, sometimes were bigger than the original loan amount, according to a 1934 Virginia Law Review article by Sol Phillips Perlman. Today, many courts measure the shortfall using a property’s market value at the time of foreclosure rather than auction results.

The likeliest candidates for deficiency judgments are so- called rational defaults, said Larry Tolchinsky, a real estate attorney in Hallandale Beach, Florida. In those cases, people who are current on their mortgages decide to walk away from a property because its value has sunk so far below their loan balance they have no hope of recouping the loss.

About 21 percent of American homeowners owe more on their mortgages than their properties are worth, according to Zillow.com, a Seattle-based real estate data firm.

“Walking away from a property comes with a cost, especially for people who otherwise have good credit,” Tolchinsky said in an interview. “The bank is going to pull your credit report, and if you’re current on your other bills they are going to come after you and potentially ruin you.”

Fine Print

It’s not just foreclosures that can trigger debt collections. Short sales also may lead to deficiency judgments years after former homeowners have moved on, according to Hillard, the attorney in Largo. In a short sale, lenders agree to let borrowers sell a home for less than the mortgage balance.

“Banks are being very careful to preserve their rights, either outright in the short sale agreement or by using vague language that leaves that door open,” Hillard said. About 90 percent of people who do a short sale think they are “off the hook.”

That was the case when two of his clients, Brigitte and John Howard, sold their home in New Port Richey, Florida, almost two years ago without using a lawyer to check the bank’s short- sale agreement.

$20,000 Shock

“We got a call out of the blue saying we owed $20,000,” said Brigitte Howard, 45. “It was a shock. There was no mention in the short-sale contract that the bank might come after us for the difference.”

The money King owes to the Soundview Home Loan asset-backed security that holds the mortgage on his former Coral Gables condominium consists of $38,000 for unpaid principal and almost $6,000 in legal fees and interest accrued prior to the ruling. According to the judgment, the security can charge 8 percent interest until he pays off the debt.

King, who said his default was caused by a reduction in his income, now rents near Fort Lauderdale, Florida, where he teaches ballroom dancing.

“I thought the foreclosure was the worst of a bad situation, but it’s not,” said King. “The people who got sucked into the real estate bubble are still paying for it, even after they’ve taken our homes.”

But no, that’s not the case. Inside, the 29-year-old Cunningham hunkers his 6-foot-2-inch frame on a dumpy couch. His heavy arms extend from his sides, palms up, so two Chihuahuas, Angel and Chuay, can curl under them. Although it’s 10 a.m. on a weekday, he’s wearing slippers.

He leans forward to lift some paperwork out of a plastic tub on the coffee table. The phone rings, and he answers with a soft voice. It’s just a friend, and soon he hangs up. He’s waiting for a particular type of phone call—one from a representative of a debt collection agency or a credit card company, whom he’ll try to ensnare like a Venus fly trap. It’s not unlikely that Cunningham’s next call will be from a bill collector, since he’s between jobs—except for being in the Army Reserve—and owes $100,000 in debts.

While most Americans with unpaid bills dread the collector’s call, Cunningham sees them as lucrative opportunities. Many collection and credit card companies, intentionally or not, violate little-known consumer rights laws, and Cunningham’s favorite pastime is catching them doing so and then suing them. In fact, it’s a profitable side job.

Call it ironic, but the only house on the block that appears to be the foreclosed end to some sad financial story is in fact the home of one of the debt collection industry’s emerging and persistent threats. Cunningham calls himself a private attorney general—someone who files private lawsuits in the public interest. Debt collectors call him a credit terrorist.

Patrick Lunsford, who edits InsideARM, a trade magazine for the debt collection industry, knows the term. “There is a sub-group out there that does actually advise people on how to bait [collectors],” he says. “That’s something that really gets under the skin of, well, obviously, collectors.”

Cunningham beats the debt collectors at their own game. He turns their money-making practice into a financial liability. He is a regular guy who has become a radical enemy of the banking system.

In 2005, two foreclosures pushed Cunningham near financial ruin. Like many Americans, he fell enchanted by the siren’s song of easy credit and borrowed more than $100,000 to bet on risky, high-yielding investments, such as stock in the now vilified sub-prime mortgage industry. Then, while stationed with the Army in El Paso, he attempted to become an absentee landlord and got zero-percent-down sub-prime mortgages to buy low-income four-plexes in Houston and Dallas. With the interest earned on his high-yielding stocks he was paying back his low-interest credit card debt; now, he was using the mortgages to borrow even more.

Then, the bottom fell out. Investors like Cunningham fell the fastest. He sold his Houston homes, but his Dallas properties were foreclosed on. The collection calls started. He was running scared.

Desperation took him online in a search of anything that could save him from his own $100,000 in bad choices. One afternoon while sitting on his couch in his El Paso home, he found a way to fight back. He stumbled across hundreds of other distraught consumers like himself on credit message boards, each with some different version of the same story of bad choices and greed. And, he found a new way to deal with his debt: He could hide behind the law.

His new online friends pointed him to a number of federal and state statutes protecting consumers like him against overly aggressive and abusive debt collectors and a credit system stacked against the little guy. If you knew your rights, he learned on the message boards, you were very likely to catch a collector violating them. Then you could sue.

Cunningham armed himself with this knowledge, and the next time a debt collector called, the trap was set.

It didn’t take long. Cunningham had canceled a home alarm service with ADT Security after two months, and the company had billed him a $450 early termination fee, which he disputed. ADT sent his account to Equinox Financial Management Solutions, a third-party debt collector. The collection agency sent him a letter asking that he call back immediately. He dialed, armed with a voice recorder.

“Can you garnish my wages if I don’t pay?” he asked.

“Yes,” the voice on the other end of the line said.

“Can you put a lien on my house?”

“Yes.”

Wrong answers. Turns out, Texas consumer rights laws are some of the most consumer-friendly in the country. And according to a federal consumer protection law, the Fair Debt Collection Practices Act (FDCPA), debt collectors are prohibited from threatening legal action that would violate state laws. In this case, garnishing wages or putting a lien on Cunningham’s house would violate the Texas Debt Collection Act.

Cunningham knew he had a good enough case to file a lawsuit against the debt collection agency, and for his first lawsuit, he decided to enlist the help of a lawyer. Two months later, he had a check in his hand for $1,000.

“It’s like discovering fire,” says Cunningham, thumbing through the stack of lawsuit papers on his table.

He immediately started devouring as much information as he could about the three chief federal laws that protect consumers from collectors: the Fair Debt Collection Practices Act, the Fair Credit Reporting Act (FCRA) and the Telephone Consumer Protection Act (TCPA). In the next four years, Cunningham accused debt collectors of misrepresenting the amount he owed (an FDCPA violation that entitles a consumer to collect up to $1,000). He sued over prerecorded and auto-dialed calls to his cellular phone (a TCPA violation worth up to $1,500 per call). He also filed complaints that agencies failed to investigate his claims that his credit file contains inaccurate information, a breach of the Fair Credit Reporting Act worth up to $1,000 per violation. All told, he filed 15 other lawsuits in federal court without the help of a lawyer, earning himself settlements totaling more than $20,000.

“Most people hear about the abuses that debt collectors do, but you just didn’t hear about the second part of it, where people sue the collectors,” he says.

Cunningham is one of thousands of hounded debtors who are trading in their paralyzing fears and learning to stand up for themselves. Americans as a whole owe some $2.5 trillion in consumer debt, according to the Federal Reserve, a figure that doesn’t include home mortgages. Nearly four in five Americans have credit cards and half carry a balance, according to the Obama administration.

In 2008, the Federal Trade Commission, the nation’s consumer protection agency, received more than 78,000 complaints against third-party debt collectors, 8,000 more than in 2007, and early numbers for 2009 indicate the growth will double. While the FTC gets the bulk of consumer complaints, today more consumers are fighting back with their own lawsuits than ever before. In 2009, nearly 10,000 cases under FDCPA, FCRA or TCPA statutes were filed around the country, mostly in federal courts. That’s a 50 percent increase from 2008, and an 83 percent growth from 2007.

A cottage industry has sprung up to counter the flood of cases. Two new companies now offer the credit and collection industries databases of repeat plaintiffs filing under the FDCPA. The companies, FDCPA Case Listing Service LLC and WebRecon, offer something akin to a background check for collection agencies. For example, if an agency received a delinquent account belonging to Cunningham, it could run his name through a database and learn he’s a repeat litigant; then the agency could either close his account or sue him first.

Back in his dim living room, Cunningham returns to the pile of paperwork on the table. His soft voice gets bolder when he recounts his war stories with the collection industry. His 15 lawsuits include one filed in federal court against Alliance One, a third-party agency collecting on behalf of Verizon. Alliance One added a $50 collection fee and misrepresented the debt he owed Verizon, he says, which is an unfair practice under FDCPA. Another lawsuit was over the collection of an outstanding bill from Time Warner. The collection agency, Advantage Cable Services, failed to post a surety bond required by the state of Texas in order to collect debts here. Plus, after telling them to stop calling his cellular phone with automated calls, they continued, so he sued and won around $3,500, the industry standard for many consumer rights violations. (Collection agencies frequently settle such lawsuits because that’s cheaper than taking them to trial.)

His debt with Time Warner hasn’t gone away, and he’s in the middle of his biggest FDCPA violation lawsuit ever, demanding upward of $200,000 from the current collection agency.

Debtors, either because they feel morally obligated or because they don’t know their options, get backed into a corner by their creditors and believe they have to repay their debts, he says. Not so with Cunningham. “I don’t have to do anything but stay black and die,” he says, a small, smug smile on his lips.

Cunningham wasn’t always such a stickler.

As a kid growing up in Detroit, family time meant gathering around the living room table to play stock market board games. His mother was a registered nurse, and his father worked for 25 years as a computer engineer for Ford. When he was 15, Cunningham met his “first millionaire,” as he tells it, still wide-eyed. This high school teacher grew wealthy off the then-booming real estate market of the mid-’90s. “He accomplished it through business and not sports,” he says. “For me, that was where the light first went on.”

Cunningham, a high school athlete, dreamed of making millions playing pro football, but he was accepted to U.S. Military Academy at West Point, where a degree would give him a more grounded back-up plan. The economics major also sought out an additional perk unique to West Point: stipends and absurdly low-interest loans. In his junior year, in 2002, Cunningham took out the maximum amount for a loan and dumped the $25,000 into the booming stock market.

“Everybody was making easy money,” he recalls, and the young cadet wanted a shot at making even more. He spent hours on his dial-up Internet connection learning money-making strategies that capitalized on the cheap and easy credit of the times. By Googling “credit help” or “increase credit score,” he landed on message boards on which posters shared how-to tips to boost his credit score and dupe major banks and credit card companies into giving him cards with credit limits around $10,000 and $20,000 at low interest rates. He’d borrow from the cards, invest the money in stocks with payouts higher than his interest rate and pay back the debt with the profits.

Cunningham learned on these boards that the credit card companies, banks and the credit bureaus worked together to determine not only your credit score but how much credit to extend you and at what interest rate.

Cunningham had no problem spending all the money anyone would loan him, but he needed to pay off some of the accrued debt to maintain his credit score. He knew his military loan did not get reported to any of the three major credit bureaus, Equifax, Experian and TransUnion. So, by paying off his credit card debt with money from that loan, he artificially maintained his credit score and continued to be approved for high credit. Sounds fishy, but Cunningham didn’t feel that he was taking advantage of the system, at least not anymore than the next guy or the brokers and bankers at the time.

“It’s their system,” says Cunningham. “I didn’t make the rules. I’m just learning what the rules are.”

Cunningham now had more than $100,000 in credit card debt, but he had a lot of money coming in as well. He was a big-time shareholder in one sub-prime lending company, Nova Star Financial, and for three years in a row he saw dividends as high as 20 percent for his investment.

Any money he was making went right back into the system. Those good times, of course, wouldn’t last.

Not wanting to miss out on the easy money in real estate buying and selling, he bought two low-income four-plexes in Dallas in 2005, using a mortgage company for the loan. He put no money down, but the interest rate was high.

Then he got burned. The four-plex’s seller wasn’t completely honest about the occupancy of the properties. Cunningham’s scheme disintegrated within six months. He was scrambling to make the mortgage payments at the high interest rate without any tenants. He knew it wouldn’t be long until he couldn’t make the payments and he would be foreclosed on. Somehow, he didn’t despair.

“I remember one day I just got pissed,” Cunningham says. “I’m running around trying to keep the ship afloat, and the banks don’t care.”

Cunningham had called the bank as well as the FBI to report the mortgage fraud committed by the seller, but nobody pursued his case.

“The regulators, the FBI, they don’t care. So, why should I care?” he says.

The Dallas properties were foreclosed, and his obsessively maintained credit score seemed wrecked. Cunningham returned to the online credit board for help. This time, however, he wasn’t looking to add an artificial shine to his credit score, he was looking for a way out of the ashes. Cunningham discovered a whole other world of consumer-generated knowledge. This was a rogue group of disgruntled consumers who were trying to save themselves and their credit by filing lawsuits when the collection industry screwed up the mechanics of debt reporting and collection. What he found was an instrument not of repair or reconciliation, but of vengeance.

“All the conventional wisdom, all the right people say, ‘Pay your bills on time and work with your creditors,’” Cunningham says, recalling his thoughts at the time. Yet he had discovered a new set of people who posted their credit reports on line and their successful lawsuits, showing how much money they won in settlements that simultaneously removed a bad debt from their credit report. “I said, ‘Maybe there’s another way.’ Again, just revolution. I never even thought about it.”

The knowledge on these boards originated from consumers testing the boundaries of the credit system through their own experiences. The nature of this information, from the beginning, was a mixture of anarchistic tendencies, vengeance and greed. Now the wisdom of the boards has been distilled into an e-book published in January. Debtsmanship was written by Steven Katz, a former New York debt collector turned consumer advocate, who now lives in Phoenix. In 2005, Katz founded a message board called “Debtorboards,” with the slogan “Sue your creditor and win!”

Katz doesn’t believe that people are morally obligated to pay back their debts. That notion was invented by debt collectors as a way to beat people into submission, he says. “Bill collectors would love for you to send them a check and then explain to your kids because you have the moral obligation to pay your debt they’re not eating this week,” he says. “But they don’t see the moral obligation to feed your children or yourself.

“People are brainwashed to think that paying a credit card is more important than paying for the necessities of life,” Katz says. “If you’re in a position where you have to make a choice, my argument is food, clothing and shelter come first… Nobody ever went to hell for not paying a debt.”

“Fight back” is the take-away message from a visit to Debtorboards, which is intended to help consumers who wish to file lawsuits without the help of lawyers. Debtorboards outlines steps consumers can take to deal with bothersome debt collectors. For example, if a debt collector is only bothering you, you could send them a letter or sue them. However, if you’re so far in debt that you see no way out but bankruptcy, then you can check out the board’s “frustrating the skip tracer” technique. There, you’ll find tips on how to run and hide from a collector.

Another Debtorboards user is 29-year-old Daniel Smith, who lives with his fiancé outside of Seattle, Washington. Early in 2009, he tried to obtain financing for a home, but was turned down by Bank of America. He soon discovered that an old girlfriend had put his name on her bank account before she fell into massive debt. He wrote angry letters to the bank, but nothing changed. He sat down at his computer and typed in “Bank of America” and “Fair Debt Collection Act” and soon landed on Debtorboards. “I spent hours upon hours upon hours on there,” Smith says. “The big epiphany is I’m a little guy but I’ve got a voice and I’m going to use it.”

Like Cunningham, Smith now armed himself with voice recorders and began keeping meticulous financial files. His file cabinet grew quickly. “I mean there’s nothing I don’t document now and that’s probably the best thing a consumer can do.”

Smith is an Army vet, an EMT, and a project manager for a construction company. He doesn’t advocate stiffing the original creditor on the bill. In fact, Smith will often pay the original creditor, but still go after the violating collection agency.

“The standard line from collection agencies is always, ‘Oh, gosh, no, we never violate.’…For the most part, the reality of it is you can sit down and find violation in almost every collection attempt made in America.”

Cunningham insists that the court system ignores lawsuits over frivolous violations. His cases, he claims, are built on true screw-ups. Cunningham won his first lawsuit, after all, after a collection company threatened to garnish his wages and put a lien on his house, both violations of Texas law.

Although that first lawsuit was filed with the help of a consumer rights lawyer, Cunningham has been filing on his own since then. Once he saw that the entire amount of the original settlement was upward of $3,500, and he only got $1,000, while his lawyer pocketed the rest as payment, Cunningham was motivated to go pro se.

“I remember seeing the $3,500 and thinking shoot that’s a lot of money, and I’m only getting a grand, so maybe I can do a little better than that if there is a next time.”

Cunningham made sure there’d be a next time. A company was trying to collect on an outstanding utility bill. They threatened to send this debt to the credit bureaus and wreck his credit score. He ended up paying the utility company the money he owed, but sued the collection company because of how they threatened and harassed him for the debt. The case earned him close to $3,500.

He was fast becoming one of the most hated debtors in Dallas, and part of an especially loathed minority of debtors in the country.

Cunningham returned to Texas from a year of active duty with the Army in late 2007, and moved to Dallas. He continued filing lawsuits against debt collection agencies, and he became ever more active on the message boards, holding long conversations about the state of the country with his online pals. In the meantime, he noticed that Debtorboards founder Steven Katz had created a new thread titled “The list you want to be on.” Here, Katz reported that a new company had appeared that was dedicated to aiding collection companies scrub their database against repeat FDCPA litigants, like Cunningham.

Cunningham toyed with the idea of suing them. After all, he thought, if they were working with the collection industry and the credit bureaus (FDCPA Case Listing Service partnered with TransUnion in 2009), then the companies sounded like credit reporting agencies to Cunningham, which would mean they would have to abide by certain credit reporting laws. Cunningham wrote to FDCPA Case Listing Service asking for a copy of his credit report (by law, a credit reporting agency must provide a consumer report if asked for one). Instead of a report, however, Cunningham found a lawsuit against him in his mailbox filed in May 2008 in Atlanta federal court. It alleged: “The defendant subscribes to and makes postings to a Web site in which consumers share information and promote litigation against the collection industry…The defendant has now conspired with others on the internet to incite civil litigation against plaintiff for the exclusive purpose of extorting money from the plaintiff.”

FDCPA Case Listing Service asked the court to declare that they are not a consumer reporting agency and not subject to the Fair Credit Reporting Act. To Cunningham, this was a clear attempt to silence him. Cunningham filed a motion to dismiss the case. For one thing, filing the suit in Atlanta was improper venue, Cunningham wrote. They should have sued him in Texas. Furthermore, since Cunningham hadn’t actually sued the company, the company had no valid reason to sue him. The court sided with Cunningham.

WebRecon offers a similar but expanded service to FDCPA Case Listing Service. Rather than only track FDCPA cases, WebRecon makes an effort to track FCRA, TCPA, and state and local cases, as well. WebRecon is headed by Jack Gordon out of Michigan. Gordon ran his own third-party collection agency for years until a spate of FDCPA lawsuits in 2008 forced him out of business. He is familiar with Cunningham’s type.

“This is definitely, if I can use a really strong word, a cesspool,” Gordon says. “The overwhelming majority of these suits are not pro se. Now when you’re focusing exclusively on pro se, I think you’re getting into a little bit of a different area. I’ve spent time personally on some of the Web sites that a lot of pro se litigants frequent…I would have to say they are far more radicalized element of society, and there’s certainly I think reason for concern.

“You’re dealing with somebody who’s looking for an opportunity. They revel in either getting opportunities or making opportunities to try out everything they’re learning online. That’s hardly an exaggeration,” he says, laughing. “It’s really an experience spending time there!”

Gordon may have a personal vendetta against Cunningham types, but so do others who represent the collection industry.

ACA International is the largest trade group representing third-party debt collection agencies. Tom Morgan is the Texas executive director for ACA International and he believes that FDCPA lawsuits will continue to rise as more and more people in this economy can’t pay their debts. He views the agencies as a kind of indirect victim in the rising tide of consumer fury and desperation.

“While our members do get filed on from time to time, the FDCPA is so highly technical there are quote, technical, violations that can occur,” Morgan says. “You know, somebody makes a mistake. But there’s no intent, OK, to defraud people or to violate the law.

“Usually it’s settled because the agency says, Uh, we didn’t intend to do that. Our collector said the wrong thing and we fess up and say, ‘I didn’t mean to do it but I did it…

“And this is where some of our members feel aggrieved in that because there’s a hyper-technical opportunity for a plaintiff’s attorney to come in, it is cheaper to settle than to fight it. And sometimes they’d really like to fight it because they don’t believe they are guilty, but it’s so costly, so they settle it.”

Thomas Stockton is on the executive committee of ACA International and also the founder and chief executive of a local collection agency, CMI. (Cunningham is in the midst of an ongoing legal dispute with CMI, which picked up his outstanding Time Warner debt.)

“In my opinion there are two reasons why there are more suits being filed today,” Stockton says. “You’ve got the Internet sites…And, it’s easy to file suit. You can do it on your own. You don’t have to have an attorney.”

Stockton says, however, that the better question is how many of the suits are successful.

The answer depends on how you define success. Debt collectors point to all the settlements they are forced to make because it’s cheaper than fighting a frivolous suit. To Cunningham and other pro se litigants, any payment is a victory.

“Does if make sense to spend $10,000 to win this suit or pay the litigant $500 to settle?” says Stockton. “Depending on the situation, it becomes a business decision at some point.”

Cunningham filed his lawsuit against Credit Management, L.P. (CMI) in August 2009, claiming violations in the amount of around $200,000—by far his gutsiest lawsuit yet. The original bill for Time Warner was for $79.84 back while he was living in El Paso. Cunningham admits he may have missed the last payment for the Time Warner bill. Time Warner, rather than validate the bill, sent his account to a collection agency. That was ACS, which Cunningham sued for violating his Texas rights, as well as federal law. ACS closed his account, but the debt wasn’t forgiven. Instead, CMI picked it up.

CMI started calling Cunningham’s cell phone with an auto-dialer, leaving prerecorded messages to please call them immediately regarding an outstanding bill. Cunningham told them to stop calling his cell phone on the auto-dialer, but they continued, each call a violation of TCPA. As Cunningham disputed the bill, CMI by law is also expected to cease collection efforts. So every call was another violation of FDCPA. Plus, to this day, CMI has not provided Cunningham with anything from Time Warner, he says, either a bill or a letter, verifying that he in fact owes anything, another violation of the law. “I don’t really know if I owe it,” Cunningham says. “If I do, send me a bill. If they don’t want to send me a bill, I don’t think I need to pay ‘em.”

CMI has countersued Cunningham, and even asked the court for a protective order from Cunningham: “Plaintiff Craig Cunningham (herein “Plaintiff”) has filed suit against a business, Credit Management, LP (herein “CMI”), and twenty-seven (27) of its employees in their individual capacities,” reads the motion for a protective order filed in Northern District of Texas in December 2009. “Defendants move for a protective order to protect Defendants from the annoyance, oppression, undue burden and expense of objecting and responding to improper, repetitive and irrelevant discovery requests.”

In December, Cunningham was called in for a six-hour deposition, the longest he’s ever sat through, at which the lawyers printed out pages of his online comments to accuse him of acting like a lawyer. Plus, CMI insists that they didn’t violate any laws and that Cunningham is acting in bad faith. Although the company already offered Cunningham money to settle the case, Cunningham refused, asking for much more than the “industry standard,” as Cunningham calls it, of $3,500.

“If they don’t pay a bunch of money, if they don’t feel pain, they will not change,” he says.

A big win in his case against CMI could go a long way toward clearing Cunningham’s debts—if he ever chose to pay them, that is.

“I took outsize risks, and I got burned,” he says. “When myself and some other fellow small investors were losing their assets, nobody cared.”

Up until now, everything was about making easy money for Cunningham. Now, it’s about justice—or at least what he sees as justice.

“When you or I make a mistake, they say, ‘Hey, tough nuts, be smarter next time, you know, bad luck, didn’t work out for ya,” he says. “When the fat cats on Wall Street make a mistake, they say, ‘Oh, national emergency! We’ve got to bail these guys out.”

Since nobody has showed up to bail Cunningham out, he’s decided some of the $100,000 debt he once amassed will never get paid back.

“I already paid them off,” he says. “The government took my money without asking me and gave it to the banks. And since I owe the banks money, but they already got my money from the government, I say we’re even.”