Consumers Are Targets of Skyrocketing Numbers of Debt Collection Suits, Most By Debt Buyers
Consumers in New York City are faced with unprecedented numbers of debt collection suits, according to a new study by the Urban Justice Center (UJC), a provider of free legal services to low-income working poor New Yorkers.
The study’s results are shocking. In 2006 alone, debt collectors tried to collect nearly $1 billion from New York City consumers, and got judgments for about $800 million–an 80% success rate. Most of those suits are filed by debt buyers–not the original creditors–and about four out of every five of those suits result in default judgments for the debt collector, in which the consumer never appears in court or enters into a settlement agreement. The study revealed that 99% of the time that debt buyers brought lawsuits, they submitted invalid hearsay “evidence” that would be inadmissible in court if anyone ever challenged it.
What’s the reason for the steep rise in consumer lawsuits? One reason is that regulators and courts largely gutted the regulatory schemes governing fees and interest that creditors are allowed to charge, beginning in the 1970s and continuing through the 1990s. A second factor is that these days nearly every consumer has access to credit of some kind or another, but lower-income consumers generally have to pay higher interest rates for their credit. Third, identity theft is on the rise. If a consumer’s identity is stolen, she likely doesn’t even know about the underlying debt, and probably isn’t informed about a debt collection lawsuit either. Finally, the market for the purchase of defaulted debt–including debt that can no longer legally be collected–is exploding. Debt buyers purchase defaulted debt for pennies on the dollar, and then try to collect the full amount, an exceedingly profitable venture if it works.
The study reveals that consumers who have household income of less than $35,000 a year have an average credit card debt of more than $6,500–a staggering amount. Why do they have so so much debt? We often hear industry put the blame on consumers for overspending on luxuries they don’t need. But the Center for Responsible Lending, which report was cited in the study, says it’s the occurrence of unforeseen events, such as job loss, medical expenses or car breakdowns, that usually prompts consumers to get out the credit card.
The fallout from these debt collection suits can be horrendous. Consumers’ bank accounts can be frozen or their wages garnished. They can be tagged for interest on the judgments as well as the debt collector’s attorney’s fees. Their credit scores suffer, resulting in even higher prices for credit they desperately need. It can be a vicious, unrelenting cycle.
The study makes a number of recommendations specific to New York courts, including that standards required for default judgments be clarified and that guidelines must be in place to ensure that consumers are actually notified about lawsuits before debt collectors are allowed to get judgments against them. But this is a nationwide problem that won’t easily be solved.