redtape.nbcnews.com | June 6, 2013
In Rochester, N.Y., city court is a busy place – for debt collectors.
Plaintiff’s lawyers seeking
judgments against alleged debtors consume 89 percent of the court
docket -- 7,148 of the 8,032 lawsuits heard in city court during 2011
involved debt collection, a remarkable number.
But not unique. In Buffalo, 76
percent of cases involved debt collection. In the Capital District
near Albany, 77 percent did. Even in Nassau County, just outside New
York City, where nearly 20,000 civil cases were filed, almost 9,000
involved debt.
“Debt collectors are flooding the
courts, overrunning the courts,” said Susan Shin, staff attorney at an
advocacy group, the New Economy Project, based in New York. The group
is issuing a scathing report on what it calls abuse of civil courts on
Thursday. “There are courts that are basically doing almost nothing
else.”
It's a growing problem, say
consumer advocates around the country: courts that seem to behave like
assembly lines, clogged with debt cases that sometimes consume an
entire day’s legal action. The New Economy Project report is among the
first to quantify the issue.
"I think people should be shocked
that in some places almost 9 out of 10 cases are these debt
collectors trying to collect on debts," said Shin.
The debt collectors blame the
volume on the huge number of cases that have arisen since the
recession and the subsequent tepid recovery.
It's not just the volume that
concerns Shin, however. The study found something missing from the
majority of these cases: the defense. Nearly half the debt cases were
settled by "default judgment,” meaning the defendant was a no-show.
Often, courts simply accept the debt collectors' suggested remedy,
giving them the ability to garnish the consumers' wages or to access
their bank accounts.
Brian Pindell says he was one of
them. He didn’t know a debt collection company had sued him and won
two judgments against him in court back in 2007, until he was denied
aid in the weeks after Superstorm Sandy. The Rockaway, Queens,
resident applied for a $4,500 Small Business Administration loan to
replace damaged computer equipment for his web design company in
December. The judgments doomed his application, he says.
"I had no idea what those cases
were. I was never served (with legal papers)," says Pindell. "In fact,
I still don't know what the debt is."
Flooding Courts
Similar debt cases are
overwhelming U.S. courts, says the consumer advocacy group, formerly
called the Neighborhood Economic Development Advocacy Project.
Like Pindell’s case, many lawsuit targets don’t find out they’ve lost their case until months or even years later.
The report also found that legal
representation in the debt collection cases examined was nearly
nonexistent; only two percent of the defendants across the state were
represented by a lawyer. That's important because, in many cases, the
debt allegations would never hold up in court if disputed, the group
says.
Collection agencies that file the
cases often engage in the same kind of "robosigning" tactics made
notorious during the housing crisis, Shin says -- incomplete
paperwork, filing so frequently that the signer couldn’t possibly
comprehend what was signed, and agency employees signing documents
asserting facts they couldn't possibly know.
"Debt collection
lawsuits—particularly those brought by debt buyers—wreak havoc across
New York State, depriving hundreds of thousands of New Yorkers of due
process and subjecting them to collection of debts that in all
likelihood could never be legally proven," the report concludes.
Robosigning and other
questionable legal strategies employed by debt collectors are starting
to get more attention nationally. In December, the Minnesota attorney
general settled a case with Midland Funding, one of the nation's
largest debt buyers, after accusing the firm of robosigning. It had
filed 15,000 cases in the state from 2008-2012. Midland admitted no
wrongdoing, but paid $500,000 to the state and agreed to change its
practices.
In California last month, the
state's attorney general sued JPMorgan Chase, alleging the bank
improperly sued 100,000 Californians between 2008-2011, using
practices that sound similar to those found in New York.
A spokesman for Chase said the bank couldn't comment on the case.
Reality of a Tough Economy
Mark Schiffman, spokesman for
debt collectors trade association ACA International, says his members
work to maintain high standards, and no one condones filing lawsuits
against debtors without having the proper paperwork. But he cautioned
against criticizing collectors for filing a high volume of lawsuits,
saying that was merely a reality of a tough economy. If consumers
ignore debt collectors, they have few other options outside filing
lawsuits, he said.
"It may be something that is
going to be stunning to people, but it doesn't mean collectors are
doing anything wrong," he said. "As long as they are following the
rules just because there's an increase doesn't equate to bad behavior."
To compile its research, the New
Economy Project obtained data from the New York State Office of Court
Administrators covering 195,105 debt collection cases filed against
New Yorkers in 2011. When debt buyers, as opposed to original
creditors, sued alleged debtors, the default judgment rate around the
state was 62 percent, the report found.
The advocacy group also picked 90
cases at random and reviewed them in detail. It found a series of
irregularities in those cases.
"Not a single one went to trial or was resolved on the merits," the advocacy group says.
In 9 out of 10 of those cases, an
employee or debt buyer who had no connection to the original
creditor testified to facts that only an original creditor could
know, the report says. And in 4 out of 10 cases, the paperwork was
filed out of order -- the affidavit in support of a default judgment
was completed before the defendant's time to answer the lawsuit had
expired, an easy-to-spot procedural error.
Nevertheless, the court rejected
the improper paperwork in only 2 of the 90 cases; and in nearly every
case where the debt collector sought a default judgment, it was
granted.
Lawsuit targets never find out
about the case because plaintiffs routinely engage in so-called "sewer
service," by hiring firms that fail to properly serve notice to
defendants that they have been sued and should appear in court, the
report alleges.
It also claims that minorities
suffer disproportionately from debt collection robosigning. In the 10
zip codes with the highest default judgment rates in New York, 75
percent of the population is nonwhite.
Pindell said his application for a
$4,500 SBA loan has been completely sidetracked by two court
judgments which now appear on his credit report. Both cases were filed
by Midland Funding -- one for $802, and one for $1,042 -- though he
believes they are different lawsuits representing the same underlying
claim.
"I spent five days going back and
forth between the two courts trying to find out about this. No one
could tell me why there were two cases," he said. "It's still a little
mind-boggling...towards the middle of this month I should know, when
their lawyers get the paperwork to me, if there is any paperwork."
The SBA is reconsidering his loan application now, he said, and he’s hopeful it will be approved soon.
Greg Call, senior vice president
and general counsel, Midland Credit Management, said in an e-mail that
the firm could not comment on individual cases, but said the firm
follows proper legal procedures.
"We are confident in our
processes, including those related to notification of the debt and
working with the consumer to satisfy his or her obligation to repay
it," he said.
He added that lawsuits are a last resort for the firm, and said only 5 percent of accounts reach litigation.
"We reach out to consumers
multiple times on the phone and through the mail. Unfortunately, if
they choose not to respond, the only option we are left with is legal
action," he said.
But Shin, the consumer advocate
attorney, says the U.S. court system has been essentially turned into
an arm of the debt collection industry -- and we are all paying the
price. The “glaring and pervasive” errors her group found show that
the collection industry has a cavalier attitude about the legal
system, she said, and that courts are making "rubber stamp" judgments.
"This really is part of an
assembly-line process," she said. "They are so sure of their sewer
service, so sure of their default judgments, from A to Z, this is how
they do it."
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