Threatening consumers with court system spam

Published April 28, 2015

By Rob Schofield

by Rob Schofield, NC Policy Watch, April 28, 2015.

Why thousands of average citizens could get dragged into court by controversial “debt buying” legislation

If you thought that the ignominy of being sued for “bad debt” and all the fun things that come with it is a phenomenon that only afflicts poor people and/or those desperate or gullible enough to get sucked into the vortex of predatory, high-cost loans, it may be time to think again.

Indeed, if the sponsors of two bills in the General Assembly and the giant national debt collection outfits behind them get their way, the “excitement” of the experience could soon be a part of your life and/or someone you know or love. In many parts of the country with weak consumer protection laws, this is already the case.

The “debt buying” industry

At issue is the subject of predatory “debt buyers” – multi-million dollar collection mills that buy up old debts (both real and fictitious) and try to collect (i.e. squeeze out) what they can.

Here’s the rather polite way the business was described in a 2014 report from the Center for Responsible Lending:

“Debt buyers are specialized companies that purchase charged-off or other delinquent debt from credit card companies, banks, and other creditors for pennies-on-the-dollar. These companies then attempt to collect the debts themselves or through collection agencies or law firms. Some debt buyers also repackage and sell the debt they have bought to another debt buyer, either almost immediately or after already having attempted to collect the debt.”

The report goes on to explain that while credit card debt is the debt buying industry’s bread and butter, these outfits also purchase student loans, medical debt, utility and phone bills, tax liens, car loans, and mortgage and auto deficiencies.

“So what’s the problem?” you ask. “Isn’t this just good old American capitalism working its magic?”

Not exactly.

The problem – as it is in so many industries – isn’t necessarily the basic concept; it’s how the business has come to work in practice. Again, here’s the Center for Responsible Lending report:

“When debt buyers acquire portfolios of charged-off debt, they rarely purchase documentation of the debts, but instead purchase an electronic file containing limited information on all of the debts in the portfolio. These portfolios are typically sold “as is”; often, account information is inaccurate, outdated, or missing, particularly if the debt is resold multiple times. The inaccuracies and lack of basic information—as well as the collection tactics used by debt buyers—result in consumers being harassed and wrongly sued for debts they do not owe or have already paid or settled, and courts around the country are overwhelmed by a flood of cases filed against consumers.”

An article on the international news website Reuters (“The sleazy world of predatory debt buyers”) put it less gently back in 2010:

“These institutions make hundreds of millions of dollars by suing people in low-income neighborhoods, often without properly serving them with notice that they’re being sued. When the alleged debtor doesn’t show up for court, the debt buyers get a default judgment, and start attaching bank accounts and garnishing wages. Often they do this successfully even when the debt is not legitimate”

In other words, the debt buyers aren’t really immersing themselves in the details of these debts and exploring in great detail how to target genuine deadbeats with a real ability to pay. Instead, they simply buy up old debts “by the gross” (often from other debt buyers), throw a vast number of claims at the wall (the courts system) and see what “sticks.” Many of the “debts” aren’t even valid. The whole thing is akin to a kind of justice system “spam.”

The situation in North Carolina

Right now in North Carolina, thanks to a bipartisan 2009 consumer protection law that is one of the strongest in the country, the worst industry practices are kept away. Prior to that time, debt buyers flooded North Carolina courts with lawsuits even where they had no actual proof that the consumer owed the debt. Many suits were filed against the wrong people, or people who had already paid or settled the debt. Many of these debts were old and way past the statute of limitations (the date set by law after which a right to sue expires).

That these practices resulted in big cash for debt buyers isn’t surprising. In many instances, debtors simply did not understand why they had been sued, or what they needed to do to defend themselves. Most consumers, of course, either could not afford an attorney or find one to take such a case. In the majority of cases, the debt buyer simply got a “default judgment” (which is what happens when the consumer fails to respond to the lawsuit) or a “summary judgment” when the consumer appeared unrepresented.

The bipartisan 2009 law, however, changed things. North Carolina became the first state in the nation to protect consumers from these frequently frivolous lawsuits with some basic, common sense protections. The law simply requires that, before debt buyers come into our court system, they must have proof that the consumer owes the debt, how much they owe, and how the total is calculated. Before they can get a “default judgment” or “summary judgment” in court, even if the consumer has failed to appear, they have to prove that they are entitled to the amount they claim is owed.

Rolling back the protections? 

Yesterday, the House Banking Committee heard an industry-driven proposal (click here to see the Senate version) that would roll back these protections. Under the bill, instead of proving that the consumer owes the amount claimed, the debt buyer would be able to submit a “charge-off” statement. Such statements merely summarize the amounts on the last credit card statement. There is nothing to explain how much was incurred for purchases, how the interest was calculated, or what the fees were that the consumer agreed to pay.

As consumer advocates noted at the hearing, the proposal would allow debt buyers to submit unreliable or fabricated evidence to the court. Under current North Carolina law, debt buyers have to go by the rules of evidence applicable to any litigant before they submit documents to the court. The new legislation removes that requirement.

The results that such changes would produce are predictable. A recent review of court records in New York (where laws are much weaker) found that some lawsuits filed by debt buyers included fabricated credit card statements created years after borrowers’ relationships with the creditors in question had ended.

But wait, it gets worse. The proposed legislation also allows a debt buyer to contact consumers on debts that are past the statute of limitations. Debt buyers claim that this provision will help consumers so they can get old debts cleared off their credit reports, but as consumer advocates rightfully point out, paying off a debt that appears on a credit report does NOT clear it off the report—it actually makes it stay on the report even longer.

Cause for optimism going forward?

One small bit of good news surrounding this issue is that no vote was taken in yesterday’s committee. Rather than simply ramming the bill through as is so often the pattern in the General Assembly these days, the committee, which is chaired by Rep. Julia Howard (an occasional maverick on some issues – especially consumer protection), actually took some time to hear significant outside testimony.

Let’s hope lawmakers got the message and now recognize the danger in subjecting their constituents to this particular brand of legal system spam.

http://www.ncpolicywatch.com/2015/04/28/threatening-consumers-with-court-system-spam/