Third-Party Debt Collectors Misusing Courts To Increase Profits

The Chicago Tribune writes that “More than 119,000 civil lawsuits against alleged debtors are clogging [Chicago] courtrooms,” but since collection agencies make money off of volume business, the suits filed are based on too little information. The result: cases based on mistaken identities, or for debts already settled, or against debtors who have made good-faith efforts to work out repayment plans. “The system is out of control,” one attorney tells the paper.

Third-party collectors, who buy old debts for pennies on the dollar and are the largest source of complaints to the FTC, are also the companies most likely to sue. The courtroom approach works in their favor: defendants often don’t have lawyers, and a new law passed last year in Illinois and “pushed by creditors’ lawyers” took away a judge’s power to limit the amount that could be garnished from wages. It’s at least partly why the third party debt collection industry raked in around $15.5 billion in 2006.

Consumer groups say the high number of default judgments can mask flaws with the lawsuits. Credit agreements and payment histories are often not included when suits are filed. Instead, debt collectors file an affidavit attesting to the validity of the debt, and it’s not unusual for that affidavit to be erroneous, said Bob Hobbs, deputy director of the National Consumer Law Center.

Andersen acknowledged that there is ambiguity about the minimum evidence needed to verify a debt. In New York, an Urban Justice Center study in 2006 found that in 99 percent of a sampling of default judgments that the evidence used to obtain the judgment did not meet the state’s legal standards.

“Debt collectors pushing to get their day in court” [Chicago Tribune]
(Photo: Getty)

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  1. savvy9999 says:

    one way to discourage this would be to increase filing fees from a corporate entity, to say, $1000 a pop.

    Individuals would still pay a nominal fee ($100, or whatever it is), but put the burden of filing buckets of suits back onto the suitor, not the state.

  2. Skankingmike says:

    @savvy9999: that’s never gonna happen.

    what should really happen is the inability to sell bad debt ever. but that’s also never gonna happen.

  3. quail says:

    These guys sell and resell debt over and over. It’s not unheard of for someone to ask collection agency ‘A’ to prove the debt, not hear back from agency ‘A’, then two years later have collection agency ‘B’ calling you, repeat the process and then have collection agency ‘C’ making claims.

    As to court cases…without proof of the debt these guys are just using scare tactics.

  4. chrisjames says:

    @Skankingmike: Even better is to stop allowing volume litigation, which has got to be axing due process in some respect.

  5. dualityshift says:

    another option is to allow these frivolous lawsuits, scrutinize the hell out of them and when the predator collection agency is in the wrong, the defendant is awarded twice what the agency was seeking.

  6. bukz68 says:

    @quail: I think an appropriate way of fixing that problem is a new law that prevents collection agencies from reselling debt after a request for proof of debt is made (presumably via certified mail). When a request for proof of debt is made the collection agency should either have to fork over the appropriate paperwork or drop the debt forever. Sure the collection agencies won’t like it but I think that’s the most fair, consumer friendly way to prevent continued harassment by the debt collection industry.

  7. mike says:

    @chrisjames: There isn’t “due process” in civil matters. You’re afforded certain rights, but there isn’t a right to an attorney or the right to warrented search and seizure.

  8. Greasy Thumb Guzik says:

    You have to sit in one of the Daley Center’s 11th floor courtrooms to see what total losers the lawyers are that the companies have hired.
    They spent all that time & money in law school & all they have to show for it are dozens of cases where the sum is below $1000.

  9. chrisjames says:

    @linus: Actually, there is due process at all levels of the judicial system. But, I was still wrong with my terminology. I forgot that due process is generally protection from the judicial system itself.

  10. windycity says:

    @Greasy Thumb Guzik: You don’t know the half of it. Frequently these third-party debt collectors aren’t attorneys at all, they are pro-se. The judges let them argue the often dozens of cases that they present per day because they “own” the debt.

  11. nuttish says:

    @quail: Quail is correct about debts getting resold to different collectors and replaced with different agencies once the consumer disputes. Under the FDCPA a consumer has limited rights to stop all collection efforts if she timely disputes until the agency provides what is called “validation” or “verification” of the debt. But the Seventh Circuit has held that an agency can actually do 1 of 2 things to comply with the FDCPA — provide the validation or stop collection, which almost uniformly means the account gets sent back to the debt buyer and it is then reassigned to a different agency. On and on such that the consumer will almost assuredly get repeatedly contacted by different agencies for the same debt. It gets confusing, upsetting, maddening, if the consumer already paid the bill and just wants peace. There are more paid debts in the system than you can imagine, as credit card companies have a very bad habit of selling the balances of debts they settled with consumers for less than the total amount due. Even if they purport to release the consumer from any further liability. Remember that the process of settling with the original creditor for less than the total amount allegedly due is what is SUPPOSED to happen with cash strapped people. It gets the credit card company more than it would have ever gotten from selling the debt for pennies on the dollar and in theory it’s supposed to give the parties finality so they can move on from troubled transactions. But it’s not working the way it should.

    Quail said “As to court cases…without proof of the debt these guys are just using scare tactics.” Unfortunately Quail is wrong. Without more than a few lines of electronic information inserted into an affidavit prepared by an absolute stranger to the credit transaction and subsequent default, these debt buyers, represented by large and small collection law firms, are getting default judgments against consumers that can result in the consumer getting hauled back into court on threat of arrest, having her wages garnished, having her property seized, and in the most serious cases, having her exempt social security and pension benefits frozen. It is not uncommon for collection lawyers to use a tactic of freezing a debtor’s bank account funds to simply take the funds or induce the consumer to make some agreement to pay.

  12. jpx72x says:

    @savvy9999: @chrisjames: @bukz68: @linus: I think we’re missing the boat. The problem isn’t with the system per se. Every code of state civil procedure, Illinois included, has a rule that says something to the tune of “If you, attorney, sign this document and give it to the court, and if you haven’t done basic investigation such as figuring out if you’re suing the right person, we’re going to pimp slap with with fines (or disbarment for repeat offenders).” See, e.g. Fed. R. Civ. P. 11. There is due process, and there is a solution for these problems. However, the system is failing because the debtor basically needs to pay an attorney to show up to initiate these proceedings–they have to show up and say, “They dragged me into court, and they don’t even have the right guy! Punish them!”

    Yes, the court can take it upon itself to smack down these sleezy lawyers, but the court won’t do so unless they know that something is amiss, and you can’t find out that something’s amiss unless the debtor shows up and tells the court. With hundreds of thousands of cases, there’s no way that the court can look into every filing and investigate. No way.

    The courts’ are bound by these rules and are hamstrung by their lack of resources. Go to your local legislator and complain if you want something to change. The legislature sets the rules the the courts follow, and they can set up extra checks for third-party debt collection.

  13. savvy9999 says:

    @jpx72x: I agree. But you yourself put the hammer to nail:

    The courts’ are bound by these rules and are hamstrung by their lack of resources.

    Increase the resources by increasing the filing fees, dramatically. The side effect of reducing the number of BS claims being filed before the court is just a bonus.

    With a reduced caseload, then maybe judges could smackdown the sleazeballs.

  14. jpx72x says:

    @savvy9999: By raising filing fees, the courts would shut out honest, but poor plaintiffs (think tenants v. slumlords, lemon buyers v. used car dealers, or even consumers v. businesses). A better solution is for the legislature to take it into their own hands. It wouldn’t be too hard for the general assembly to set up and fund special third-party debt collection courts with enhanced checks and balances for (alleged) debtors.

  15. SacraBos says:

    @bukz68: I could go for that idea.

  16. richcreamerybutter says:

    “and a new law passed last year in Illinois and “pushed by creditors’ lawyers” took away a judge’s power to limit the amount that could be garnished from wages.”

    How did this one get past Obama?

  17. elijah_dukes_mayonnaise says:

    @richcreamerybutter: He was too busy reminding everyone that he was against the Iraq war when he was a community organizer, or some shit like that.

  18. Greasy Thumb Guzik says:

    @richcreamerybutter:
    He was not in the totally corrupt Illinois Senate then.
    Plus he was too busy campaigning for prez to be concerned about the poor people of Illinois.
    And he supported Toddler Stroger for Cook County Board President.
    That’s “Change” for you!

  19. Loki_Monster says:

    This article is utterly misinformed and now gives me serious doubts about the quality of consumerist posts. You refer to a “new law passed last year in Illinois” and “pushed by creditors’ lawyers” took away a judge’s power to limit the amount that could be garnished from wages.” That is NOT correct. The “new law” merely addressed one judge’s belief that the law allowed a reduction below the mandatory garnishment rate of 15%. The garnishment rate has ALWAYS been a mandatory 15%. The mandatory 15% was a non-issue in all but one courtroom in the entire state of Illinois, and consumer lawyers know that. And by the way, 15% garnishment is well below that mandated by federal law (25%) and the rates mandated in other states.

    And what’s sleazy? A lawyer filing suit to collect a legitimate debt or a consumer lying, cheating and basically stealing in order to NOT pay a debt owed.

    Understand this: every delinquent debt costs each and every person who uses credit. Last year, the debt collection industry saved the average US household somewhere around $350.00. People who don’t pay their debts cost money for those of us who do. I, for one, don’t have any sympathy for those who can’t take personal responsibility, and neither should anyone else.

  20. savvy9999 says:

    @jpx72x: which is why in my initial post I said there should be a separate corporate rate vs an individual rate. A sleazeball debt entity could try to game the system by filing as an individual, but when it came time to be @ court, and that single individual needed to represent multiple cases at the same time… oops! Default.

    This would have no effect upon consumer/tenant/etc cases.

    Again, the idea of opening a separate court for handling debt is well and fine– gotta get through the caseload somehow– but who or what is going to pay for it?

    this one is beaten to death, I’m tapping out. nice discussion though.

  21. HeartBurnKid says:

    @richcreamerybutter: Perhaps because he was in the US Senate last year, not the Illinois State Legislature.

    Civics wasn’t your strong suit in high school, was it?

  22. FLConsumer says:

    @jpx72x: Actually, the courts SHOULD force a mandatory investigation on every claim filed for awhile. If the collection agencies knew their cases would take 18 months from the time of filing, plus a few rounds of submitting paperwork for further scrutiny, before getting a judgement, they’d probably abandon this route, at least until they find some other way.

    @Loki_Monster: I’ve never had to deal with a collection agency, but I’d gladly “spend” $350/year to make sure others don’t have to. I’ve had to help more than a few friends deal with collection agencies when they found themselves in financial trouble, and each time the collection agency was playing very loose with the laws and facts.

  23. TechnoDestructo says:

    @jpx72x:

    Have the fee increase for every lawsuit you file.

    Of course, the problem with this idea is that debt collectors would end up making a shit-ton of little fake companies to use for filing lawsuits. Or if there had to be an individual doing the suing, they’d just use every employee and relative they could get their hands on to spread the load out.

  24. Crazytree says:

    this is actually great news for consumers.

    if you are sued on a debt you do not owe, you can counterclaim for malicious prosecution due to the fact that the plaintiff did not conduct a reasonable investigation of the facts prior to filing to determine whether or not their claim had any merit.

    and don’t worry… the judges hate this shit. I see them yell at lawyers and sanction them all the time for this type of behavior.

  25. TheNerd says:

    Let’s not forget the outrageous “reasonable laywer fee” tey tack onto all suits.

  26. TheNerd says:

    @Loki_Monster: I wonder if you’d be so high-and-mighty when you get laid off/disabled and find yourself unable to pay your debts.

  27. stopNgoBeau says:

    @Loki_Monster: I would gladly pay the $350 to get them to stop calling my work phone 4 times a day even though I insist they have the wrong number. Apparently, cease and desist letters are only for the debtors, and not for the wrong-numbered.

    To whom do I make the check out?

  28. Why is the judicial system accepting of affidavits that are almost universally inaccurate?

  29. lesleyhoenig says:

    WindyCity: In Illinois, any corporate entity that files suit, HAS to be represented by an Attorney. I have yet to see a judge in Illinois not force an entity that is attempting to sue pro se to get an attorney. Albeit, I have never sat at the Cook County collections call, but in Will, Grundy, LaSalle, Kane and DeKalb counties, they all require the entity to get an attorney.

    Unrelated to WindyCity’s comment:
    I think this story just illustrates that need for debtor to not ignore court summons. Many of these debt buyers would go out of business if the debtors (or alleged debtors) actually showed up and contested the debt. There is no way the courts can afford to investigate every case.

    People should be aware though, that Debt Collection Agencies are supposed to be registered to do business as such in the state of Illinois (I believe most states have similar requirements), and SOMETIMES, the suing agency is not registered as a collection agency. Also, I don’t know if other counties do this, but at Will County’s small claims call, they limited the number of cases that any one attorney/law firm can have up on the 9:00 collections call to 30 cases (or at least that was the case last time I went there, I’m no longer in Illinois so things could’ve changed).

    I have to say though, before I moved the number of collections cases on all the collection calls I went to would increase every time. Amazingly though, it’s not just unscrupulous debt collectors. At least not in the collar counties. Sometimes it’s just large numbers of medical bills, or smaller creditors (not collection agencies) that actually have evidence of the debt and have attached it to the complaint.

    Should the courts investigate claims made by non collection agencies? That would be a major waste of resources. If the Defendants showed up to court and requested a trial, that WOULD be the investigation. If the Plaintiff can’t prove their case, they lose. Letting them get a default judgment makes their life too easy.