This article examines current trends in debt buyer litigation, including a review of recent regulatory actions and the impact of debt buyer lawsuits on individual consumers and on small claims courts. The article calls for a ban on the sale of consumer junk debt by banks, and for a requirement to make public the terms, conditions and disclaimers from sales contracts between banks and junk debt buyers.
Debt buyers have flooded courts nationwide with collection lawsuits against consumers. This article reports the findings from the broadest in-depth study of debt buyer litigation outcomes yet undertaken. The study demonstrates that in debt buyer cases, (1) the vast majority of consumers lose the vast majority of cases by default the vast majority of the time; (2) consumers had no lawyer in ninety-eight percent of the cases; and (3) those who filed a notice that they intended to defend themselves without an attorney fared poorly, both in court and in out of court settlements.
This study challenges the notion that there is an “adversary system” within the context of debt buyer lawsuits. The findings suggest that no such adversary system exists for most defendants in consumer debt cases. Instead, these cases exist in a “shadow system” with little judicial oversight, which results in mass produced default judgments.
The procedural and substantive due process problems which are endemic in debt buyer cases call for heightened awareness and remedial action by the bench, the bar, and the academy. As lawyers who are “public citizens, with a special responsibility for the quality of justice,” the profession can do better. This article proposes suggestions for further study, and several common sense reforms.
Advocates for lower-income families need to be aware that many debt buyers are suing the wrong people, and for the wrong amounts.
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This Article uses a unique collection of contracts for the sale of consumer debts — e.g., delinquent credit card accounts — to examine the sale transaction. It finds that in many contracts, sellers disclaim all warranties about the underlying debts sold or the information transferred, sometimes as far as specifically refusing to stand by “the accuracy or completeness of any information provided.” The Article argues that the collection of consumer debts sold through these transactions is in violation of the Fair Debt Collection Practices Act’s prohibition against using deceptive or misleading representations in connection with the collection of a debt. After considering some potential explanations for why this illegal collection has gone on for so long, the Article proposes a regulatory and a market solution to the problem.
(This article was previously titled: Illegality in the Sale and Collection of Consumer Debts).
The Federal Trade Commission today announced the results of the first empirical study of debt buyers – companies that are in the business of buying consumer debts and trying to collect on them.
As the Commission has found in its prior work, debt collectors who have insufficient information may approach the wrong consumers, try to collect the wrong amount, or both. The report, titled The Structure and Practices of the Debt Buying Industry, found there is room for improvement in the information debt buyers have when they contact consumers and try to collect.
The study analyzed more than 5,000 portfolios of consumer debt containing nearly 90 million consumer accounts with a face value of $143 billion. By dollar amount, most of the debt studied (71 percent) was credit card debt, but the study also included mortgage, medical, utility, telecommunications, and other consumer debt. The study evaluated the types of information debt buyers received from creditors both at and after the time of purchase, as well as the contracts governing the relationship between debt buyers and creditors.
The report notes that debt buying plays an important role in consumer credit. Debt buyers paid pennies on the dollar (an average of about 4 cents, with older debt selling for less than newer debt) for the billions of dollars in debts they bought from creditors. The proceeds from these sales have helped to reduce creditors’ losses from lending money, allowing them to provide more credit at lower prices.
But, as the report points out, debt buying also raises significant consumer protection concerns: Consumers each year disputed an estimated one million or more debts that debt buyers attempted to collect. Prior FTC experience has found that consumers often dispute the amount of the debt or that they owe the debt at all. Debt buyers verified only about half of the disputed debts, which means that buyers either could not verify or did not attempt to verify about 500,000 debts each year.
The report also found that at the time of purchase, creditors provided debt buyers with some important information concerning debts, including the name, address, and telephone number, and social security number of the debtor; the creditor’s account number; the outstanding balance on the account; and the dates of account opening and last payment. Buyers, however, did not receive some key information about debts purchased, such as whether consumers previously disputed the debts or whether collectors previously verified the debts. Creditors also imposed limitations on the ability of debt buyers to obtain information and documents about accounts after sale. Most contracts between creditors and debt buyers stated that the creditors did not warrant that the information they provided to buyers about debts was accurate.
The report cites a need for further research. The study focused on nine of the nation’s largest debt buyers, which comprised more than 75 percent of the industry, and did not include data from any smaller debt buyers. The study also did not consider the practices debt buyers used when taking legal action against consumers, or the accuracy of the information debt buyers received and used to collect debts. Further research on these and other debt buyer topics would be beneficial to policymakers.
The Commission vote to issue the report was 4-0-1, with Commissioner Joshua D. Wright not participating.
Junk debt buyer lawsuits have overwhelmed the courts all across the United States. These lawsuits wreak havoc on consumers and their families. Often overlooked is the fact that judgments against consumers which are based on junk debt are part of a zero sum game, where every bogus judgment deprives a legitimate creditor of the chance to get paid from scarce resources. Thus, the legitimate creditor to whom money is owed is materially harmed by the junk debt buyer who extracts money based on an illegitimate claim, or who causes someone to declare bankruptcy. Providing representation to this otherwise unrepresented population will not only help individual consumers. It could improve the entire U.S. economy, by preserving precious resources to pay what is legitimately owed, and avoiding paying for what is not. This article surveys the landscape of the junk debt buyer industry and provides advice for consumer advocates engaged in the battle against unscrupulous junk debt buyers.
This Article explores consumer collection litigation through original research from more than five hundred cases filed in the Dallas County courts. It analyzes the data within the context of the modern debt collection industry, paying special attention to the role of debt buyers and to the peculiar legal issues their involvement raises. After explaining the methodology and mechanics used to gather and analyze the data, the Article discusses the data collected, identifying and analyzing the most significant findings and placing them within a larger legal landscape. While the research confirms anecdotal reports of litigation abuse in consumer collection cases, it also reveals some surprising patterns. For example, the research indicates that consumer default was not the most common outcome and that minimal effort by consumers often considerably helped to protect their rights and favorably to conclude the litigation. The Article concludes by discussing some of the implications for the judicial system and by suggesting additional areas of research that would increase understanding of the challenges the litigation presents for parties, their lawyers, and the courts.