An old adage teaches that one man’s pain is another’s gain. That adage is a truism when it comes to the debt collection industry.
According to the Federal Trade Commission, debt buyers pay just 3.1 percent on the dollar for defaulted debts. Additionally, 94 percent of these debts are sold without documentation.
So why would a business bother with buying old and potentially inaccurate credit claims? The answer is money and lots of it.
After paying pennies on the dollar for old accounts, debt buyers pursue consumers for the full dollar value shown. Ignoring whether the debt is already paid or even actually belongs to someone else, debt collection lawsuits have flooded courts across the country. If an affected consumer is unaware of a legal challenge, default judgments can and have been entered resulting in wage garnishment, bank account seizure and negative items on credit reports.
This fall ProPublica, a nonprofit news organization specializing in investigative journalism, published a groundbreaking analysis that documents how debt collection lawsuits hit Black neighborhoods the hardest. Analyzing lawsuits over a five-year period in the metro areas of St. Louis, Chicago and Newark, ProPublica found that the rate of judgments was twice as high in mostly Black neighborhoods in each of these cities.
The report states that “generations of discrimination have left Black families with grossly fewer resources to draw on when they come under financial pressure … Collection suits – typically over smaller amounts like credit card debt – fly across the desks of local judges, sometimes hundreds in a single day. Defendants usually don’t make it to court, and when they do, rarely have an attorney.”
Chicago’s Chatham neighborhood, once a solid middle-class area in the 1950s and 1960s, was found to have the highest rate of judgments in all of Cook County, Illinois. Nearby suburban Matteson residents with median household incomes of $76,055 suffered the most judgments – 700 – in all of Cook County.
Similarly in Newark and Essex County, New Jersey, median household incomes greater than $52,000 were not enough to spurn debt collection lawsuits in Upper Vailsburg. This middle-class neighborhood with a large Haitian and West Indian community accounted for about 60 percent of Essex County lawsuits.
In metro St. Louis, debt collection lawsuits have been brought based on a range of reasons including medical providers, public utilities, high-cost lenders and those unable to pay traffic tickets and/or court fines in several neighborhoods including Jennings, Normandy, Kinloch and Berkeley.
Weeks following publication of these startling findings, on Dec. 3, Missouri Attorney General Chris Koster proposed judicial reforms to curb abusive debt collection. Taking the opportunity to bring the issue to the attention of the state’s recently formed Commission on Racial and Ethnic Fairness, AG Koster outlined three specific ways that Missouri’s state courts’ rules could end this financial abuse:
• Require debt collectors to establish the right to collect the debt in court with documents showing ownership;
• Deny the issue of a default judgment until after a consumer has received adequate notice of the suit and additionally failed to appear at a trial setting; and
• Require debt buyers to certify that cases are brought within the allowed time period with an itemized explanation of fees and costs sought.
Commenting on the proposed rule changes, Koster wrote, “In Missouri and elsewhere, abusive litigation practices in the collection of consumer debts result in a disparate negative impact on racial minorities.”
A few days later on Dec. 7, the Consumer Financial Protection Bureau filed a complaint against a Massachusetts-based debt collection firm that was reporting and collecting on old cellphone debts that consumers disputed. Further, the debt collection firm, EOS, failed to correct information that it determined to be inaccurate.
“After buying a portfolio of debt, EOS soon learned of several red flags that raised doubts about the debt’s validity,” CFPB Director Richard Cordray said. “Even so, EOS still proceeded to collect certain disputed and unverified debts. It is unacceptable that consumers were harmed by these practices and that the company supplied inaccurate information to the credit reporting companies.”
CFPB’s enforcement followed more than a year of continuing investigations of major debt collection firms and their practices. In 2014 and in 2015, debt collection remains the number one concern measured by consumer complaints, more than mortgages, credit cards or bank accounts. In the past year, debt collection represented 50 percent of complaints by service men and women.
Earlier this year the Center for Responsible Lending released a report on debt collection that recommended state reforms include protections that ensure people are not sued in connection with debt they do not owe, or for amounts they do not owe. At a minimum, CRL called for state protections to set standards for adequate information and documentation to collect a debt, and require documentation on it before obtaining a judgment against a consumer.
“The debt collection and debt buying practices highlighted in recent state and federal regulator actions demonstrate the harms individuals often face in the debt collection market,” said Lisa Stifler, senior policy counsel at CRL. “Every consumer should be free from abusive and harassing debt collection. Decisive actions at both the state and federal levels combined with aggressive enforcement will together hold debt collectors accountable for their wrongdoing.”