Solving the Epidemic of Bad Debt Lawsuits in Indiana

I've been trying to understand the dynamic behind what appears to be a lot more lawsuits against consumers over bad debts, especially old credit card accounts, especially old credit card accounts that have been assigned to one or more debt buying company.  Today I dusted off a law review article from 2012 that I put aside for rainy day reading. The article is by Professor Judith Fox of the University of Notre Dame Law School.  It is entitled DO WE HAVE A DEBT COLLECTION CRISIS? SOME CAUTIONARY TALES OF DEBT COLLECTION IN INDIANA.  It was published in the Loyola Consumer Law Review, and you can download it here.  Professor Fox led a survey of all the third-party debt collection lawsuits filed in Indiana from January 1, 2009 to March 31, 2009.  She made some interesting findings and I want to share some of them with you

Thirteen debt buying companies filed 79% of the lawsuits studied.  Here they are in decreasing order of frequency.

Midland Funding

Arrow Financial Services

Asset Acceptance

LVNV Funding LLC

American Acceptance

Atlantic Credit & Finance

Credit Max

CACH, LLC

RAB Performance Recovery

NCO Financial

Unifund

Patriot Recovery LLC

Portfolio Recovery  

[If you've  been sued by any of these companies contact a consumer attorney member of the National Association of Consumer Advocates. You can find one in your area through www.naca.net.  If you are in Indiana, you can call me at (317) 662-4529.  Better yet, if you get a collection letter from one of these companies but haven't been sued yet, call us before you get sued.  Frequently, a consumer lawyer can make these collectors go away forever with just an attorney letter.]

These bad debt buying companies are what we in the consumer law practice call "bottom feeder" collectors. They buy accounts after they've been written off by the collector, and perhaps they have passed through hands of several other collection companies.  Because accounts are often old and pretty doubtful. buyers pay for these accounts, usually no more than two cents on the dollar. The bad quality of the accounts is reflected in the price that the When represented consumers as an attorney at UAW Legal Services Plans, whenever my clients would get a letter from one of these companies, I would send the collector a request for validation, and usually that was the last that I ever heard from the collector. We rarely had to defend a lawsuit on one of these assigned accounts.  Still, the collectors love to file lawsuits hoping to get default judgments (suits where the consumer does not respond to the complaint) because if the collector gets a judgment, a $2.00 investment turns into a judgment for $100.00 that remains on the consumer's credit report for 10 years and is potentially collectible for 20 years.  Even one of these bad debt judgments can be a financial disaster for a consumer who is struggling to overcome financial hardships and rebuild credit.  

The Debt Buyers' Dirty Little Secret - they often (usually?) can't prove their debt, and don't want to go to court.

In her law review article, Professor Fox points out that in these assigned debt cases, the accounts have usually passed through several hands, and at each step there is the potential for errors and lapses in record-keeping.  When properly challenged, it is not easy for a debt collector on an assigned debt to prove entitlement to the money claimed.  Still, in the 640 complete case files that were part of the Fox study,  the collectors almost always won a judgment.  The biggest reason is that in 535 of the cases (83%) the defendant never responded to the complaint. In only 23 cases did a defendant file a formal answer, which I believe is the consumer's best defense. In 40 cases, the consumer wrote a letter to the court. Writing a letter is sometimes better than doing nothing. Sometimes it is worse, depending on whether the trial judge treats the letter as a full answer.  Not surprisingly, in the Fox study, only 26 defendants, 4% of the total, were represented by attorneys; and some of those were represented by bankruptcy attorneys notifying the court of a pending bankruptcy.   The bottom line is that fair fights are rare in collection cases, and that's no accident. The debt companies want it to be that way. Not only are the debt collectors avoiding fair fights, they are trying to avoid showing up to court at all. 

Professor Fox's study observed that from 2005 to 2009 cases designated as "civil collection" matters in the case header (with "cc" in the case or cause number) increased 51.8%. In the same time-frame, small claims cases (designated "sc") in the header decreased 7.9%. To understand this section, you need to know that small claims ("sc") cases can be filed with a lower filing fee, but the claim cannot exceed $6,000.); whereas "cc" claims can claim any amount but require paying a higher filing fee, usually about a $50.00 difference.  Professor Fox surprisingly found that 64% of the "cc" cases were filed for a mounts less than $6,000; so, in theory, those cases could have been filed in small claims court, thereby costing the plaintiffs less to file.  Professor Fox speculates (I think correctly) on why collectors are paying more to file outside of the small claims docket.  The collection attorneys don't want to show up at court, and they don't want the consumer defendants to show up at court.  Usually on the small claims docket cases, there is an initial appearance date set that the defendant can show up and raise defenses. This isn't routinely set in the "cc" cases. Another factor is that the collection attorneys are usually from out-of-town, and sometimes from out of state. If the attorney has to show up at court even once it can make the case unprofitable.  (In the Fox study, the biggest debt buyer plaintiff was Midland Funding. Midland used a law firm in Merrillville Indiana for its collection cases all over the state. Merrillville, near Chicago, is several hours away from the southern half of Indiana.  

How can you tell if you were sued on a case where the collection attorney doesn't want to go to court?  Is the amount of the claimed debt under $6,000? if so, look at the court case number or cause number. Does the number have "cc" in it?  If yes, then the defendant could have sued you in small claims but sued you on the regular collection docket in hopes to avoid court. With this knowledge you have a lot more leverage in "cc" cases.