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1.5.5 Characteristics of Debt Buyer Collection Lawsuits

Consumer debt is sold for pennies on the dollar. This low price reflects the relatively small size of most consumer debts and the cost to prepare a case for litigation, to litigate the case, and to collect on a resulting judgment.

To minimize these costs, debt buyers develop a mass production model—somewhat akin to manufacturing widgets—to bring collection actions on consumer debts. Debts from many creditors are consolidated with one debt buyer that produces affidavits and related information on a mass production basis and forwards this information to a large collection law firm. The law firm also works on a mass production basis, producing complaints in bulk, filing many complaints on the same day in the same court, and appearing for hearings for many cases in the same court on the same day.

For example, one large debt buyer, Encore Capital Group, placed over 100,000 accounts with one law firm that employed only sixteen attorneys.44 Asset Acceptance Corporation placed much of its business in twelve states with one law firm, employing twenty-four attorneys, that sued or threatened to sue approximately half a million consumers.45 Portfolio Recovery Associates placed approximately 27,000 collection lawsuits with a firm employing three attorneys.46

Over 70% of the 320,000 collection actions brought in New York City in one year were brought by just four law firms.47 In New York City alone, on average, each of these four firms filed over 1000 new cases and obtained over 800 default judgments in other cases each week.

It is no coincidence that this system results in robo-signing abuses, wherein affiants rubber-stamp affidavits without reading them and notaries notarize signatures without seeing an individual actually sign the document. Nor is it a coincidence that there are so many errors in the affidavits, attachments that are not attached, and glaring errors in the legal complaints.

The Consumer Financial Protection Bureau (CFPB) has alleged that the nation’s largest debt buyer sued using affidavits, many of which contained false or misleading testimony.48

Collection attorneys get by with such sloppy litigation conduct because the overwhelming majority of cases result in default judgments. Estimates of collection lawsuits that result in default judgments run from 74%49 to as high as 90% of cases filed,50 and very few of these default judgments are ever set aside. One study found that only about 2% of default judgments in New York City are later set aside.51

Defaults are issued if the debtor does not appear for the trial. If the debtor does appear, the collection attorney may seek to convince the unrepresented consumer to settle the case for most of the amount due. If the consumer contests the matter and refuses to settle, the collection attorney may dismiss the case, typically without prejudice. One sampling of debt buyer lawsuits found that none went to trial or were resolved on the merits.52

One reason this business model works for collection attorneys is that in only 1% or 2% of cases does a collection attorney face a consumer represented by counsel.53 A Maryland study found that in only 2% of collection lawsuits was the consumer represented by an attorney.54 Another study found that attorneys represented consumers in only 2% of the 195,000 collection cases filed in New York in 2011.55 Before a number of pro bono programs were instituted, an earlier study had found the percentage was well under 1%.56

The fact that cases are never contested also means the debt buyers do not have to worry about adequate legal pleadings. A New York City study found that, in 99% of the cases in which default judgments were entered, the materials underlying those applications constituted inadmissible hearsay and did not meet New York’s standards for the entry of a default judgment.57 In 85% of the cases, the supporting evidence was an affidavit from the debt buyer’s own employee (who would not have direct evidence as to the creation of the debt), and in another 12% it was from an employee of an unidentified entity.58 Another study concluded that, among the sample of cases reviewed, no application by a debt buyer for a default judgment complied with New York law.59

Not only are the pleadings often inadequate, in many cases the consumer does not owe the debt. Cases may be brought against victims of identity theft, those who are only authorized users, or even against the wrong consumer (someone who may happen to have the same name as the debtor). Other actions are brought for inaccurate amounts or after the limitations period has expired.

It is hard to estimate how often this happens in collection lawsuits, but one CFPB survey found that, in 53% of debt collection contacts, the consumers reported that an incorrect amount was sought, the debt was not owed, or the person owing the debt was a family member, not the person contacted.60 (The survey did not query consumers about other explanations—such as inaccurate calculations of prejudgment interest or attorney fees—as to why the debt sought might not be owed.) While this survey was based only on consumers’ opinions—and it is possible that the error percentage is lower for lawsuits filed than for collection contacts—it does show that errors are common.

Since debt buyers often do not carefully investigate the validity of the debts they purchase before bringing suit on those debts, it is easy to see how errors in debt collection contacts can lead to errors in lawsuits filed. The CFPB has found that, apart from the process of checking incoming data against external databases, very few debt buyers perform additional checks for accuracy or adequacy of the data.61 For example, for three years Encore Capital Group purchased over 10,000 consumer accounts from a bank containing overstated interest rates. Encore continued to purchase accounts from that bank without determining if the amounts stated as owed continued to be inaccurate.62

Footnotes

  • 44 Consent Order, In re Encore Capital Grp., Inc., No. 2015-CFPB-0022 (Sept. 9, 2015), available at www.consumerfinance.gov.

  • 45 Id.

  • 46 Consent Order, In re Portfolio Recovery Associates, L.L.C., No. 2015-CFPB-0023 (Sept. 9, 2015), available at www.consumerfinance.gov.

  • 47 Urban Justice, Debt Weight, The Consumer Credit Crisis in New York City and Its Impact on the Working Poor (Oct. 2007).

  • 48 Id.

  • 49 Consumer Fin. Prot. Bureau, Consumer Experiences with Debt Collection 27 (Jan. 2017), available at www.consumerfinance.gov.

  • 50 McCollough v. Johnson, Rodenburg & Lauinger, L.L.C., 637 F.3d 939 (9th Cir. 2011) (Montana collection attorney estimated that 90% of collection lawsuits result in a default); Fed. Trade Comm’n, Repairing a Broken System 7 (July 2010) (most panelists from around the country at FTC hearings indicated that the 90% figure was about right; also citing a number of studies); Legal Aid Soc’y, Debt Deception 6 (May 2010) (study of New York City collection lawsuits found that 94.3% of cases in sample resulted in a default judgment or a settlement); The Globe Spotlight Team, Dignity Faces a Steamroller: Small-Claims Proceedings Ignore Rights, Tilt to Collectors, Boston Globe (July 31, 2006) (study of collection actions in Massachusetts found an 80% default rate).

  • 51 Urban Justice, Debt Weight, The Consumer Credit Crisis in New York City and Its Impact on the Working Poor (Oct. 2007).

  • 52 New Economy Project, The Debt Collection Racket in New York (June 2013).

  • 53 See § 2.2.1, infra (studies cited in first paragraph).

  • 54 Peter Holland, Junk Justice: A Statistical Analysis of 4400 Lawsuits Filed by Debt Buyers, 26 Loy. Consumer L. Rev. 179 (2014).

  • 55 New Economy Project, The Debt Collection Racket in New York (June 2013).

  • 56 Urban Justice, Debt Weight, The Consumer Credit Crisis in New York City and Its Impact on the Working Poor (Oct. 2007).

  • 57 Id.

  • 58 Id.

  • 59 New Economy Project, The Debt Collection Racket in New York (June 2013).

  • 60 Consumer Fin. Prot. Bureau, Consumer Experiences with Debt Collection 25 (Jan. 2017), available at www.consumerfinance.gov.

  • 61 Consumer Fin. Prot. Bureau, Study of Third-Party Debt Collection Operations 22 (July 2016), available at www.consumerfinance.gov.

  • 62 Consent Order, In re Encore Capital Grp., Inc., No. 2015-CFPB-0022 (Sept. 9, 2015), available at www.consumerfinance.gov.