2.1.1 Reason #1: Consumers Often Have Dispositive Defenses

Many people, including some judges, assume that when a collector sues on a debt the consumer almost always owes the money. Whatever the accuracy of this view in times past, changed practices in the marketplace have dramatically altered the facts. Today, consumers have complete defenses in a significant number of collection cases and partial defenses in many more.

The major reason for the marketplace change is the explosive expansion of the multi-billion dollar distressed-debt-buying industry, in which debt collectors purchase from the original creditors literally millions of old consumer debts for pennies on the dollar. The debt buyers in turn file huge numbers of collection lawsuits on the assumption that the overwhelming majority will result in a default judgment or a settlement. The amount the debt buyers can expect to recover from each case may not justify litigating the matter if the debtor contests the lawsuit, and the debt buyer in such a case may even dismiss the action rather than pursue it.

As a result, debt buyers may file cases in bulk without first attempting to investigate the merits of an action. In fact, the debt buyer may have little information to go on even if it wanted to investigate the case more fully—the debt buyer may just have a file with the debtor’s contact information, an amount that the original creditor alleges is due, and perhaps a date when the account was charged off or the last payment made. This minimal information may be passed on from debt buyer to debt buyer as accounts are sold and re-sold.

Because debt buyers purchase older debt and devote little effort in analyzing the applicable statute of limitations, they may file lawsuits even though the applicable limitations period has expired. Debt buyers who cannot produce the written contract often bring the case on an account stated or other claim not based upon a written contract.¹ In many states, such causes of action have a shorter limitations period than a claim based upon a written contract.² Credit card collection cases, even when brought on a contract theory, may have to be brought within a shorter limitations period applying to non-written contracts.³ Moreover, the action may have to be brought within a shorter limitations period found in the law of some state other than the forum state.⁴

Consumers often will have moved after the credit account was closed, and the debt buyer must first try to locate the consumer’s present residence. Debt buyers may try to serve the consumer at the wrong address⁵ or even sue the wrong consumer.⁶ Debt buyers rely on credit reports to locate the consumer, but the credit reports themselves are filled with errors, including “mis-merged” information that mixes the credit reports of two or more people with similar names and other identifying information, which results in the collector then suing the wrong person.

At the same time, there has also been an explosion of identity theft and unauthorized use of credit cards. While federal law states that consumers in these situations do not owe the money,⁷ collectors frequently sue the consumer regardless.

Quite often, the debt buyer does not have sufficient evidence to prove its case, relies on business records that are not properly introduced into evidence, or tries to prove its case based on clearly defective affidavits.⁸ Debt buyers frequently cannot even prove that they own the debt they are collecting.⁹ Debt buyers may not have access to better evidence or may not want to expend the resources acquiring that evidence, so they try to win cases by default without an ability to prove that money is owed.

Creditors also may commit billing errors, which may be the reason the creditor stopped collection efforts—the consumer did not owe all or part of the money claimed. When these debts are sold, the debt buyer does not receive or retain this information concerning consumer defenses. The consumer can then defend the collection action based upon the original dispute the consumer had with the creditor.¹⁰

Too often debt buyers will bring actions against spouses and other parties knowing these defendants do not owe the debt but hoping to either pressure them into payment or obtain a default judgment against them.¹¹ Examples include suits against authorized users not liable on the account and against family members of a deceased debtor. The debt buying business model is to cast a wide net without consideration as to whether the consumer owes the money and see what money is recovered.

Another factor leading to the recent increase in valid consumer defenses is that creditors have aggressively offered credit to almost anyone, including college and even high school students. Credit is being thrust upon not only the young but also upon others who traditionally would not have been eligible. This practice leads to the increased relevance of the defense of lack of capacity, including that the consumer was underage, had mental disabilities, or was intoxicated at the time of the credit offer.¹²

Even if the consumer owes a debt, the collector may be seeking interest, attorney fees, or other charges to which it is not entitled. A collector cannot recover prejudgment interest or attorney fees pursuant to the credit agreement if the collector has not proven that agreement, and state law may further limit such charges. When the originating creditor has ceased seeking interest once it charged off a debt, a debt buyer purchasing the debt may not be able to seek such interest or may not be able to seek interest at the same rate as the originating creditor.

The bottom line is that attorneys, judges, and the public must readjust their expectations. When consumers are sued, the operating assumption, more likely than not, should be that the consumer does not owe the amount sought or that the collector will not be able to prove its case against the consumer. The assumption should never be that the collector has sufficient evidence to establish the amount it is seeking.