In Rochester, N.Y., city court is a busy place – for debt collectors.
Plaintiff’s lawyers seeking judgments against alleged debtors consume 89 percent of the court docket -- 7,148 of the 8,032 lawsuits heard in city court during 2011 involved debt collection, a remarkable number.
But not unique. In Buffalo, 76 percent of cases involved debt collection. In the Capital District near Albany, 77 percent did. Even in Nassau County, just outside New York City, where nearly 20,000 civil cases were filed, almost 9,000 involved debt.
“Debt collectors are flooding the courts, overrunning the courts,” said Susan Shin, staff attorney at an advocacy group, the New Economy Project, based in New York. The group is issuing a scathing report on what it calls abuse of civil courts on Thursday. “There are courts that are basically doing almost nothing else.”
It's a growing problem, say consumer advocates around the country: courts that seem to behave like assembly lines, clogged with debt cases that sometimes consume an entire day’s legal action. The New Economy Project report is among the first to quantify the issue.
"I think people should be shocked that in some places almost 9 out of 10 cases are these debt collectors trying to collect on debts," said Shin.
The debt collectors blame the volume on the huge number of cases that have arisen since the recession and the subsequent tepid recovery.
It's not just the volume that concerns Shin, however. The study found something missing from the majority of these cases: the defense. Nearly half the debt cases were settled by "default judgment,” meaning the defendant was a no-show. Often, courts simply accept the debt collectors' suggested remedy, giving them the ability to garnish the consumers' wages or to access their bank accounts.
Brian Pindell says he was one of them. He didn’t know a debt collection company had sued him and won two judgments against him in court back in 2007, until he was denied aid in the weeks after Superstorm Sandy. The Rockaway, Queens, resident applied for a $4,500 Small Business Administration loan to replace damaged computer equipment for his web design company in December. The judgments doomed his application, he says.
"I had no idea what those cases were. I was never served (with legal papers)," says Pindell. "In fact, I still don't know what the debt is."
Courtesy Brian Pindell
Brian Pindell says he never knew he lost a lawsuit to a debt collector in 2007.
Similar debt cases are overwhelming U.S. courts, says the consumer advocacy group, formerly called the Neighborhood Economic Development Advocacy Project.
Like Pindell’s case, many lawsuit targets don’t find out they’ve lost their case until months or even years later.
The report also found that legal representation in the debt collection cases examined was nearly nonexistent; only two percent of the defendants across the state were represented by a lawyer. That's important because, in many cases, the debt allegations would never hold up in court if disputed, the group says.
Collection agencies that file the cases often engage in the same kind of "robosigning" tactics made notorious during the housing crisis, Shin says -- incomplete paperwork, filing so frequently that the signer couldn’t possibly comprehend what was signed, and agency employees signing documents asserting facts they couldn't possibly know.
"Debt collection lawsuits—particularly those brought by debt buyers—wreak havoc across New York State, depriving hundreds of thousands of New Yorkers of due process and subjecting them to collection of debts that in all likelihood could never be legally proven," the report concludes.
Robosigning and other questionable legal strategies employed by debt collectors are starting to get more attention nationally. In December, the Minnesota attorney general settled a case with Midland Funding, one of the nation's largest debt buyers, after accusing the firm of robosigning. It had filed 15,000 cases in the state from 2008-2012. Midland admitted no wrongdoing, but paid $500,000 to the state and agreed to change its practices.
In California last month, the state's attorney general sued JPMorgan Chase, alleging the bank improperly sued 100,000 Californians between 2008-2011, using practices that sound similar to those found in New York.
A spokesman for Chase said the bank couldn't comment on the case.
Reality of a tough economy
Mark Schiffman, spokesman for debt collectors trade association ACA International, says his members work to maintain high standards, and no one condones filing lawsuits against debtors without having the proper paperwork. But he cautioned against criticizing collectors for filing a high volume of lawsuits, saying that was merely a reality of a tough economy. If consumers ignore debt collectors, they have few other options outside filing lawsuits, he said.
"It may be something that is going to be stunning to people, but it doesn't mean collectors are doing anything wrong," he said. "As long as they are following the rules just because there's an increase doesn't equate to bad behavior."
To compile its research, the New Economy Project obtained data from the New York State Office of Court Administrators covering 195,105 debt collection cases filed against New Yorkers in 2011. When debt buyers, as opposed to original creditors, sued alleged debtors, the default judgment rate around the state was 62 percent, the report found.
The advocacy group also picked 90 cases at random and reviewed them in detail. It found a series of irregularities in those cases.
"Not a single one went to trial or was resolved on the merits," the advocacy group says.
In 9 out of 10 of those cases, an employee or debt buyer who had no connection to the original creditor testified to facts that only an original creditor could know, the report says. And in 4 out of 10 cases, the paperwork was filed out of order -- the affidavit in support of a default judgment was completed before the defendant's time to answer the lawsuit had expired, an easy-to-spot procedural error.
Nevertheless, the court rejected the improper paperwork in only 2 of the 90 cases; and in nearly every case where the debt collector sought a default judgment, it was granted.
Lawsuit targets never find out about the case because plaintiffs routinely engage in so-called "sewer service," by hiring firms that fail to properly serve notice to defendants that they have been sued and should appear in court, the report alleges.
It also claims that minorities suffer disproportionately from debt collection robosigning. In the 10 zip codes with the highest default judgment rates in New York, 75 percent of the population is nonwhite.
Pindell said his application for a $4,500 SBA loan has been completely sidetracked by two court judgments which now appear on his credit report. Both cases were filed by Midland Funding -- one for $802, and one for $1,042 -- though he believes they are different lawsuits representing the same underlying claim.
"I spent five days going back and forth between the two courts trying to find out about this. No one could tell me why there were two cases," he said. "It's still a little mind-boggling...towards the middle of this month I should know, when their lawyers get the paperwork to me, if there is any paperwork."
The SBA is reconsidering his loan application now, he said, and he’s hopeful it will be approved soon.
Greg Call, senior vice president and general counsel, Midland Credit Management, said in an e-mail that the firm could not comment on individual cases, but said the firm follows proper legal procedures.
"We are confident in our processes, including those related to notification of the debt and working with the consumer to satisfy his or her obligation to repay it," he said.
He added that lawsuits are a last resort for the firm, and said only 5 percent of accounts reach litigation.
"We reach out to consumers multiple times on the phone and through the mail. Unfortunately, if they choose not to respond, the only option we are left with is legal action," he said.
But Shin, the consumer advocate attorney, says the U.S. court system has been essentially turned into an arm of the debt collection industry -- and we are all paying the price. The “glaring and pervasive” errors her group found show that the collection industry has a cavalier attitude about the legal system, she said, and that courts are making "rubber stamp" judgments.
"This really is part of an assembly-line process," she said. "They are so sure of their sewer service, so sure of their default judgments, from A to Z, this is how they do it."