Debt collector to credit card user: "Show me the money." Credit card user to debt collector: "Show me the proof."
Credit card customers and other consumers around the country are getting more protection from debt collectors -- both the many scrupulous debt collectors and the few unscrupulous.
For the most part, these protections require debt collectors to provide more proof that they own the debt they are seeking to collect through lawsuits and -- this is becoming an increasingly crucial point -- to show that the statute of limitations on such suits has not expired.
The trend comes at a key point in time, with unemployment remaining at stubbornly high levels, the economic recovery remaining unusually feeble, indebted consumers becoming increasingly desperate and, as a consequence, debt collectors flooding courts with lawsuits in virtually every state.
One study found that nearly 500,000 lawsuits were filed in New York City by 26 debt buyers between January 2006 and July 2008 alone, and experts say that was only the leading edge of a subsequent tsunami of debt collector lawsuits.
"For far too long, courts have been used as an arm of the collections industry," said Jonathan Harris, a staff attorney for the Public Justice Center, a nonprofit legal advocacy group in Baltimore. "These suits lead to garnishment of wages, seizure of assets and liens on homes and cars -- consequences that those already struggling to make ends meet can hardly afford.
"Therefore, it is critical that courts ensure that the correct party is suing the correct consumer on the correct debt," he said. "Hopefully, as a result of this trend, debt collectors will stop flooding the courts with suits that fail to meet basic standards of proof."
Debt collection changes
Elements of the trend include:
- A growing number of states, counties and cities that are substantially elevating the barriers that must be hurdled before debt-related lawsuits can be filed or cleared for action.
- Proposals to strengthen federal regulations related to such lawsuits and, going further, the sale and purchase of consumer debt.
- Legislation pending in Congress that would bar debt collectors from bringing legal action on a debt after the statute of limitations has expired, an issue that often comes into play because -- by definition -- a suit filed on behalf of a debt relates to a debt that is pretty old.
"Consumers must be protected from overzealous debt collectors who are bending the rules to collect," Rep. Steve Cohen, D-Tenn., said when he filed the bill in June. "When the original creditor sells their time-barred debts to new collectors, consumers should be informed of the rules and not be misled. My legislation helps consumers recognize and understand the rules of debt collection during these tough economic times."
Representatives of the debt collection industry emphasize that most debt buyers are legitimate and run scrupulous businesses, though -- as in any industry -- some take shortcuts or seek to take advantage of consumers. In general, these representatives say, the industry supports full disclosure and strict standards for filing lawsuits.
"From our perspective, the availability of complete and accurate consumer account information is the foundation of a fair and effective collection system," said Mark Schiffman, director of public affairs for ACA International, which represents more than 5,000 third-party collection agencies, asset buyers, attorneys, creditors and similar entities around the world.
"Creditors generate vast amounts of consumer information in the origination and maintenance of consumer accounts," he said. "Collectors rely upon the transfer of this information to effectuate collection of the debt once it becomes delinquent. In cases where creditors sell portfolios of consumer accounts to debt buyers, the robust transfer of complete consumer account information is critical to both consumer privacy and effective collections."
Proof of indebtedness disappears
In fact, outstanding debts often are sold and resold multiple times. By the time they reach the hands of the third or fourth collector, who acquires it for pennies on the dollar, the chain of evidence -- showing who owes what -- has vanished.
At the same time, courts are being overburdened by the sheer volume of debt-related lawsuits, many of them filed after the statute of limitations has expired. The statute of limitations time period varies by state, but is somewhere from three to 10 years.
The result: Hundreds of thousands of credit card users and other American consumers are responding to or otherwise carrying the burden of lawsuits that are lacking in evidence or are just flat bogus.
Consumer advocates emphasize that, particularly when it comes to the statute of limitations, knowledge of your rights is absolutely crucial.
Here's why: If the statute has run out, but you are sued anyway, that suit is illegitimate. But, if upon being sued you begin to make payments on that debt, you may inadvertently restart the clock on your debt, setting the entire statute of limitations in motion again.
"Paying part of a debt may actually give the debt new life by starting the statute of limitations all over again, which is why it's critical to talk with a lawyer," Harris said.
With stakes that high, at least nine states, counties or cities recently have crafted new laws, administrative guidelines or court rules to require specific proof that the person sued is responsible for the debt and that the entity suing that person now owns that debt. In many cases, the plaintiff also must show that the statute of limitations has not expired.
Through the work of the Public Justice Center, Maryland's attorney general and others, Maryland earlier this year became the latest state to revise its procedures.
The strict new rules imposed by the Maryland Court of Appeals require, among other things:
- Proof of the existence of the debt, such as a bill or printout showing purchases, payments or other actual use of a credit card or account by the consumer.
- Proof of the applicable terms and conditions of the account agreement if the debt buyer is seeking interest or attorneys' fees above the Maryland constitutional rate of 6% a year.
- Proof of the debt buyer's ownership in the form of a chronological listing of the names of all prior owners of the debt and the date of each transfer, and a certified or other properly authenticated copy of the bill of sale or other document that transferred ownership of the debt to the plaintiff and to each purchaser of the debt in the chain of ownership.
- Identification of the account, including the name of the original creditor, the defendant's full name as it appears on the original account and last four digits of his/her Social Security number, the last four digits of the original account number and the nature of the consumer transaction (utility, credit card, consumer loan, etc.).
- Proof that the plaintiff holds a Maryland collection agency license.
"These amended Maryland court rules pertaining to debt buyers and other government actions to rein in unscrupulous debt collection tactics, are victories for consumers because they require debt collectors to meet basic standards of proof when suing consumers," Harris said.
Other states or cities requiring debt collectors to meet tougher requirements include Illinois, North Carolina, Minnesota, Delaware, Tennessee, Connecticut, Chicago and New York City.
A study produced in May 2010 by the Legal Aid Society and other groups in New York City found that debt buyers filed 457,322 suits in New York City Civil Court between January 2006 and July 2008 -- and that the deck is stacked against most defendants.
The debt buyers won 94.3% of those cases, most often by obtaining automatic default judgments because the defendants did not appear in court. The resulting judgments and settlements equaled more than $1.1 billion.
"In recent years, legal services offices have been deluged by requests for help from thousands of New Yorkers who have found themselves fighting extraordinary debt collection abuse ...," the study, entitled "Debt Deception," concluded.
"Debt buyers often fail to notify people of the lawsuits filed against them and file lawsuits without having proof of their claims," the study found. "The people sued -- frequently very low-income, elderly or disabled individuals -- cannot effectively defend themselves. They have no legal representation, are intimidated by the court process, lack knowledge of their legal defenses, face language barriers or do not receive notice of the lawsuits."
Other studies have disclosed that overwhelmed courts have been allowing clerks -- rather than judges -- to enter declarative judgments against indebted consumers.
In addition, enforcement agents say that some debt collectors have been ordering employees to sign hundreds of affidavits -- asserting personal knowledge of the debts -- each day. This so-called "robo-signing" is reminiscent of one of major, foreclosure-related abuses of the banking industry, one factor of the housing meltdown.
"Robo-signing is very common in the consumer debt collection industry," said Harris, the legal services attorney in Maryland. "It's been eclipsed in the news by the robo-signing in home mortgages, but it's just as big a problem, if not bigger, for credit card suits and the like."
These and other practices are attracting the attention of federal regulators. The Federal Trade Commission has held workshops and issued several reports on problems associated with current debt collection activities.
Industry proposes self-regulation
Industry officials now expect the new Consumer Financial Protection Bureau, which is inheriting the FTC's oversight of the debt collection industry, to issue a set of proposed regulations.
Seeking to get ahead of those regulations, the industry -- through ACA International -- is promoting its own agenda. Among them:
- Responsible litigation in the collection industry
"We believe that collectors must be responsible for making sure the consumer receives the requisite notice of the suit," Schiffman said. "In addition, collectors should ensure they have a reasonable basis for filing the suit and access to documentation to support the claim underlying the suit."
- Debt validation
"We have recommended that the CFPB make available a model validation notice that will provide collectors an effective safe harbor ... when communicating with consumers in writing," Schiffman said. "In addition, a model validation notice will help collectors ensure consumers understand their rights.
"Further, we believe the validation notice should be required to include the name of the original creditor and to provide an itemization of the fees and interest applied by a collector after it is placed for collection or by a debt buyer after it is acquired. Ultimately, including this information in the validation notice will reduce consumer confusion and better enable consumers to evaluate the origination of the debt and the amount sought in collections."
- Debt documentation.
"We are advocating to ensure that creditors and debt buyers are required to maintain consumer debt information for seven years -- this coincides with length of time it can be reported on consumer credit report -- in order to allow debt collectors to provide documentation to be more responsive to consumers," Schiffman said.
The most important thing to remember, according to all experts on all sides of this issue, is that you must not ignore a collection notice or, worse, notice of a lawsuit.
"Consumers shouldn't avoid debt collectors or dismiss being contacted as a scam without verifying it first," Schiffman said. "Avoiding the debt collector won't make the debt go away.
"The vast majority of debt collection activity is legitimate, and it's imperative to address a debt collection inquiry head-on because a consumer's failure to act could have a negative impact, such as their ability to get future credit," he said. "Whether it's a debt to resolve or they have contacted the wrong party, nothing can be resolved without communicating with the debt collector."
This is particular crucial when it comes to the statute of limitations.
"In many states, debt collectors are allowed to sue consumers even after the statute of limitations has expired," Harris said. "In these states, it's up to the consumer to contest the suit by raising the statute of limitations as an affirmative defense. Therefore, the consumer should speak with a lawyer to see if and how he or she may raise this defense."
One other thing to know: Though expiration of the statute of limitations means you can't legally be sued, it does not mean that you are off the hook for the debt.
"In America, we don't have a system whereby a consumer can buy a product or service on credit and then avoid paying the debt until the statute of limitations runs out, thereby having the debt erased," Schiffman said.
"When the statute of limitations expires, the debt is still owed by the consumer and a collector can still legally attempt to contact the consumer to collect it," he said. "This debt can still be reported to consumer reporting agencies, possibly impacting the consumer's ability to obtain credit."