Hundreds of thousands of New York consumers are victimized by “predatory” debt-collection practices in which “debt buyers” flood the courts with unsubstantiated lawsuits and give inadequate legal warning to consumers in the hope that no one shows up to contest the claims, a new report by a consumer group said Monday.
The report by the New York City-based New Economy Project accused debt buyers of pursuing a strategy designed to overwhelm the court system and debtors without having to produce the documentation to back up their claims.
The advocacy group formed in 1995 said collection firms count on debtors not having attorneys and not contesting cases, so the debt buyer wins by default. It also asserted that the companies “systematically lie to the courts about key information that they do not in fact have.”
In particular, the group contended that the plaintiffs violate consumers’ rights to due process of law by failing to properly notify debtors that they are being sued, in what is known pejoratively as “sewer service.”
And it criticized the firms for relying on consumers’ fear and lack of legal sophistication to extract millions of dollars every year. In 2011 alone, debt buyers obtained $230 million in judgments against New Yorkers.
“They were winning because the people they were suing didn’t have any lawyers, didn’t know how to defend themselves, and often didn’t even know they were being sued,” said Claudia Wilner, staff attorney at New Economy Project.
The group called for stronger protections for consumers against frivolous and abusive debt-collection lawsuits, through a proposed new law, new state regulations, and better enforcement of existing laws that would require debt collectors to produce more documentation to prove their claims. Some of those have been tried successfully in other states, and in New York City.
“These are all straightforward steps that the court, regulators and their counterparts should take immediately to address these abuses,” said Susan Shin, another staff attorney for the nonprofit group, formerly known as the Neighborhood Economic Development Advocacy Project, or NEDAP.
In particular, the activists called for passage of the Consumer Credit Fairness Act, which would require debt buyers to provide more information before they can file lawsuits and seek default judgments. They would have to prove they own the debt and have a right to collect it, and would have to properly serve notice on consumers. It would also cut the amount of time for which debt collectors can go after consumers for past-due amounts from six to three years. The bill passed the Assembly several times, but not the State Senate.
“It would be great if we had this legislation,” said Vera A. Cedano, staff attorney at the Western New York Law Center. “I don’t see this issue going away any time soon.”
The report, titled “The Debt Collection Racket in New York,” takes aim at a growing industry. The number of debt-collection lawsuits in state courts has soared in the last decade, reaching 195,105 in 2011. That included nearly 9,000 in Buffalo City Court, or 76 percent of all civil filings there. More than half of all debt cases are filed by debt buyers, the report said.
“It’s a huge problem,” said Matthew A. Parham, staff attorney at the Western New York Law Center. “There’s all sorts of abuses just due to the fact that these companies collect old debts that the creditors don’t think are worth collecting.”
Debt buyers obtained default judgments – when the accused debtor does not show up in court – in 54 percent of the cases in Buffalo. Almost all of the default judgements in Buffalo civil cases, 96 percent, involved debt collection.
“They rely on getting default judgments and intimidating people who do not have lawyers into entering into settlements,” Wilner said.
Debt buyers are firms or investors that purchase old debt from the original creditors for pennies on the dollar and then try to collect on it. These are debts that have already been written off by the credit card issuers and other lenders, who provide the debt buyers with little paperwork to back up any claims. But the buyers paid so little for the debt that almost anything they collect is profit, leading to practices that have been widely criticized
The report accused the debt buyers, as well as the attorneys who represent them, of using New York courts as a collections mill by “filing nonmeritorious cases en masse.” It alleged that the debt buyers and their attorneys routinely engage in “robo-signing” by mass-producing affidavits and other court documents, signed by employees who attest to firsthand knowledge of debts. In 40 percent of the cases, the affidavits were prepared even before the deadline for the borrower to respond. “It tells you how cynical this process is that they completed paperwork in advance,” said project founder and co-executive director Sarah Ludwig.
The report said debt buyers and their attorneys also falsely claim to the courts that they have served the debtors with court papers when, in fact, the debtors are unaware they are being sued. As a result, they don’t show up and don’t hire an attorney, resulting in a default judgment, which is an automatic ruling by a court because the party being sued doesn’t appear to challenge the claims.
The result of these lawsuits and judgments are blemished credit reports, which, in turn, hinder consumers from getting homes, loans or jobs, and frozen or seized assets. It’s particularly damaging for low-wage workers, elderly and disabled New Yorkers, single mothers, victims of domestic violence and those affected by Superstorm Sandy or other natural disasters.
Tracy McCoy, a single mother of five in Amherst, works two jobs, as a home care aide and at a pizzeria. She saved up $8,000 for a down payment on a home and was appalled when it was suddenly seized by a creditor – for an $18,000 credit card debt that wasn’t even hers. She had been served in 2006, but at an address that she lived at in 1999.
So she fought it, with help from the Western New York Law Center’s consumer law clinic, CLARO, and got the judgment reversed. She now has a home under contract and is waiting for the mortgage approval.
“I was very, very scared. Talk about stress. I’m so glad it’s over,” she said. “They know how to scare you. I can just imagine all the people out there who are so frightened; they just send in the money.”