Most States Allow Abusive Debt Collection, Report Says

By Marco Poggio | March 6, 2024, 4:28 PM EST ·

A majority of states lack legal guardrails preventing people burdened by debt from facing legal jeopardy and even jail time, the National Center for Access to Justice at Fordham University School of Law recently found.

In 30 states, borrowers can be incarcerated for failing to obey court orders to repay debt, according to data released Monday through the center's Consumer Debt Litigation Index, a new online tool ranking states and the District of Columbia based on their protections from abusive credit practices.

Millions of Americans have debt that gets sent to private collection agencies, NCAJ researchers wrote in a report showcasing the findings. They added that many of those borrowers end up getting sued by their creditors, a phenomenon that clogs up court dockets across the country and impacts the lives of people with debt in significant, sometimes severe ways. Debt collection litigation plows through families and can lead to homelessness, advocates say.

In compiling its index, an aggregate of 24 policy benchmarks, the NCAJ found that seven states allow debtors' wages and property to be seized without a court order, a practice called garnishing. At least 15 states charge a fee to answer a consumer debt complaint, the researchers added.

Lauren Jones, the NCAJ's director of law and policy, told Law360 Pulse Wednesday that "There are vast numbers of people who are impacted by consumer debt cases."

"We see that people sometimes don't know that they've been sued," Jones said. "Sometimes they don't even know until their bank accounts have been garnished."

She also said it's hard to estimate how many debt collection lawsuits are filed each year, in part because states do not effectively collect data.

By assigning a total score lumping the benchmarks together, the index identifies the District of Columbia as the jurisdiction with the most protections against abusive debt collection litigation. New York comes in second as the highest-ranking state, followed by Alaska, Pennsylvania and Texas. Meanwhile, Montana, Louisiana and Hawaii rank last with the same score.

The report proposes a series of policy changes that would expand protections for people with debt. It recommends that state governments find ways to ensure debtors are timely informed of debt lawsuits filed against them.

Research by the nonpartisan Pew Charitable Trusts, which provided a grant that funded the production of the Consumer Debt Litigation Index, showed that in jurisdictions where data is available, more than 70% of consumer debt suits end in judgments favoring creditors because the consumer failed to respond or appear in court. And only about 10% of those who responded had a lawyer on their side, whereas creditors were almost always represented, the Pew study said.

Currently, only Ohio and New York have laws requiring that either a public official serves a suit to its intended respondent or a court sends a supplemental notice of the case through first-class mail.

At least 15 states require people to pay a filing fee to answer a debt collection suit, NCAJ researchers noted. For people who are struggling to pay a debt, that's an additional hurdle, they said. In California, for instance, filing fees range from $181 to $435, depending on the amount in question in the case.

To prevent bogus litigation, creditors should be required to produce evidence showing a debt claim is valid, and that payments for fees and interest should be limited to avoid wrecking a defendant's finances, the NCAJ recommended in its report Monday.

The center further advocated for the total elimination of incarceration for missing debt payments.

While Congress abolished debtors' prisons in 1833, collection agencies can ask courts to issue arrest warrants for people who failed to appear in court to respond to unpaid civil debt judgments, the researchers said.

After a consumer has been ordered to pay, the creditor can hold debtors' examinations in court where the borrower answers questions about their finances and how much they can afford to pay, the study noted. Examinations can be scheduled multiple times and frequently, and a consumer who missed one such hearings may be held in contempt of court and ordered arrested by a judge, the center said.

Only a few states limit how often creditors can call for examination hearings, NCAJ data shows. Meanwhile, only 15 states have laws prohibiting incarceration for failure to obey a court order to appear at a debtor's examination, unless the non-appearance was willful, the center's report pointed out.

Besides taking a toll on people's lives, consumer debt litigation taxes court systems in major ways, according to researchers. Pew Charitable Trusts found that, in 2021, debt cases made up an average of 42% of civil dockets in nine states for which data was available: Alaska, Colorado, Connecticut, Indiana, Missouri, New Mexico, Texas, Utah and Wisconsin.

David Udell, the NCAJ's executive director, said in an interview that simple changes in state laws could help reduce the number of unjust lawsuits filed and ease the burden on courts.

"Access to justice means not only providing counsel at critical junctures, it also means having laws that are fair," Udell told Law360 Pulse. "Some of the most basic consumer debt laws, such as statutes of limitations, service requirements and pleading requirements, can reduce the flow of illegitimate cases into the courts, in turn reducing the need for counsel and the burden on the judiciary, while increasing justice for all."

--Editing by Covey Son.

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