Is Now The Time To Reform How Courts Handle Debt Cases?

By Kevin Penton | May 10, 2020, 8:02 PM EDT

COVID-19's chilling effect on court operations at least presents an opportunity to rethink how consumers are treated in debt collection lawsuits, according to the group behind a new report, which found that, even before the pandemic, individuals facing such cases were often a missing element in the courtroom.

With more than 70% of recent cases settled by default, many likely never even showed up, according to the April 6 report by the Pew Charitable Trusts. Fewer than 10% of defendants had legal representation to dispute allegations that they owe debts on their car loans, credit cards, medical bills or other expenditures — compared with nearly all plaintiffs in the cases, the report said.

The cases mushroomed to represent approximately a quarter of all civil cases in state courts in 2013. The nonprofit anticipates the trends will only accelerate amid the financial fallout from the COVID-19 pandemic.

With activity at many courts having ground to a halt amid restrictions related to the novel coronavirus, and some jurisdictions pausing the ability for new debt collection suits to be filed, Pew believes that legislators should view the current period as a time to enact reforms.

"Right now is a critical moment for actions," said Erika Rickard, director of the civil legal system modernization project at Pew. "Now is the time for modernizing how these processes work."

In its report, Pew identifies several features of debt collection suits that could be ripe for changes.

As courts are generally barred from independently evaluating the merits of allegations against a defendant, that means that judges often effectively rubber-stamp claims made against consumers, according to the report.

Pew found that in instances in which a consumer is not present, only 11 states required that collectors provide documented proof of the validity of a debt, rather than expect defendants to be the ones to question plaintiffs on the validity of their claims, according to the report.

All states allow pre- and post-judgment interest to be tacked onto the debt, ranging as high as a 12% annual rate in Massachusetts. Consumers must often also pay for the court costs and attorney fees that debt collectors took on to bring the matter to court,

With only four states — North Carolina, Pennsylvania, South Carolina and Texas — generally barring the garnishing of wages to pay off debts, approximately one of every 14 U.S. workers is seeing money garnished from their paychecks, according to a 2017 study by payroll provider Automatic Data Processing Inc.

Pew also found that only 12 states had at least some courts that provided public data on debt claims. But of those, only seven — Alaska, Colorado, Connecticut, New Mexico, Texas, Utah and Wyoming — had tracked relevant caseloads since 2013, and only Texas provides the data for all of its courts.

Members of ACA International, a trade group for debt collectors and related services, work with consumers to structure flexible payment plans catered to each individual's unique financial situation, said Mark Neeb, the organization's CEO, in a statement on Friday. The goal is to avoid litigation altogether and ensure that consumers land on their feet and merchants continue to operate, he said.

"It's important we maintain open lines of communications so that consumers receive critical financial information as soon as possible and understand their options could include emergency hardship programs during times of crisis," Neeb said. "ACA will continue to stand behind its members in supporting small businesses and consumers across the country."

While a few states have enacted reforms on how debt collection suits are handled, more needs to be done to avoid courts effectively being used as a debt collection tool against consumers, according to Pew.

The report suggests that states should track data about debt claims so that legislators can better understand the impact on consumers and provide the appropriate support to them as they go through the legal process.

Legislators should also review the rules in their state's courts, the relevant state policies and the practices that are commonly followed, so that parties in debt collection cases are able to present their cases adequately, according to Pew.

And states should provide additional information online on cases, in formats that nonlawyers can also follow.

"This report aims to expand the conversation among policymakers at all levels of government about modernizing the civil legal system to better serve all of its users," the report said.

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--Editing by Katherine Rautenberg.

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