Reforms Urged As Mich. Debt Collection Caseload Grows

By Carolyn Muyskens | November 16, 2022, 8:27 PM EST ·

Debt collection lawsuits are "dominating" Michigan's civil court system and the state should do more to help debtors defend themselves in court, a Michigan Supreme Court commission said Wednesday.

The study also found racial disparities in debt collection filings and said Michigan trails its peers in consumer protections during the debt collection process.

The report by the Michigan Supreme Court's Justice for All Commission found debt collection cases made up 37% of all civil court filings in state district courts in 2019, the most recent year for which data was analyzed. They were the second-most-common type of case filed after traffic cases.

The growth in the volume of debt collections suits in the last several years "was driven almost entirely by debt buyer companies," the commission found. 

Third-party debt-buying companies are increasingly the plaintiffs behind debt collection lawsuits in Michigan courtrooms and are responsible for 60% of debt collection filings, the report said. The top three filers by volume in recent years were third-party debt buyers: Midland Funding filed 20% of Michigan's debt collection cases from 2017-2019, Portfolio Recovery Association 12% and Jefferson Capital Systems 8.8%, according to the commission.

The trend in debt buyers bringing court actions presents "unique concerns," the commission wrote, because consumers do not have a direct relationship with the debt buyer. When contacted by a debt buyer prior to or during a court action, a consumer may not recognize the company's name, may think the debt buyer's communications are a scam and may ignore collections attempts and court documents until it's too late and a default judgment is entered. Default judgment is the outcome in 68% of Michigan's debt collections cases, typically because the defendant failed to respond, the study found.  

Looking at geographic data, the report found that two to three times more debt collection lawsuits are filed against consumers in majority Black neighborhoods compared with majority white neighborhoods across all income levels.  

"More information is needed to understand the reasons for these disparate filing rates," the commission said, pointing to possible answers in racial disparities in access to low-interest credit and in disparities in generational wealth that mean Black debtors are less likely to be able to get help from a family member to pay off a loan.

Compared with neighboring states, Michigan also has more lenient pleading requirements for a debt collector to file a claim in district court, the report found. Plaintiffs need only to provide an account number and a balance due, with no requirement to provide documentation substantiating the amount owed or proving ownership of the debt, unlike Illinois, Indiana and Minnesota.

"Other states in the region require documentation such as the original agreement or a monthly billing statement showing the defendant used the account in question, the balance due with fees and interest broken out, and documentation showing the chain of ownership of the debt if it was sold to a debt buyer," the report said.

Fewer than 0.5% of defendants in debt collection cases had legal representation, the report also found, while 96% of plaintiffs were represented by counsel.

The debts at issue involved all nonmortgage consumer debt, including amounts owed on credit cards, car loans, medical bills and payday loans. The median amount sought in debt collection lawsuits was $1,600 in 2018-2019, the study said.

Once default judgment is entered, judges will grant garnishment in 78% of cases, most often of state income tax returns, but also of wages, bank accounts and other income.

The fact that so many cases end in default judgment, with serious consequences such as wage garnishment, raised red flags for the commission about "whether consumers actually received service of process, whether the complaint and summons provided meaningful and understandable notice to consumers of the claims against them, and whether consumers understood" the court process.

The commission recommended a series of policy changes that would provide more time to serve defendants with notice of a lawsuit and expand options for mail and alternative methods of service; increase the amount of information a plaintiff is required to include on the complaint; and revise court forms so that they are easier for self-represented litigants to understand.

"This groundbreaking research will help us improve how trial courts handle debt collection cases to make the process easier to navigate and more equitable, efficient and consistent," the commission's chair, Michigan Supreme Court Justice Brian Zahra, said in a statement accompanying the report's release.

The commission also said it would work on pilot programs offering alternatives to litigation, describing debt collection lawsuits as a costly, time-consuming "lose-lose-lose" situation for creditors, consumers and the courts.

"With debt collection accounting for a substantial and growing share of caseloads, this work is a critically important step forward toward our goal of a civil justice system that is accessible to all," said commission Vice Chair Angela Tripp, director of Michigan Legal Help.

Tripp called on "other branches of government" to also take action to tackle the issue of debt collection practices.

The report was compiled with the assistance of The Pew Charitable Trusts and data consulting firm January Advisors.  

--Editing by Jill Coffey.

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