Report calls debt lawsuits a ‘racket’

PHOTOGRAPHER: Sara Foss

Even now, Christine says she doesn’t know exactly who sued her for failing to pay an old debt. She says she doesn’t even know exactly where the debt originated, whether it was legitimate or bogus.

It was only when she attempted to purchase a car at zero interest in 2009 that she learned that she owed $1,200 to “some company I’d never heard of.” Because she was never served with court papers, she missed her court appearance, and a judge ruled against her, she said. “How am I supposed to show up in court if I don’t know about it?” she said.

“My credit was very good,” continued Christine, who lives in the area but requested that her last name and place of residence be withheld. “But one judgment was all that was needed to ruin it.” She said she asked the company that filed the lawsuit against her who they represented, but never got an answer. “They said, ‘We don’t have to give you that information,’ ” she said.

Christine’s story is part of a new report from the New York City-based advocacy group the New Economy Project.

The report, titled “The Debt Collection Racket in New York,” paints a negative portrait of the debt collection industry, suggesting that creditors and debt buyers engage in fraudulent and deceptive practices that target low-income neighborhoods and minorities.

Two of the top 10 New York state zip codes with the highest concentrations of default judgments are in Albany: the greater South End ranked number one, while Arbor Hill ranked fourth. Neighborhoods in Queens and Buffalo rounded out the rest of the list.

The New Economy Project report suggests that creditors and debt buyers routinely engage in a practice called “sewer service,” which involves falsely claiming to the courts that the subjects of debt collection lawsuits have been served with court papers, and “robo-signing,” which involves mass producing documents, some with incorrect or fraudulent information, and submitting them in bulk to the courts.

“Debt buyers — companies that buy old, charged-off debts for pennies on the dollar — file more than half of all debt collection lawsuits in New York, and systematically lie to the courts about key information they do not in fact have,” the report says. Submitting a large volume of documents to the court makes it easier for creditors and debt buyers to obtain automatic, or default, court judgments, especially if the defendant doesn’t show up in court.

These default judgments appear on people’s credit reports, and can make it much more difficult for them to buy houses and cars, or even get a job.

“People never really get notified of the cases against them,” said Claudia Wilner, a staff attorney at the New Economy Project. “The robo-signing and false affidavits are serious due process violations.”

According to the report, in the past decade the number of debt collection lawsuits filed in New York’s courts has exploded, with nearly 200,000 cases filed in 2011 alone. That year, only 2 percent of New Yorkers sued by the debt collection industry had legal representation, while debt buyers brought more than half of all debt collection lawsuits.

In the Capital Region, 5,389 debt collection lawsuits were filed in 2011, and 3,364 default judgments were issued.

Industry response

Mark Schiffman, vice president of public affairs for the credit and debt collection industry trade group ACA International, said that the New Economy Project report raises some legitimate concerns, but is also unfair to the debt collection industry, and doesn’t include any comments from debt collectors themselves.

“It doesn’t say anything about how consumers have an obligation to pay their rightfully owed debts,” Schiffman said. “We just came out of one of the greatest recessions we’ve ever had, and people’s credit blew up. … We’ve seen an incredible increase in the volume of debts defaulted on, and there is nothing that just wipes debt away.”

Schiffman said debt collectors do not serve defendants with court papers, and should not be blamed for “sewer service.” “That’s a separate industry,” he said. “If people don’t know about [a debt collection lawsuit] that’s highly concerning to us.” But he also suggested that a lot of people simply don’t show up in court when notified of a lawsuit against them. “The vast majority of people don’t want to deal with a debt collector,” he said.

Ann Seyse, a staff attorney at Albany-based Legal Aid Society of Northeastern New York, said the New Economy Project report is an accurate depiction of the interactions people have with the debt collection industry.

“We see a fair number of people who have had default judgments granted against them,” said Seyse, who works in the Legal Aid Society’s consumer law project. “Sometimes they’re legitimate, but sometimes they’re totally out of left field, or they’re too old.” A lot of people, she said, don’t learn of the default judgment until their bank accounts are frozen, or their wages are garnished. “They have no idea,” she said.

Seyse said the debts her clients report owing typically range from about $500 to several thousand.

“It’s mostly credit card debt,” she said. “Some of it’s medical debt.” She said that sometimes people have paid off their debts or filed for bankruptcy, but their credit report was never updated. Much of her work involves damage control — helping her clients gain access to their bank accounts again, or bring a halt to wage garnishment.

The Legal Aid Society of Northeastern New York serves people who earn 200 percent of the poverty level — which starts at $22,980 for a single person and adds $8,040 for each additional household member — or less.

Legitimate debt

Cindy Jordan, a housing counselor at Better Neighborhoods Inc. in Schenectady, has helped would-be homebuyers clear up their credit reports. Some of these people are unaware that a default judgment has been made against them until she pulls their report. In the vast majority of cases, the debt is legitimate, she said. “They’ve ignored it for years,” she said. “The question is: Are they ready now to address it?”

Previous New Economy Project reports have examined the debt collection industry in New York City. Wilner said that “The Debt Collection Racket in New York” is the organization’s first report to focus on the industry’s impact on the rest of the state.

“These problems exist all throughout the state,” Wilner said. “They’re actually worse outside of the city.”

Christine settled her debt collection lawsuit in March and sounds scarred by her experience.

“It was a very, very hard time,” she said. “I don’t want them harassing me or trying to get me back.”

She said that most people just pay off their debt to get the debt collection company of their back. She said she couldn’t stomach the thought of doing that, and opted to pay a private attorney instead. The private attorney wasn’t cheap, but it was money well spent, she said.

“Now my credit is excellent again,” she said.