An excellent November 17, 2015 New York Times editorial highlights several widespread abusive collection practices, and calls on states to update collection and garnishment laws to better protect consumers from predatory debt collectors. “For example, companies that buy up consumer debt for pennies on the dollar from creditors and then try to recover the full debt for themselves often pursue people for debts that are too old to be legally collected or fake documents intended to show that the debt is authentic.” For years, consumer advocates have been pointing out these types of abuses. Perhaps the NYT coverage will lead to greater public awareness and thereby subject collectors and the court system to greater scrutiny. The editorial is reprinted in full below:
All states have laws that are intended to prevent debt collectors from driving families into destitution. But those laws, some of which date to the distant past, have been rendered ineffective by debt collectors using new and devious ways to win court judgments that allow them to seize debtors’ paychecks or bank accounts.
Last week, a network of debt collectors agreed to pay $59 million to settle a class-action suit brought on behalf of people in New York, many of whom had their paychecks garnished or their bank accounts frozen. The lawsuit, filed in 2009, accused the companies of filing false affidavits in court claiming that they had properly notified people that they were being sued. The plaintiffs charged that after they failed to show up in court, the debt collectors applied for a default judgment, making it possible to get access to the people’s bank accounts and paychecks.
A multiyear investigation by the New York State attorney general’s office into the debt collection industry uncovered this tactic and other improper practices. For example, companies that buy up consumer debt for pennies on the dollar from creditors and then try to recover the full debt for themselves often pursue people for debts that are too old to be legally collected or fake documents intended to show that the debt is authentic. A recent investigation by ProPublica, a nonprofit news organization, found that debt suits were being disproportionately used against minority communities.
The federal Consumer Financial Protection Bureau has also become engaged on this issue. It recently ordered two big debt-buying companies to pay nearly $80 million in refunds and penalties, stop collection on debts totaling about $128 million and amend illegal practices.
The National Consumer Law Center, a policy and advocacy group, has recommended that states adopt a model law that, among other things, would prevent debt collectors from seizing so much of a person’s paycheck that they dropped below a certain income floor; allow the debtor to keep a used car of average value; and preserve at least $1,200 in the bank to pay rent, utilities and transportation to work.
Most states don’t come close to meeting these standards. Vermont, for example, allows the debtor to keep one cow, two goats and three swarms of bees, but only a vehicle worth $2,500. The Pennsylvania law covers items like Bibles, school books and sewing machines, military uniforms and only $300 in other property. In Alabama, Delaware, Kentucky and Michigan, debt collectors can seize virtually everything a debtor owns, including the minimal assets needed to keep a job. Even in states with relatively strong laws, a debtor must often file court papers or attend hearings to prevent seizure of his or her bank account — a process that could take weeks. During this period, the account is frozen, so that rent, mortgage or car payments go unpaid.
Weak debtor protections also encourage predatory lending by creditors, who know that if a debt goes bad, they can seize nearly all the debtor’s assets. Until the states strengthen these laws, their corrosive effects will continue to mount.