Debt Deception

Abstract

In recent years, legal services offices have been deluged by requests for help from thousands of New Yorkers who have found themselves fighting extraordinary debt collection abuse. This abuse comes in the form of frivolous lawsuits filed by debt buyers – a relatively new and fast-growing segment of the debt collection industry. Debt buyers often fail to notify people of the lawsuits filed against them and file lawsuits without having proof of their claims. The people sued – frequently very low-income, elderly, or disabled individuals – cannot effectively defend themselves. They have no legal representation, are intimidated by the court process, lack knowledge of their legal defenses, face language barriers, or do not receive notice of the lawsuits. For these reasons, despite offering no proof of their claims, debt buyers routinely win court judgments against hundreds of thousands of New Yorkers each year. The cumulative impact of these judgments is enormous: Between January 2006 and July 2008, the top 26 debt buyers extracted more than $1 billion in judgments against New York City residents. Debt buyer lawsuits are overwhelmingly concentrated in New York’s lowest-income communities and communities of color, with devastating results. Armed with default judgments, debt buyers can seize people’s assets, freeze their bank accounts, or garnish their wages to collect the debts. Judgments also appear on credit reports, preventing people from being able to secure housing, obtain credit, and even find employment. Judgments are enforceable for 20 years, and even longer in some cases. In this report, we examine lawsuits filed by debt buyers and their profound impact on low- and moderate-income New Yorkers, lower-income communities, and communities of color. We begin, in Part I, with background on the debt buying industry, including an analysis of the debt buyer business model and collection methods. Part II focuses on debt buyer lawsuits, particularly the systemic problems at the root of these lawsuits. In Part III, we highlight specific findings from a study of debt buyer lawsuits in New York City. We draw results from two data sets: (1) a 365-case sample of lawsuits brought by the 26 debt buyers who filed the greatest number of cases in New York City between January 2006 and July 2008 (“Court Sample”); and (2) a 451-case sample of callers to NEDAP’s legal hotline who were sued by a creditor or debt buyer in 2008 (“Client Sample”). Finally, in Part IV, we recommend policy and legislative reforms to address the problems documented in this report.