The pandemic forced a record-breaking number of Americans to file for unemployment, but many already faced a financial burden – debt.
According to a Pew Research Center survey conducted earlier this month, more than one third of Americans said they worried about the amount of debt they have every day or almost every day.
As a health crisis morphs into an economic one, the ranks of Americans in debt are expected to grow. With them is an anticipated surge in the number of debt collection lawsuits that the industry has increasingly come to rely on.
Industry observers predict that as the market for collections grows, it will be paired with a rise in illegal, predatory debt collection practices and scams.
Scott Kinkley, a staff attorney for the Northwest Justice Project in Spokane, Washington, said that in states where collectors can work remotely without direct supervision, there’s a risk they could “go rogue,” resorting to high-pressure tactics that break the law.
“I think that’s concerning, especially where some collectors receive commissions based on what they can collect, and the temptation may be to overreach,” Kinkley said.
Meanwhile, stimulus checks that were meant to provide financial relief are at risk of being garnished.
“This remains a very fluid situation and a situation that is really threatening to many Americans who have far fewer financial resources than they did a few weeks ago but are facing the same number of debts or maybe even more if they’ve had medical care needs,” Legal Services Corporation President Ronald S. Flagg said.
Several states, including Washington, Massachusetts and Illinois, placed restrictions on wage garnishments during the pandemic, but widespread protections don’t exist on the federal level.
Debt collection lawsuits expected to accelerate
Under normal circumstances, some debt collectors have been known to flout consumer protection laws, including the federal Fair Debt Collection Practices Act.
Last year, a group of companies settled with the Consumer Financial Protection Bureau (CFPB) and New York Attorney General’s office over allegations they encouraged collections agents to pose as law enforcement officials, while improperly adding $200 to each debt owed. Collection agents sometimes threatened consumers with fraud charges or arrest.
In a separate complaint from last year, CFPB alleged New York-based firm Forster and Garbus filed more than 99,000 debt lawsuits in just a few years. Most of the suits were filed without verifying payment histories, billing statements or other records to verify the debt.
In the collection industry, debts frequently pass from company to company, leading to mistakes that impact consumers.
Debt buyers inherit records that may be outdated or incorrect, leading to situations where agents attempt to collect on debts that were never owed or that fall outside of the statute of limitations, meaning they can’t legally be collected.
Those debts often play out in the court system, where those who owe the debt rarely can afford to pay an attorney to represent them. This puts them at a severe disadvantage, as debt owners are almost always represented and more likely to prevail in court.
Last year, the Center for Responsible Lending studied Washington debt collection cases from 2012 to 2016. The analysis found that those being sued were represented by an attorney in just 1 percent of cases.
In Utah’s courts, debt collection dominates civil caseloads. According to data from the 2019 fiscal year, debt collection cases outweighed the number of divorces, evictions and protective order cases combined.
In those debt lawsuits, just 2 percent of those sued had an attorney. On the other hand, companies or individuals suing over debt were represented in all but seven cases out of about 62,000.
Across the country, default judgments are the most common way for civil cases, including debt lawsuits, to be resolved. In default judgments, courts rule in favor of the only party who appeared in court for a hearing.
In debt cases, those sued often don’t respond to complaints or attend hearings, leaving creditors and collection agencies on the winning end of judgments.
In Washington, debt buyers received default judgments in more than 80 percent of their cases, according to the Center for Responsible Lending.
In 2016, default judgments concluded two out of three of Utah’s debt collection cases, court data shows.
Default judgments may have their own baggage, though.
When collection agencies file lawsuits using unreliable data, mistakes can happen. A person may be sued for a debt they never owed in the first place.
It’s also possible for notice of a lawsuit to be improperly served, leaving the defendant in the dark about the case.
“Most of my clients come to me because they’ve been garnished on a debt that they had no idea that they were sued for and may not have even owed,” Kinkley said. “That’s usually when they finally reach out and make first contact to find out what the heck’s going on and why their paycheck is being garnished.”
During the pandemic, at least one state, Wisconsin, is adjusting its policy regarding harassment during collections, which is illegal under federal law and the Wisconsin Consumer Act.
Two weeks ago, the Wisconsin Department of Financial Institutions (DFI) warned debt collectors that “practices that may have been typical or customary under normal conditions may be deemed harassment under conditions of a global pandemic.”
Michael Lawton, a consumer credit examiner in DFI’s Bureau of Consumer Affairs, said attempting to collect during home visits could be viewed differently than it was before covid-19.
“So, in that situation with the stay-at-home order, a debt collector knocking on your door would be something that would easily broach into harassment,” Lawton said. “A few months ago, a visit in and of itself may not be considered harassment.”
Lawton said DFI hasn’t received a spike in reports of harassment or debt collection scams, although some recent consumer complaints mention job loss and an inability to pay off debts.
Flagg, the Legal Services Corporation president, said scams, including those involving debt collection, tend to increase during disasters. The elderly are particularly vulnerable.
“They know that people are in a bad way, that they’re scared,” Flagg said, adding that not just “people involved in debt collection, but others who are peddling medical remedies that are fake are going to prey on people.”
How states and cities are giving relief to consumers in debt
Some federal agencies and states took action to lessen the blow of debts as incomes evaporate.
Debts owed to the Department of Veterans Affairs are frozen.
In Massachusetts, new debt collection lawsuits can’t be filed until late June or the end of the state of the emergency. Repossessions of cars and debt collection tactics that require in-person contact are part of the temporary ban.
On the local level, Chicago paused city debt collection until the end of the month, and the DC Council banned some collection activity and new debt collection lawsuits from being filed until 60 days after the state of emergency ends.
Richard Cordray, who was the first director of the CFPB, and several of his former colleagues wrote a paper urging the agency to push companies to waive fees for late payments and insufficient funds. Utah’s Democratic candidate for governor, University of Utah law professor Christopher Peterson, helped co-write the paper.
“We could use this difficult time as an opportunity to just generate more revenue out of people who don’t have the money because they’ve lost their job or their hours have been cut back,” Peterson said. “Or we could recognize that we’ve got to give some more time to these people and extend some courtesy to them to not pile on with a bunch of fees that they can’t afford to pay.”
Peterson also supports moratoriums on mortgage foreclosures, evictions and repossessions of vehicles during the pandemic.
“If that vehicle is repossessed it can cause serious problems, not just for the person who has borrowed the money but for the entire family or extended family,” Peterson said. “Our economy is going to fall into deeper turmoil if we don’t suspend some of those repossessions.”
There’s been some movement to ease the burden of student loan debt during the pandemic. Until late May at the earliest, payments and interest on federal student loans are suspended, and New York froze collection on student debt owed to the state until at least mid-May.
The Ohio Student Association and three other organizations sent a joint letter asking Ohio’s attorney general to stop student debt collection during the pandemic.
“We need to make sure that we’re helping Ohioans, who are going to probably be in one of the worst economies in the last hundred years, be able to get back on their feet,” Ohio Student Association Executive Director Prentiss Haney said. “Our current student debt collections will not allow that.”
According to a study from Policy Matters Ohio, student debt is more likely to impact black, low-income and first-generation college students. Students from community colleges and Central State University, the state’s only public historically black university, are most impacted by student debt owed to the state.
“A lot of times, what’s happening is that these students are living paycheck to paycheck,” Haney said. “They may forget to turn in a key or don’t make a tuition bill one semester, and then that turns into a bill that goes unpaid and gets referred to the AG’s office and now becomes something that haunts them through the rest of their academic career or through their lives if they’ve graduated.”
Contact Big If True editor Mollie Bryant at 405-990-0988 or bryant@bigiftrue.org. Follow her on Facebook and Twitter.
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