Debt collectors have an advantage over debtors

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As the debt-collection industry files numerous lawsuits each year to recover unpaid bills, it's banking on a simple fact: The vast majority of those sued will never appear in court to defend themselves.

Only one out of 10 defendants in collection cases attend the court dates, according to some industry experts and judges.

"The system is broken," said Jane Santoni, a Towson, Md., attorney who represents people sued by debt collectors.

When calls and letters to past-due debtors don't work, debt collectors have one option to turn up the heat: Lawsuits. Collectors file hundreds of thousands of collection lawsuits each year, according to expert estimates.

Some judges feel the rules are stacked against consumers -- but say they're too swamped to do anything about it. Chicago Judge Tom Donnelly, who oversaw up to 600 collection cases a day in Cook County, Ill., described the situation to a federal panel this summer.

"The complaints that have been upheld are ludicrous. Basically, a complaint that says, 'He owes me $10,000,' passes muster under the small-claims rules," Donnelly said at a U.S. Federal Trade Commission conference in Chicago in August.

"When you have 600 default cases, it's very difficult to sort of stop the flow of cases and say, 'Hey, there's something wrong with these complaints.' "

The concerns come as job losses and a bleak economy are making it harder for many Americans to pay their bills. As of the first quarter of 2009, about 6.6 percent of credit cards were at least 30 days past due -- the highest delinquency rate in 18 years, according to an October report from the Government Accountability Office, a nonpartisan congressional agency that audits federal programs.

Because courts are overwhelmed, judges have loosened the burden of proof on collectors, said Southfield, Mich., consumer attorney Ian Lyngklip. Collectors are presenting "little more than an e-mailed spreadsheet saying that 'Joe owes me this much money,' " Lyngklip said.

This is a significant shift, Lyngklip said, because traditionally there has been a much higher burden of proof for collection cases.

"If Capital One wanted to sue you for debt, it used to be that Capital One had to show the receipts to prove you owed them money," he said, providing a hypothetical example about the credit-card company.

Along with lawsuits, creditors have also sent hundreds of thousands of cases to forced arbitration. But this summer, America's largest arbitrator for consumer debt, the National Arbitration Forum, effectively shut down. Minnesota filed suit against NAF, claiming the company -- which was supposed to be impartial and neutral -- had extensive ties to collectors, constituting a conflict of interest.

For their part, collection attorneys say they're doing a better job proving their cases. Bob Markoff, president of the National Association of Retail Collection Attorneys, says that better technology is allowing collectors to gather and retain debt documentation more effectively than before.

"If we've got it, we're going to give it to the consumers, because we know that it promotes resolution of the matters even prior to litigation," Markoff told the FTC panel.

Rozanne Andersen, executive vice president of ACA International, the Minneapolis-based collection-industry trade group, also defends the industry's practices.

"There's a perception that there's a clogging of the court system," Andersen said, noting that debt litigation has increased. "That's the oddest way to describe this. That's what our courts are for. We're supposed to be able to secure judgments in court. That's why our judicial system exists."

Indeed, lawsuits can lead to big paydays. After a court has found in a collector's favor, they can take money directly from that individual's bank account. Collection companies have crafted business models based on buying debt for a fraction of a penny on the dollar, filing thousands of lawsuits and betting that few people will push back against them, Lyngklip said.

"This is a gold prospector's model," Lyngklip said.

Experts offer many reasons why so few people defend themselves. One common explanation is because individuals simply don't know they're being sued. When a person is sued, they are supposed to be "served" with official documents. But sometimes, the companies tasked with delivering these documents don't do the job. In July, New York's attorney general took action to invalidate 100,000 debt-collection judgments, saying that the delivery companies failed to do their job.

Service abuses are worse than federal authorities realize, Lyngklip said.

"The FTC is probably not getting a really good whiff of the things that are going on in the state district court system," Lyngklip said of the federal agency that is supposed to police debt collectors.

"It's pretty damn common around the country," Ira Rheingold said of shoddy document-delivery service, which is known as "sewer service." Rheingold, executive director of the National Association of Consumer Advocates, says defendants don't show up because they're so broke that they don't think it matters.

"People are trying to collect blood from a turnip," Rheingold said. "The problem is when people don't show up, the court system is not built to demand that the debt collector who is trying to collect a judgment against you proves that the debt is owed."

Added Santoni: "Judges are placing the burden of proof on the wrong party."

Andersen, the debt-collection industry official, thinks the problem could be broader.

"It could be a breakdown in our entire judicial system. There is a whole segment of people that are perhaps uneducated about our judicial system," Andersen said, adding that public outreach programs could help make the court system more accessible, thus causing more defendants to attend court. "I honestly cannot speak to the rationale of why someone wouldn't show up."

The world's largest debt-collection company, Horsham, Pa.-based NCO Group, hires law firms to file "tens of thousands" of collection lawsuits each year, said company CEO Michael Barrist. He thinks people don't show up because they know they owe the money.

"In most cases they don't have a defense," Barrist said.

Barrist doesn't think the legal system is broken. He points to the fact that, in the 23 years he's been in the collection business, there's always been a very low percentage of people showing up to defend themselves.

"Years and years ago when accounts would get litigated, nobody would ever show up," he said. "And I don't know that that number's really changed."

(E-mail Isaac Wolf at wolfi(at)shns.com.)