Maryland has joined a growing number of states in which judges must demand greater proof from debt buyers before allowing them to sue consumers to recover alleged obligations.
Rule changes by the Maryland Court of Appeals, the state’s highest court, are being hailed as a significant effort to stop debt collectors from getting judgments based on flimsy evidence.
“It is critical that courts ensure that the correct party is suing the correct consumer on the correct debt, and these rules will help to do that,” said Jonathan F. Harris, an attorney with the Public Justice Center in Baltimore.
These lawsuits can lead to garnishment of wages, seizure of assets and liens on homes and cars, consequences that those already financially struggling can hardly afford, Harris said.
Debt buyers pay pennies on the dollar for defaulted debt. They buy the debt portfolios from original creditors or from other debt buyers and debt brokers. The debt can be sold four or five times. Often there’s scant documentation other than the person’s name, last known address, Social Security number and debt amount.
State courts have become burdened by debt-collection cases. In Maryland, the attorney general’s office and the Department of Labor, Licensing and Regulation advocated for tougher rules, making the state one of the latest to say, “Hold on, we’ve got to see more proof.”
The Maryland Court of Appeals directed debt-collection companies to present better proof of an existing debt — a bill or print-out showing purchases, payments or other actual use of a credit card or account by the consumer. Companies also have to show they own the debt they are trying to collect.
“We saw affidavits signed by employees of companies swearing they had personal knowledge of the debts, when the companies were the third or fourth owners of the debt and had never purchased any of the underlying documents (or media) from the original creditor,” said W. Thomas Lawrie, an assistant attorney general for Maryland. “Moreover, some of these people were signing hundreds of these affidavits a day. There is no way the person could have reviewed all of the underlying files to claim personal knowledge, even if their companies had purchased the original media.”
“It appears this robo-signing has been going on at some companies in this industry for years,” he added. “Some companies are following all of the rules, but a number are clearly not.”
At least other eight states have implemented new laws, court rules or administrative orders requiring more specific proof of debt from buyers who sue consumers, according to Harris. North Carolina now requires collectors to provide debt documentation that includes an itemized accounting and proof of ownership of the debt.
Several consumer advocates working with clients in New York put together a report last year criticizing how easy it is for debt buyers to get judgments. The organizations looked at 26 debt buyers who filed more than 450,000 lawsuits in New York City Civil Court from January 2006 through July 2008. The companies won about 95 percent of the time and were awarded more than $1 billion in judgments. The people sued were overwhelmingly low-income, elderly or disabled.
“Despite offering no proof of their claims, debt buyers routinely win court judgments against hundreds of thousands of New Yorkers each year,” the report said.
A major reason for the high rate of default judgments is that many people do not know they have been sued, the consumer groups found.
“Debt buyers often send notices to addresses associated with the underlying credit card accounts, which are often outdated and no longer valid,” the groups wrote in their report.
The Federal Trade Commission has also been critical of the debt-collection industry. Last year, the FTC issued a report concluding that the system for resolving consumer debt-collection disputes is broken. The agency recommended significant litigation and arbitration reforms to improve efficiency and fairness to consumers.
The FTC said it was troubled that collectors weren’t properly notifying consumers of suits they have filed, and that courts frequently granted default judgments against consumers who did not appear in court or defend themselves. The agency recommended that states adopt measures to make it more likely that consumers will defend themselves in litigation. That would raise the bar on what information the debt buyers have to submit to the court when filing lawsuits and applying for those default judgments.
Kudos to Maryland and other states that are looking out for consumers and preventing unscrupulous debt buyers from using the judicial system to do their collection work.
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