New In-Depth Study Shows How Debt Collectors Abuse Legal System and Borrowers

The Loyola Consumer Law Review has just released an important paper by Peter Holland of the University of Maryland Francis School of Law. Holland has undertaken the most extensive study of outcomes in debt collections to date, investigating 4400 lawsuits in all 26 Maryland district court jurisdictions in 2009 and 2010, across 11 of the most active debt collectors in state. We’ve embedded it at the end of this post for your convenience.

As readers presumably know well, in the overwhelming majority of cases, these are junk claims that could be beaten if the borrower had the means. In many cases, the debt is invalid by being too old (the statute of limitations has expired), previously discharged (the borrower actually paid it or it was wiped out in bankruptcy). And even when it might be valid, debt collectors can rarely meet the legal standards needed to enforce the obligation (which includes a copy of the original agreement with the borrower’s signature, the payment history that proves the amount owed, and the complete documentation to substantiate all the transfers of the debt from the original lender to the current holder). To add insult to injury, the debt collectors typically can’t begin to prove how the borrower came to owe the amount it says is due. But broke borrowers aren’t in a great position to pay legal fees.

What is striking about Holland’s investigation is how little rigorous work has been done in this area, despite its importance to ordinary Americans. The few previous empirical studies have been small in scale, limited to single counties or courts, and thus could easily be brushed off as not representative (the one exception was not as in depth as the Holland study). This is the first large-scale statistical analysis of this type.

The article makes some important in passing observations:

Even the debt collection industry concedes that most consumers who default aren’t deadbeats; even the very earliest studies forty years ago found that they were “consumers in trouble” pitted against a collection system that “benefits the unscrupulous and penalizes the weak.” Investors in junk debt are even more removed from consumers than they were then, so practices have decayed even further.

Many small claims courts are swamped by debt collection cases and many courts and judges simply enter default judgments rather than get bogged down in a case backlog. Even so, one out of four cases are now rejected by judges due to lack of evidence (this contrasts with anecdotal evidence from judges that in more than 90% of the cases, the debt collector can’t produce the evidence needed to prevail).

Here are the main findings:

Only 2 in ten borrowers who were served respond to a summons (one has to wonder what percentage of the summons were “sewer service”)

70% of the time, the debt collector prevails, with the average judgment exceeding $3000

The overwhelming majority of cases aren’t settled (some Maryland jurisdictions provide for “restitution conferences” in court but with no judge presiding)

Under 2% of borrowers had an attorney representing them. The few that did engage attorneys got much better results

Racial minorities suffer more under this system than whites

If debtors who lose or get default judgments fail to appear in the supplementary hearing to find out what assets they have, they risk being charged with contempt and arrested. The bond is typically set as the amount owed the debt collector. Thus debtors’ prisons are alive and well in America

And mind you, these are the results in a state that has been in the vanguard of fighting the worst debt collection abuses. But the study deems these efforts to have had very little impact (this is based on a small sample follow up after rule changes were made in 2012).

In his list of proposed reforms, Holland stresses that (not intending to evoke the 12 step process) that governments and pundits need to recognize where this system is, and that it operates well outside the rule of law. So his common-sense ideas are to bring it back into compliance, by restoring rules of evidence, enforcing rules of attorney conduct (New York State courts did that in foreclosures by requiring that attorneys provide certifications, which procedurally makes it easier to sanction them), to update judicial ruled to give judges instructions regarding cases where defendants do not appear in court, and revise the law school curriculum to clue lawyers-in-training about legal shadow systems like the debt collection underworld.

Admittedly, in foreclosures, banks succeeded in bending the laws and the courts to give them a close to free pass for their flagrant abuses. But debt collectors misconduct is far more pervasive and flagrant, and they are not a well connected or powerful industry. Keeping their bad conduct under the spotlight has good odds of producing meaningful reform.

Peter Holland, Loyola Consumer Law Review, Junk Justice

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  1. gonzomarx

    I have had the same experience there in the UK. My partner gets a call out of the blue from a debt collection company about 5 months ago stating she owes them X amount for a debt from 2002.
    The company said that they bought the debt of another debt company who in turn bought it from the originator. This is the first she’d heard ever of this debt.
    Their opening gambit was to offer a discount of 50% if paid in full now or a payment plan was set up.
    Now using some of the limited knowledge I’ve been able to glean from NC I told her to ask them to prove that they owned the debt. The agent on the phone was not ready or able to deal with this question!
    That was the first call.
    In the mean time we called the free National Debt Line to check out the what we could do and found out about Statute Barred, I’m guessing that’s similar to statute of limitations in the US
    We have had about 4 further calls from them saying we’ll been taken to court or bailiffs will be sent and every time we just repeat to them, prove you own the debt and in any case it’s statute barred. We’ve had no calls for 2 months now.
    The behaviour is shocking, harassing calls, legal threats, denying knowledge of the law, all for debts they know are bollocks and bought by the tonne for pennies on the pound hoping to scare people into paying a debt that they don’t owe.

    And thanks to you Yves (and the comments people) for sharing your help and knowledge

  2. SJ

    “they are not a well connected or powerful industry”

    This isn’t really true. They are very well connected – the industry gives lots of work to lawyers and judges, and performs a useful service for the credit providers. Who is going to oppose them? Poor people?

    1. Yves Smith Post author

      Debt collection lawyers are like foreclosure mills, with lots of paralegals, except they are vastly less profitable (what they can charge on a debt collection is at most several hundred, and they don’t always get paid, versus the several thousand to tens of thousands of dollars on each case that foreclosure mills get paid by banks).

      They are real bottom-feeders and have no clout in State bar associations and are held in poor esteem in the profession.

      Finally, debt collectors pursue student borrowers. These are by definition well-educated victims, and they are starting to act collectively to try to curb abuses.

  3. Dito

    I agree with the article in general.

    I dispute the idea that there is any effort to quantify legal risks, with maybe the exception of big corp.

    I’ hope to be proven wrong.

    Its actually an issue that is near and dear to me. I am being downsized because little hard data exists outside of insurance actuarial tables for quantifying legal risks

    There are notable subject exceptions.

  4. washunate

    “What is striking about Holland’s investigation is how little rigorous work has been done in this area, despite its importance to ordinary Americans.”


    Of course, not really striking at all, since ignoring the various types of oppression and abuse in our system is critical for the technocratic class who, in aggregate, depend upon said system…

  5. Ulysses

    One of the reasons these scumbags continue their harassing behavior is that many jurisdictions “reset” the statute of limitations clock– from the point that the alleged debtor contacts the alleged creditor in any fashion. Thus, people who complain about harassment are unwittingly extending the time in which the alleged debts are considered legally valid.

    1. Stratos

      The statute of limitations clock is reset when a borrower agrees (either verbally or in writing) to pay a past due debt, not at the time of contact by the creditor.

  6. F. Beard

    So unnecessary since endogenous money can be issued as shares in Equity without debt or usury.

    Instead, the world continues to be deceived by the debt pushers who insist, contrary to a cursory look at a balance sheet, that purchasing power can ONLY be created as debt. Worse, their obscene debt-creation strategy requires extensive government privileges (a fiat lender of last resort and a government deposit insurance instead of a Postal Savings Service) which should a dead giveaway to any adult that the scheme is crooked.

    1. Vatch

      I don’t understand what you mean by shares in equity. Equity in what? Shares of common stock? Stock prices can be very volatile. Yes, currency values can also be volatile, but the major currencies are typically relatively stable; certainly more stable than many company stocks. Could you please explain how your recommended monetary system would work?

      1. Thisson

        The US can have the treasury issue US Notes as dollars instead of borrowing money by issuing treasury bonds and selling them to the Federal Reserve to obtain Federal Reserve Notes (dollars). Under the current system, the Fed gets to siphon seigneurage, interest, and other fees off of the top of the whole economy.

        1. Vatch

          Hi Thisson: Good answer! It’s not the same as common stock, but it’s not Federal Reserve Notes, either.

        2. F. Beard

          The Fed should be abolished since only the monetary sovereign, e.g. the US Treasury, should be able to create its own fiat. Central banks are thieving abominations

      2. F. Beard

        Stock prices can be very volatile. vatch

        Because of the underlying money system whereby purchasing power is lent into existence and is destroyed when repaid hence the boom-bust cycle and volatile asset prices.

        Common stock as private money will never catch on while the government-backed credit cartel exists because “Why share when one can legally steal purchasing power instead?”

        1. Vatch

          Volatility in the Enron and Worldcom stocks had nothing to do with the underlying money system.

            1. Vatch

              Diversification is fine for personal investment purposes. It is meaningless in the context of using stocks as currency. You’re recommending a form of barter.

              1. F. Beard

                You’re recommending a form of barter. vatch

                No. For one thing the issuing company can always (with existing stock owner approval) issue more stock.

                Apparently you are unfamiliar with a balance sheet or you’d know that Equity and Liabilities are BOTH backed by the Assets of the company. Thus, if bank credit is private money so are shares in Equity private money (unless Liabilities exceed Assets).

                And I’m not necessarily recommending common stock as private money but if endogenous money creation is necessary then common stock is an ethical means to do so. So there’s no excuse for government privileges for the banks.

                1. Vatch

                  So now you say that you’re not necessarily recommending common stock as money. You need to make up your mind. The fact that a company can issue more stock is completely irrelevant to the question of whether or not this is barter. Each company’s stock shares have different prices, and those prices change daily (or by the minute). We’re back to my original question:

                  Please explain how your recommended monetary system would work. Specifics, please. If it won’t be common stock, what will it be?

                  1. F. Beard

                    Use whatever you want for private money. But there’s no excuse for a government-backed/enabled/privileged credit cartel for endogenous money creation since common stock is an ethical means of private money creation.

                    YOU make up YOUR mind whether you support government-backed thievery and oppression of the poor or justice. I suggest you choose the latter if you care about your soul.

  7. Screech

    For a number of years, I worked as a consumer advocate assisting persons who had fallen behind in their mortgage and other payments. Most were being hounded by debt collectors of various stripes.

    One technique that I used with excellent results for the debtor was to determine the original holder of a debt (not always easy to do, of course) and to then send a certified letter to the CEO of this debt holder stating that debt collector so-and-so was representing himself as an agent on behalf of the CEO’s company.

    The responses from the company’s representatives were swift and usually in agreement to investigate and follow up on the issue.

    While not every instance resulted in a positive result for the debtor, most did. Laying a paper trail to the door of the CEO in such issues has its merits.

    Yves: Thanks for this terrific website.

  8. allcoppedout

    I wish more of our academics turned their hand to things that matter to ordinary people like this. Can’t fault the method or conclusions. Good Lord, am I going soft!
    I’m with Beard on this one in principle. I would point out Islamic banking has done little for the poor, micro-finance has been a general disaster and we haven’t fixed the moral hazard issue (though this may be easier than they make us think).

    My partner is still being harassed by some student loan rubbish despite having paid it back and passed the age it was all supposed to lapse at. This stems from claimed arrears from a time in hospital ten years ago. In fact, they were claiming money we didn’t have from our joint account without permission (strangely Sue wasn’t earning while in hospital having chemo) at this stressful time.

    1. F. Beard

      When the Muslims copied and edited the Old Testament they apparently neglected to copy that profit-taking (but not profits!) is also forbidden from one’s fellow countrymen, an embarrassing omission since common stock as private money requires NEITHER usury NOR dividends (profit-taking).

  9. Peter Pan

    For about the last twenty years I’ve consistently received mail, telephone calls and/or voicemail from collection agencies for individuals other than myself, regardless of where I lived (NJ, MD, NM, WA).

    Rule #1: Never answer unknown telephone numbers or respond to messages from collection agencies. Never open unknown mail & mark envelope as: addressee unknown, return to sender.

    Rule #2: Always file a complaint with the FTC against collection agencies that attempt to contact you. Use reverse telephone lookup or reverse address lookup or complaint websites to identify the culprit.

    Lastly, from the FTC: “FTC Files Amicus Brief Opposing District Court Finding on Collection of Time-Barred Debt” –

    1. leapfrog

      Don’t forget the CFPB. Haven’t had any debt collection issues, but I did see a section where you could file a complaint against the bottomfeeders there. I was having credit bureau willful reporting of erroneous derogatory information issues. CFPB did help. I was skeptical, but they got it resolved.

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