Study of Debt Collection Lawsuits in California Shows Reforms’ Impact

As state leaders seek innovative ways to handle the rise of debt collection lawsuits in their courts, research from California provides a novel evidence base to inform such efforts. A comprehensive study published in July by Princeton University’s Debt Collection Lab analyzed 11 years of California state court record data and finds that recent reforms may be bringing some positive results.

The study, conducted by experts at the University of California Irvine, shows how state and federal changes enacted in the early 2010s correlate to a reduction in debt collection lawsuits and rates of automatic judgments against consumers. It also highlights that key challenges associated with these cases persist: 9 out of 10 consumer defendants did not formally respond to the lawsuit and a greater share, 97%, did not have access to legal representation. The findings demonstrate how continued research can help guide more effective implementation of enacted legislation at the court level, as well as development and consideration of additional reforms.

Data helps explain impact of reforms

In 2010, the federal government took significant action toward addressing the “broken” system of resolving consumer debts in state courts by establishing the Consumer Financial Protection Bureau (CFPB). The bureau has the authority to enforce the Fair Debt Collection Practices Act (FDCPA), which set standards for the debt collection industry.

A few states followed with their own reforms, including California through its Fair Debt Buying Practices Act (FDBPA). That measure, enacted in 2013, required debt collectors to provide the court and consumers with documentation substantiating their claims. Legislative sponsors wanted the reforms to help weed out invalid claims and reduce default judgments caused by lack of defendant engagement with the court process.

The Debt Collection Lab report, which looks at data from 16 California counties that are home to 80% of the state population, shows that these reforms correlated with both a reduction in overall filings of debt collection lawsuits and a lower rate of judgments against defendants.

Most debt cases in state courts still one-sided 

This initial reduction, however, was short-lived. Debt collection filings in California increased significantly in 2018 and 2019, the two years before the COVID-19 pandemic hit.

Additionally, despite the promising potential effects of policy changes, challenges with defendant participation in debt collection lawsuits in California persisted. Researchers found that in cases filed from 2009 through 2020, fewer than 9% of defendants on average ever formally engaged with the lawsuit. Just 8.8% filed an answer in response to the lawsuit, a step required in California to avoid a default judgment—an automatic win for the debt collector.

And once default judgments are entered, consumers’ money in the bank or their paychecks may be at risk. California law protects some income and money in bank accounts from being garnished by debt collectors but in practice requires that defendants file an exemption claim in court to activate this protection. During the study period, however, only 3% of defendants who received garnishments actually did so and took advantage of this law.

The lack of formal defendant participation in these cases reveals a persistent challenge that courts face in serving all parties equitably. Engaging with the lawsuit makes a big difference: Those who formally respond to a lawsuit are 55% more likely to have their cases dismissed and avoid garnishment.

The small number of companies and attorneys that bring debt collection lawsuits in the state illustrates the one-sided use of California’s courts by debt collectors. Over the study period, five companies alone brought 25% of debt collection lawsuits filed. A single law firm was responsible for 10% of all filings in this 11-year study period.

New efforts across government branches help address challenges

Over the past two years, California has responded to these challenges through multibranch policy measures to address gaps with the FDBPA and federal initiatives. The steps taken by each branch can serve as models for other states in efforts to be responsive to changing court caseloads in a way that addresses all stages of a court case. For example:

• Legislature. California lawmakers have played a key role in addressing gaps in previous legislation such as the FDBPA, which did not address the post-judgment or garnishment stage of a lawsuit. In 2019, they passed a bill that made the statutory bank account exemption from garnishment self-executing or essentially automatic. That meant the onus would no longer be on defendants to file the exemption claim to assert their rights to a bank account protection. However, an exemption claim is still required to protect more than 25% of a defendant’s wages.
• Judiciary. California’s courts have taken steps to better implement policies enacted by the Legislature so that they make a difference in practice. In 2021, they launched a new online legal assistance portal that provides information and guidance to people without lawyers on how to navigate debt collection lawsuits and includes an explanation of their rights. The portal includes videos and guidance on accessing court resources. Courts in some counties have also developed checklists for court staff and judges to use to review cases before entering a judgment against the defendant, so that the FDBPA reforms can be better integrated into the court process.
• Executive. In 2020, the Legislature established the state’s Department of Financial Protection and Innovation (DFPI) to enforce laws regulating debt collectors and provide an additional resource to consumers dealing with debt collection at any point in the process. The DFPI can serve as an actor in addition to the courts in ensuring that legislative reforms are implemented effectively.

The research suggests that reforms targeting debt collection lawsuits can be effective but must be monitored and adjusted with constant action by all branches of government to make sure the intended effects are maximized for all parties. Officials in California have taken the lead in doing that.

The state now has opportunities to use these new findings to both enact and implement reforms that cover all stages of the debt collection lawsuit process and that empower defendants to meaningfully engage with that process. For example, policymakers could target the challenges of low defendant participation by removing procedural and economic barriers to court engagement, such as the need to formally respond and pay a court fee to avoid a default judgment or file an exemption claim to be protected from garnishment. Expanding the use of plain language and instruction on court notices and requiring courts to efficiently review and screen all cases regardless of defendant participation would also help realize the impact of existing reforms in practice.

Natasha Khwaja works on The Pew Charitable Trusts’ civil legal system modernization project.