The Michigan Justice for All Commission (JFAC) has just released a comprehensive report that shows how debt collection lawsuits dominate the state’s civil courts. In Michigan, 55% of consumer debt collection cases were filed by just five companies. These findings mirror national trends on debt claims when a business sues an individual to collect a debt, such as medical or credit card debt. Oftentimes, people don’t even know these lawsuits have been filed against them, and they frequently end in what’s called a default judgment—when a plaintiff automatically wins a case. In Michigan, this happens in 68% of these lawsuits. Following a default judgment, the plaintiff can garnish an individual’s wages and even seize their home and other property to satisfy the debt, which happens for almost 80% of debt collection judgments in Michigan. Despite the prevalence of debt litigation suits, they fly under the radar due to a lack of data on their impact.
By looking at this data to scope the problem locally, Michigan can now act on it. The commission considered a variety of solutions to modernize the policies and procedures governing the various stages of a debt collection lawsuit and also minimize financial shocks for consumers, such as:
Michigan’s Supreme Court launched the JFAC in early 2020, with technical support from The Pew Charitable Trusts, as part of the judiciary’s multiyear strategy to advance access to civil justice and community engagement.
Michigan’s findings on the rise of debt collection lawsuits show that these cases occupy the largest share of the state’s civil dockets. In particular, cases filed by debt buyers in Michigan almost doubled from 2010 to 2019 and now represent 40% of general civil cases filed in the state. In court, debt buyers—who purchase medical, utility, and credit card debt for pennies on the dollar from original creditors—typically seek the full amount of money owed to the original creditor. These debts can be sold and change hands multiple times before ending up with the company that initiates a lawsuit, so it’s important that the courts review all information related to debt claims, which includes proof of the original debt owed, documentation showing how the debt has changed hands, and who is entitled to collect it.
However, currently Michigan courts require this accounting only if a consumer requests it or shows up to court, which does not happen in at least 68% of cases. Legal resources that would guide consumers to request documentation are also scarce for consumers in debt collection cases; less than 2% of defendants are represented by an attorney as compared with nearly 100% representation by plaintiffs. And the court forms used to notify defendants of a lawsuit provide minimal context on the claim, and little information on the lawsuit’s next steps and implications that would be understandable to defendants without a lawyer to guide them.
But although debt collection lawsuits have increased and the types of companies and individuals using civil courts have changed, the court policies governing them have not. Commission members recognized that to effectively administer justice in this transformed landscape of civil litigation, courts should implement clear and consistent policies that require plaintiffs to prove their debt claim. The resulting recommendations consist of creating standard forms and fields of documentation in court notices based on an affidavit of debt from Illinois and a complaint review checklist from Wisconsin. Such standardized forms would be more user-friendly and let defendants without lawyers understand the nature of the claim being brought against them and how to respond, and would also enhance the courts’ ability to review the validity of claims across multiple cases even when defendants do not engage in the process.
The JFAC also used court record data to examine who is getting sued for debt collection to understand why people may not be participating in these cases. A lack of participation makes it challenging for the courts to collect demographic data on defendants, but defendant addresses can be matched with U.S. Census data, which tracks to neighborhoods. In Michigan, as income in neighborhoods goes up, the number of lawsuits per 100 people decreases—except in predominantly Black neighborhoods, where it remained the same regardless of income. Additionally, neighborhoods where more than half of the residents were Black had double the rate of lawsuits filed compared with majority White neighborhoods, regardless of income.
These disparities motivated the JFAC to view its recommendations as having the potential to positively affect racial equity in Michigan. The JFAC also recommended further study to more deeply address the disparities. Broader recommendations include using mediation programs to resolve debt collection lawsuits outside of court and help consumers enter into equitable settlements with the companies suing.
But debt collection lawsuits don’t end once a judgment is received; 78% also receive a garnishment order, granting plaintiffs court authority to seize a consumer’s state income tax return, wages, or money in a bank account. Michigan is a national outlier in allowing state-income tax garnishment for private consumer debts but lacks thoughtful policies on what assets, income, and public benefits are exempt from garnishment. The state’s exemption policies have not been updated since 1964, so they don’t match the rising costs of living and inflation.
The JFAC contemplated solutions aimed at modernizing such outdated garnishment exemption policies so that litigants are not plunged deeper into debt because of additional costs and penalties resulting from court involvement. Analysis of such policies across the country suggests that solutions could include specifying exemptions for newer public benefits, such as the earned income tax credit, and adjusting wage and asset exemptions to account for inflation.
The JFAC used court record data to better understand what types of companies are using the courts to collect debts and which consumers are being sued. By marrying findings from court trends with policy comparisons across other states, the JFAC bolstered Michigan’s ability to contemplate and select best practices from the first wave of states (including neighboring Illinois, Indiana, and Wisconsin) to have acted on debt collection litigation and formulated custom reform recommendations.
This process—which Pew also supported in Utah—and its ensuing recommendations can be replicated and locally tailored by other states grappling with how debt collection is transforming their civil dockets.
Natasha Khwaja works on The Pew Charitable Trusts’ civil legal system modernization project.