How Too Many State Policies Fail Americans Sued for Debt

This article is the first of a three-part series looking at issues surrounding debt lawsuits in state courts.

Debt lawsuits are burdening Americans, overwhelming state courts, and failing to provide many litigants with meaningful resolution, according to research done by both the National Center for Access to Justice (NCAJ) and The Pew Charitable Trusts.

For example, NCAJ’s 50-state Consumer Debt Litigation Index shows that every state has room to improve policies related to the handling of these cases. Across nine issue areas, including ease of responding to a lawsuit and making sure that debt collection actions do not increase the likelihood of homelessness, not a single state scored higher than 50 out of 100 (the District of Columbia, which is included in the index, received the top score, earning a 58).

NCAJ’s findings on the challenges facing consumers in these cases align with Pew’s research over the past four years into the legal system’s involvement in debt collection matters and the impact on consumers, local businesses, plaintiffs, and the state courts that hear these cases. Through its debt-related analyses and technical assistance efforts in Michigan, Minnesota, Oklahoma, Oregon, Pennsylvania, Tennessee, and Utah, Pew found a system that perpetuates the cycle of debt for millions of Americans, rather than providing resolution. Since Pew launched the courts initiative in 2020, the research has found that:

• Americans in debt often end up in court—with communities of color hardest hit.
• A handful of large, well-resourced companies drive debt litigation in state courts.
• Confusing legal processes can discourage individuals from participating in the cases against them—and most people sued for debt don’t show up to court, often leading to default judgments for the plaintiffs, an automatic win for the company suing.

• When consumers don’t participate in debt cases, there are serious consequences for them and their communities.

Some states have already begun tackling these issues with straightforward, but meaningful, fixes. And the research shows that policymakers have opportunities to change their state systems for the better.

Americans in debt are likely to end up in court

More than 1 in 5 Americans has a debt currently in collections, and in the eight states where Pew analyzed 2023 data, about 1 in 20 people faced a lawsuit.

Consumer debt cases are among the most common civil case types in U.S. state courts: A recent analysis of these cases found that at least 2.5 million debt collection lawsuits were filed in 2022. Because a substantial share of civil cases is unidentified in court data, the actual number could be as high as 4.5 million. But, as the NCAJ index shows, in many states, those sued don’t always know where to turn for help—or even that they’ve been sued. Most household debt in collections involves expenses incurred during a financial shock, such as illness or job loss. Pew’s debt collection efforts in Oregon and Minnesota shows that most underlying debt in these cases is related to either credit card and bank debt or medical debt.

In addition, communities of color are disproportionately affected by debt suits—in terms of cases filed, judgments, and garnishment, or seizure, of wages—compared with White communities with similar wealth demographics.

In Oregon, Pew and research firm January Advisors found that filing rates are 30% higher against Black and Latino residents compared with White residents. This held across incomes: Researchers analyzed debt lawsuits by both the race and ethnicity of the person sued and the median household income in their neighborhood and found that Black and Latino Oregonians at all neighborhood income levels faced higher rates of debt suits, with those in the lowest-income neighborhoods affected the most.

Court processes can create new disparities. In Michigan, 3 out of 4 consumers with a judgment against them in a debt case see their tax returns, wages, and/or bank accounts garnished, but those living in Black neighborhoods are 1.2 times more likely to be garnished than those in White neighborhoods.

Just a few companies drive debt litigation

Plaintiffs in consumer debt cases typically belong to one of three categories: 1) original creditors, including credit card companies and, in the case of medical debt, hospitals and health care providers; 2) third-party agencies that work on behalf of a creditor and charge a fee for collecting; or 3) debt buyers—companies that purchase debt and make a profit when they can collect. That last group specializes in collecting debt and typically files high volumes of cases.

Just 10 companies are responsible for filing the majority of debt collection cases in Minnesota (56%), Michigan (71%), and Oregon (53%). The top national filers are seen across jurisdictions, highlighting their ability to make a profit in different regulatory environments. And few states have policies in place that require these filers to even show proof that the debt they are using the courts to collect is valid.

Most people don’t participate in their debt cases

Individuals fail to participate in debt suits against them for a variety of reasons. When people don't participate in the court process, plaintiffs can request a default judgment—an automatic win for the plaintiff based on the consumer not participating, rather than the facts of the case. In an analysis of jurisdictions where Pew has conducted technical assistance work related to debt litigation, between 60% and 70% of debt cases ended in default judgment for the plaintiff.

Issues related to the lawsuit notification process can mean that individuals aren’t always aware that they’re being sued. Those who are notified may receive unclear or confusing information that doesn’t provide enough specifics about the debt in question or even who is suing them. This means that people who are sued may not, or may not be able to, participate in their cases. For example, in Oregon, only 4% of people who were sued formally participated in the court process.

Other state policies—such as requirements that people who are sued file a written answer and pay fees associated with filing an answer to take the next step in their case—also pose barriers.

Lack of participation has serious implications

A judgment can mean that the person sued may be subject to garnishment or seizure of wages and bank accounts, further affecting their ability to afford necessities.

Garnishment is one of the most financially harmful results of a consumer debt lawsuit, and federal protections don’t go far enough—they protect only 75% of wages, meaning as much as 25% can be seized (with exemptions for some forms of income, such as Social Security). As of 2023, there were 13 states where the only garnishment safeguards were from the minimum federal protections, potentially perpetuating a cycle of debt for consumers.

Additionally, judgments against consumers accrue interest over time—sometimes reaching twice as much as the original amount—as high post-judgment interest rates drive up costs and can linger for years.

But the research shows that even plaintiffs fare worse when cases end in default judgment, as opposed to when consumers participate. Informed consumers can come to the table early on to make payment arrangements or otherwise attempt to reach a settlement that works for both parties. In Minnesota, default judgments are less likely to be satisfied than other case dispositions: 76% of them are not fully satisfied within three years. In Utah, judgments are a similarly ineffective tool for collecting: Only 50% of judgments in district court and only 35% of judgments in small claims court were satisfied four years after the judgment was entered.

Policymakers can change the status quo

Going forward, policymakers can use Pew’s research and the Consumer Debt Litigation Index to gain insights into how courts in their states manage consumer debt cases and consider reforms to improve debt litigation policies, processes, and outcomes. In Tennessee, Oklahoma, and other states, legislators and court leaders are using data to gain a clearer picture of debt litigation in their courts. That has helped to enact reforms that prioritize getting people to court and helping them avoid the worst consequences of a lawsuit, allowing plaintiffs to collect funds without litigation, and giving courts the ability to effectively resolve these matters.

By investing the resources necessary to improve the handling of these cases and redesign processes, state legislators and other system stakeholders can transform how parties engage in debt cases and improve the court’s ability to ensure meaningful resolutions.

Ruth Rosenthal is the project director and Lester Bird is a senior manager with The Pew Charitable Trusts’ courts and communities project.