Simple Solutions Can Help States Better Handle Debt Cases

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

State courts should offer a path to resolution for the millions of Americans sued for debt each year. Too often, however, consumers involved in litigation must deal with inadequate information, confusing processes, and outdated, ineffective policies that do little to help them address their debts. Better policies around these lawsuits can help alleviate some of those issues, and policymakers have both the ability and the authority to implement simple, straight-forward solutions to improve how debt cases play out in court.

As part of its examination of how consumer debt litigation policies fail consumers, The Pew Charitable Trusts has identified four areas where policymakers can help make debt litigation processes more effective and equitable. State legislators can take steps to improve the system by enacting measures and policies focused on:

• Ensuring that people know when they are being sued.
• Supporting courts in verifying the validity of debts.
• Removing barriers that prevent people from participating in their cases.
• Simplifying processes and strengthening protections for consumers repaying debt.

Ways to ensure that consumers know they’re being sued

Problem: Notification is the official process used to inform people that they are being sued and to provide them with information about their cases. But this process often falls short. Process servers, who deliver court paperwork, don’t always reach people being sued, and most states don’t require proof that service was even attempted. Without the knowledge that they are being sued, consumers aren’t able to respond to or participate in these lawsuits.

Solution: To make sure consumers know that they are being sued, policymakers can mandate that professional process servers implement the verification technology that delivery drivers use. The same GPS and photo tools that verify when a package has been delivered can be applied to case notification. States should require that all process servers have GPS evidence of their attempts to serve paperwork. Some jurisdictions are already moving in this direction. New York City, for example, adopted GPS verification requirements for process service in 2010.

Steps to ensure that the debt lawsuits are valid

Problem: Even when individuals are notified of a lawsuit, the paperwork may not include clear information about the debt in question. In many cases, the original debts may have been sent to a collection agency or sold to a debt buyer. That means that if people receive notice of their suits, they may not recognize the person suing them. Some states, including Connecticut, now require that plaintiffs filing lawsuits include documents clearly showing the origin of the debt and its validity. Even so, a recent analysis of Connecticut debt suits by the Debt Collection Lab at Princeton University found that courts accepted debt filings even when plaintiffs failed to include required documentation. Without a clear mechanism for compliance, courts are struggling to implement even those filing protections.

Solution: Policymakers can work with courts to implement standards for ensuring that debt lawsuits are legitimate. The Uniform Law Commission (ULC), a national nonpartisan legal organization that helps states develop model approaches to common issues, has developed a model law that can serve as a guide. The ULC’s Consumer Debt Default Judgment Act provides states with guidance on judicial review of lawsuits and the information that a plaintiff should share with a consumer when filing a lawsuit (e.g., name of the original creditor) to ensure that a judgment is entered only for valid debts. Under this model law, backed by business and consumer advocates, these requirements would apply equally to all consumer debt lawsuits. Courts should then ensure that there are standard processes in place and enough resources to adequately review the cases.

Remove barriers to participating in debt cases

Problem: In most debt collection cases, the people sued must respond to lawsuits by filing written answers with the court. If they fail to do so, the companies suing them may win the cases through default judgments—an automatic win for the plaintiff based on the consumer not participating, rather than the facts of the case. But filing an answer can be difficult and often requires a filing fee. Studies show that very few people engage with their cases when there’s a formal answer requirement, and most of those cases end in default judgments.

Solution: Legislators should eliminate the formal answer requirement in debt collection cases and mandate that hearings be scheduled automatically, instead of waiting for the person sued to file a formal answer to the case. Courts in most states already use this approach to manage evictions and small claims cases, recognizing that many defendants in such cases do not have attorneys and cannot complete legal filings on their own. Adopting similar policies in debt collection cases could increase participation and lead to fairer outcomes.

Take steps to simplify and strengthen garnishment processes and protections

Problem: Whether the consumer knows about the lawsuit or not, when debt collectors win a case, they can seize, or garnish, part of a person’s wages and funds in their bank accounts. Certain protections exist in state law to ensure that garnishments allow people to pay debts while still affording basic needs, but they are often insufficient and aren’t generally automatic. Consumers must both know about them and complete complex paperwork to claim them. A recent Hamilton County, Tennessee, study found that fewer than 1% of debt cases in the county with a judgment had claimed existing protections.

Solution: State legislators can lessen the negative impact of bank account garnishment by making protections self-executing, or automatically applied. This simple step will save individuals from having to deal with the cumbersome process of filing a request with the court to receive these protections. Eleven states have implemented self-executing exemptions that automatically protect a certain amount in a bank account. (See Figure 1.) By making such protections automatic, policymakers reduce the burden on consumers to appear in court and file complex legal paperwork to request relief that is already afforded to them. Automatic protections also make garnishments less burdensome for the banks and credit unions that must process them.

Policymakers in states across the country have an opportunity to address issues related to debt collection lawsuits. Legislators can take steps to ensure that consumers know that they’re being sued and understand why. They can also make it easier for these individuals to participate in their cases and ensure that people involved in debt lawsuits are actually receiving the protections afforded to them under the law. Enacting such reforms would allow for fair application of the law in debt collection lawsuits across the country.

Ruth Rosenthal is the project director and Giulia Duch Clerici is a senior associate with Pew’s courts and communities project.