Rules Apply to Everyone: Even Zombies
Image via The Debt Settlement Agency.
By Karla Gilbride
Imagine that you try to buy something using your debit card and the transaction is declined. You call your bank to find out what’s going on and are told that your account has been frozen because a judgment has been entered against you and the court is preparing to garnish your wages. And to top it all off, the lawsuit against you was brought by a company you never heard of to collect a credit card debt you thought you paid off more than five years ago.
Sound like a bad dream or a Franz Kafka novel? Maybe so, but it’s a reality that a growing number of consumers are facing because of the multi-billion-dollar zombie debt industry.
Roberta Bordeaux experienced zombie debt firsthand in April of 2014, when she learned that Midland Funding, a debt buyer, was suing her in New Jersey state court to collect $1,018 she supposedly owed for Dell computer products she had bought and paid for between 2005 and 2009. And she has plenty of company: Encore Capital and its subsidiaries, including Midland Funding, filed more than 239,000 lawsuits in New York State between 2007 and 2012 and reaped $564.7 million in legal collections in that state in 2013 alone.
Very few consumers respond to these lawsuits and even fewer hire lawyers to defend them: in a study of 4,400 cases brought by debt buyers in Maryland in 2009 and 2010, 85 percent of consumers did not respond (and debt buyers won in 73 percent of those cases) whereas only 2 percent retained counsel (in those cases, the debt buyer obtained a judgment only 15 percent of the time). Bordeaux is among the small group of consumers who is pushing back: Unlike the 49 other people that Midland Funding sued in Bergen County the same day it sued her, 42 of whom have already had default judgments entered against them, Bordeaux hired an attorney, Yongmoon Kim of the Kim Law Firm. And with the assistance of Public Justice, she is taking her case to New Jersey’s court of appeals.
Debt buyers are companies that purchase portfolios of defaulted credit card, retail store and utility accounts that the original creditors have given up on collecting and want to get off their books. Creditors sell these portfolios of bad debt for pennies on the dollar. A 2013 study by the Federal Trade Commission found that the average price paid by debt buyers was four cents per dollar, with older debts being even cheaper. Debt buyers then attempt to collect the full value of the debt.
Debt buying is big business; in 2013, the three largest publicly traded debt buyers — Encore Capital, Asta Funding and Portfolio Recovery Associates — spent more than $1.2 billion to buy portfolios of debt worth more than $85 billion, according to regulatory filings. And it’s also extremely profitable; Encore Capital reported assets of $3.6 billion as of June 2014 and a record-high earnings per share in the third quarter of 2014.
But the costs to consumers are real, and well documented. The FTC’s 2013 report pointed out that debt buyers only obtain electronic records listing basic information about the alleged debts in the portfolio but usually don’t get the actual account statements or other records that would show whether a debt was previously disputed by the consumer. And the portfolios are sold with a disclaimer stating that there’s no warranty as to the accuracy of any of the information they contain.
So it’s not surprising that many consumers report being chased by a debt buyer for a debt they previously paid off, or had already disputed with the original creditor because it was the result of identity theft or clerical error.
Perhaps even worse, because the debts are so old and the addresses given to debt buyers are often outdated, many people don’t even know that a collection lawsuit has been filed against them until after they fail to appear and the court enters a default judgment in the debt buyer’s favor. Once a judgment is entered against a consumer, it can wreak havoc with her credit for years and can lead to wage garnishment and freezing of assets. Indeed, of 237 clients represented by a New York legal aid organization between January 2008 and June 2009, 65 of them, or 27.3 percent, first learned of the lawsuit when their wages were garnished or their bank accounts restricted.
One of the most tragic things about the high rate of judgments against consumers in these cases is that there are lots of good defenses—most consumers just don’t know about them. For one thing, many of the zombie debts being sued on are so old that the statute of limitations has expired, meaning that the debt buyer no longer has a right to sue to enforce them. New York Attorney General Eric T. Schneiderman recently obtained a settlement against Encore Capital that required it to vacate 4,500 judgments it had obtained on such time-barred debts, for a total of nearly $18 million. The settlement also noted that Encore and its subsidiaries, including Midland, obtained many of these judgments using the infamous practice of robosigning, where employees signed hundreds of affidavits per day claiming to have personal knowledge of accounts about which they actually knew nothing.
Bordeaux made this same argument of timing in response to Midland’s suit against her. She filed a counterclaim against Midland contending that the company had violated the federal Fair Debt Collection Practices Act by suing on a debt outside the applicable statute of limitations.
Apparently not liking to litigate against someone who actually fought back, Midland sought to have the case moved to binding arbitration, where any decision would not be public. The judge granted Midland’s request despite the fact that Midland was unable to produce any evidence that Bordeaux had ever agreed to arbitration. (The only evidence Midland came up with to support its motion to arbitrate was an unsigned, undated, two-page excerpt of a longer document that even the judge said he could not read.)
Bordeaux appealed the order sending her case to arbitration. We, with co-counsel Yongmoon Kim, argue that Midland waived its right to arbitrate by filing the lawsuit in court against Bordeaux and by filing tens of thousands of other such lawsuits in New Jersey courts every year. We also argue that debt buyers like Midland must be held to the same standard as any one else for coming forward with admissible evidence to support their claims and that Midland had so far failed to do this to enforce either the arbitration agreement or the underlying debt against Bordeaux.
As one New York judge aptly put it in an opinion, debt buyer litigation is a “game of odds” in which the companies churn out thousands of lawsuits based on scant evidence, counting on most of them to go uncontested.
Public Justice hopes to change this status quo, in New Jersey and throughout the country, by letting Midland and other debt buyers know that if they come into court to collect a debt, they will be expected to follow the rules of evidence and actually prove their case the same as anyone else.