New Study Finds Serious Shortcomings in New York Debt Collection Cases

The report, by the New Economy Project, is titled The Debt Collection Racket in New York: How the Industry Violates Due Process and Perpetuates Economic Inequality.  Some excerpts:

Over the past decade, the number of debt collection lawsuits filed in New York’s courts has exploded, with upwards of 200,000 cases filed in 2011 alone. Creditors and debt buyers engage in an array of fraudulent and deceptive debt collection practices that siphon billions of dollars from New York’s low-income neighborhoods and communities of color. Abusive debt collection falls along a continuum of discriminatory financial practices that pervade low-income neighborhoods and communities of color, long targeted by high-cost and predatory financial services providers.

The creditors and debt buyers that bring these lawsuits routinely engage in "sewer service" — falsely claiming to the courts that they have served people with court papers. They also engage in rampant "robo-signing" — mass-producing fraudulent documents that they then submit to the courts. Debt buyers — companies that buy old, charged-off debts for pennies on the dollar — file more than half of all debt collection lawsuits in New York, and systematically lie to the courts about key information that they do not in fact have.

Creditors and debt buyers engage in this fraud to obtain automatic, or "default," court judgments, which they then use to freeze people’s bank accounts or garnish their wages. The judgments also appear on people’s credit reports, blocking them from housing, employment, and credit access. Consequences have been especially dire for low-wage workers, elderly and disabled New Yorkers on fixed incomes, single mothers, and domestic violence survivors — and now also New Yorkers affected by last year’s hurricane.

Debt collection abuses stem largely from structural problems related to the buying and selling of old, charged-off debts. When selling the debts, creditors, including the country’s largest banks, disclaim virtually all liability for inaccuracies in the scant information they provide. When purchasing debts, debt buyers obtain only extremely limited information and cannot substantiate the debts in court.

The courts have long been on notice that debt buyers routinely fail to submit the legally-required documentation, and bear significant responsibility for allowing debt buyers to get away with fraud. Although New York City courts recently have taken some corrective measures, the courts continue to grant debt buyers hundreds of thousands of default judgments in violation of New York law.

And here are some claims from the report that are particularly interesting:


Debt buyers virtually never prevailed in contested cases, but relied on winning cases by default or by intimidating unrepresented people into making settlement agreements.  

In 9 out of 10 cases, an employee of the debt buyer — who had no connection to the original creditor — fraudulently testified to facts that only the original creditor could possibly know.

[N]o application by a debt buyer for a default judgment complied with New York law. The court nevertheless improperly granted default judgments on 97% of the applications.

[W]e observed significant differences in outcomes between lawsuits filed against New York City residents and those filed against New Yorkers outside New York City. New York City courts had a lower default judgment and higher answer rate than non- NYC courts. This difference is likely attributable to two key factors: First, people sued in New York City are more likely to receive notice due to an additional notice requirement that the New York City Civil Court adopted in 2008. Second, New York City residents benefit from a range of free programs — some offered by the court itself and some by the private bar or legal services offices — designed to assist unrepresented litigants sued by debt collectors. Unfortunately, few similar programs exist outside New York City.

This last finding suggests that consumer benefit from the consumer protection laws referred to in the paragraph.

0 thoughts on “New Study Finds Serious Shortcomings in New York Debt Collection Cases

  1. Louise says:

    The hoods known as “debt collectors” should be classified as “criminals” and prosecuted as such, just like racketeers. This mafia should be made illegal and vendors of any denomination (credit cards included) should handle their own debt collection.
    The burden involved will prompt such vendors to be a little more explicit and fair in their transactions with customers, then there may be a lot less “debts” to collect.
    CFPB PLEASE take note and start a petition to create such a law. I will be the first to sign it.

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