June 14, 2013

Debt collecting thrives in sewer

After Superstorm Sandy, an entrepreneur in Queens named Brian Pindell applied for a U.S. Small Business Administration loan to help restore his ruined graphic and Web-design firm.

Much to his disappointment, he was turned down. But it was the group's reason that really threw him for a loop: A credit check showed two judgments had been entered in court against him for failing to pay bills. That came as news to Mr. Pindell.

"I didn't even know I had ever been sued," he said.

Mr. Pindell is one of thousands of New Yorkers targeted by debt-collecting outfits who engage in "fraudulent and deceptive" practices to secure court judgments against debtors, according to a report released Monday by New Economy Project, an advocacy organization. The report said that the judgments are made even though people like Mr. Pindell frequently aren't notified of the legal action against them, so they can't show up in court to contest the matter. Not only are debtors unaware that they face litigation, but in some cases, the outfits charged with notifying them falsely state that debtors have in fact been formally served.

In legal circles, the term for this kind of activity is "sewer service." Think of it as a kissing-cousin to robo-signing in the mortgage foreclosure world.

The spread of sewer service mirrors the growth of the debt collection business, which over the past 25 years has grown alongside the explosion in credit-card and other kinds of consumer debt.

Debt collectors specialize in buying debts so delinquent that banks, credit-card issuers or other lenders have given up on them. The debt collectors buy the loans for pennies on the dollar, then try to wrangle whatever they can from consumers.

One way to do that is to make a lot of not-so-friendly phone calls, but that only goes so far. So, another tactic is for the debt-collecting company to hire a law firm that files a lawsuit against the debtor. Of course, it's a lot easier to prevail in court if the defendant doesn't know he's the target of a legal action.

The folks at the New Economy Project, who have studied this corner of finance for many years, say that debt collectors filed nearly 200,000 lawsuits against debtors in New York last year. These suits accounted for 80% of all default judgments entered, suggesting that debtors are seldom showing up to fight the cases against them. The report added that debt collectors "virtually never" prevail in contested cases.

New Economy Project is calling for the state legislature to pass a law assuring "fundamental due process" for New Yorkers sued by debt collectors and is urging the New York state Office of Court Administration to tighten its rules. It also called on the state Department of Financial Services and Attorney General's office to take "aggressive enforcement action" against debt collectors who violate state laws.

New Economy Project has filed a class-action suit against Leucadia National Corp., a large Wall Street investment firm, alleging it and other defendants cheated tens of thousands of New Yorkers with sewer service and other abusive debt collecting practices. Leucadia won't comment on the litigation, but said in its annual report that it would be willing to pay $20 million to settle the matter.