May 9, 2014
Top State Judge Tightens Rules on Debt Collection
New York State’s chief judge announced on Wednesday that he would institute new court rules and protocols that would make it more difficult for debt collection companies to win default judgments and would offer more protection to debtors.
In a speech in Albany, the chief judge, Jonathan Lippman, said the more than 130,000 debt collection lawsuits filed each year in the state were rife with problems that undermine the due-process rights of debtors, the majority of whom lack legal representation.
As a result, many debtors are never served papers and learn they have a judgment against them only when their bank accounts are frozen or their wages are garnished, the judge said. In addition, he said, the mass-produced lawsuits all too often rest on flimsy documentation because the debts have been bought and sold several times on a vast secondary market.
“You wind up with big judgments against people that half the time have no basis in fact,” the judge said in an interview. He said the changes were intended to make debt collectors “reach certain evidentiary standards under the law.”
Consumer lawyers have long criticized the legal tactics of debt buyers, who purchase large portfolios of delinquent credit card or auto-loan debt, often for pennies on the dollar, then file multiple suits with boilerplate language and a spreadsheet of the debts. Such suits usually lack proper documentation of each debt’s origin, history and amount.
Those companies also excel at what Judge Lippman called the “nefarious practice of sewer service,” consumer lawyers say. That is when debt collectors falsely claim the debtor has been served with papers and then win a default judgment when the person fails to come to court. More than half of the consumer credit cases in New York State end in default judgments.
The new rules would make those practices nearly impossible, Judge Lippman said. To win a default judgment, creditors will now be required to submit documents detailing the chain of ownership of the debt, as well as affidavits from people having personal knowledge of that history.
“No more robo-signing,” Judge Lippman said. “No more affidavits riddled with hearsay allegations.”
The courts will also now require a creditor to attest in a sworn statement that the statute of limitation has not expired on a debt. To cut down on “sewer service” abuses, creditors will now have to give the court a stamped envelope bearing the debtor’s address, and the court will send out a notice of the lawsuit, Judge Lippman said.
The state’s administrative board of the courts, led by Judge Lippman, has approved the new rules and published them for public comment. They are expected to go into effect on June 15.
Mark Schiffman, a vice president at ACA International, the trade association for the debt collection industry, said debt buyers were hamstrung in legal proceedings by the documentation the original lenders provided them. Still, he predicted debt collection businesses in New York would adapt to Judge Lippman’s reforms, which will not be retroactive.
“We have got to be careful that none of this takes consumers off the hook for rightfully owed debts,” Mr. Schiffman said.
But Susan Shin, a staff lawyer for New Economy Project, a nonprofit that provides aid to debtors, said that because the business model of many debt-buying companies depended on filing a large number of lawsuits and winning default judgments, the companies did not always do enough due diligence to ensure that mistakes were not made.
Virginia Jenkins, 75, a retired department store employee from Crown Heights, Brooklyn, received an alarming pair of letters in March: JPMorgan Chase informed her that the bank account containing her life savings had been frozen; Midland Funding, a debt buyer, wrote to say it had a court judgment against her for $6,000.
Mrs. Jenkins had never borrowed that amount on her credit cards, which she paid off religiously, her family said. Neither had she ever been served with court papers, even though Midland Funding later claimed in court that it had delivered papers to a middle-aged woman at her address.
“She didn’t know what it was about,” Ms. Jenkins’s daughter, Michelle, said. “Her first thought was, ‘I have lost everything.’ ”
Michelle Jenkins sought help for her mother from a legal services organization. A month later, a court ruled that Midland Funding’s evidence was too thin, threw out the judgment and dismissed the suit.
“You have creditors who know the law like the back of their hand, who know how to manipulate it,” Michelle Jenkins said. “And you have people that don’t know these things.”