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Study: bogus debts still plague Maryland courts and consumers

March 12, 2014
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Thanks to Yves Smith at Naked Capitalism, we have word today of an important analysis of 4400 debt collection lawsuits in Maryland by Peter A. Holland at the University of Maryland Francis King Carey School of Law.

Here’s Smith’s summary:

As readers presumably know well, in the overwhelming majority of cases, these are junk claims that could be beaten if the borrower had the means. In many cases, the debt is invalid by being too old (the statute of limitations has expired), previously discharged (the borrower actually paid it or it was wiped out in bankruptcy). And even when it might be valid, debt collectors can rarely meet the legal standards needed to enforce the obligation (which includes a copy of the original agreement with the borrower’s signature, the payment history that proves the amount owed, and the complete documentation to substantiate all the transfers of the debt from the original lender to the current holder). To add insult to injury, the debt collectors typically can’t begin to prove how the borrower came to owe the amount it says is due. But broke borrowers aren’t in a great position to pay legal fees.

This study is one of the few to look empirically at this flood of cases, and it’s more remarkable for the fact that Maryland has been at the forefront of reform in this field, having pushed back against the unscrupulous tactics debt buyers have used routinely for years in this and other states.

Only 20 percent of those sued for debts even respond, a figure that suggests that “sewer service”–the tactic of deliberately serving the wrong person or the wrong address, in order to get a default judgment, is alive and well.

From the abstract:

The study demonstrates that in debt buyer cases, (1) the vast majority of consumers lose the vast majority of cases by default the vast majority of the time; (2) consumers had no lawyer in ninety-eight percent of the cases; and (3) those who filed a notice that they intended to defend themselves without an attorney fared poorly, both in court and in out of court settlements.

Holland says the debt collection goes on “in a ‘shadow system’ with little judicial oversight.”

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    The financial crisis five years ago put many consumers in financial distress as millions lost their jobs, homes, or suffered other losses. According to the National Consumer Law Center, approximately 4.4 percent of consumers historically have fallen behind on their
    credit card payments (one to six months late); yet this figure increased to 6.6 percent by early 2009. By the end of 2009, banks charged off delinquencies over 180 days as “uncollectible” for 9.1 percent of their credit card loans, nearly triple the 3.4 percent rate from 2006.