Reforms pushed as the number of debt collection cases in Me. grows
Law360 (Nov. 16, 2022 8:27 p.m. EST) — Debt collection claims “dominate” Michigan’s civil court system, and the state should do more to help debtors defend themselves in court, a Michigan Supreme Court commission said Wednesday .
The study also found racial inequalities in filing debt collections and said Michigan lags behind its peers in consumer protection during the collections process.
The report The Michigan Supreme Court’s Justice for All Commission found that collections cases accounted for 37% of all civil court filings in state district courts in 2019, the most recent year for which data was analyzed. They were the second most common type of case filed after traffic cases.
The growth in the volume of collections in recent years “has been driven almost exclusively by collection agencies,” the Commission noted.
Third-party debt-buying companies are increasingly the plaintiffs behind debt collection suits in Michigan courtrooms and are responsible for 60% of debt collection requests, the report said. The three top-grossing claimants in recent years have been third-party buyers: Midland Funding filed 20% of Michigan collections from 2017-2019, Portfolio Recovery Association 12%, and Jefferson Capital Systems 8.8%, according to the commission.
The trend for debt buyers to take legal action raises “unique concerns,” the commission wrote, because consumers have no direct relationship with the debt buyer. If a consumer is contacted by a debt buyer before or during legal proceedings, a consumer may not recognize the company’s name, may believe the debt buyer’s communications to be fraudulent, and ignore collection attempts and court documents until it is too late and a default judgment is reached he goes . 68% of debt collection cases in Michigan result in a default judgment, usually because the defendant failed to respond, the study found.
Looking at the geographic data, the report found that two to three times more collection claims are filed against consumers in black majority neighborhoods than in white majority neighborhoods across all income levels.
“More information is needed to understand the reasons for these disparities in filing rates,” the commission said, pointing to possible answers related to racial disparities in accessing soft credit and disparities in generational wealth that mean black borrowers are less likely to do so are able to get help from a family member to repay a loan.
Compared to neighboring states, Michigan also has more lenient pleading requirements for a debt collector to file a claim in district court, the report said. Plaintiffs are only required to provide an account number and a balance due, with no documentation required to show the amount owed or prove ownership of the debt, as is required in Illinois, Indiana and Minnesota.
“Other states in the region require documentation such as the original agreement or a monthly statement showing that the accused used the account in question, the balance due with itemized fees and interest, and documentation showing the chain of ownership of the debt, if any it was sold to a debt buyer,” the report said.
Less than 0.5% of defendants in debt collection cases had legal counsel, according to the report, while 96% of plaintiffs were represented by a lawyer.
The debt in question was all non-mortgage consumer debt, including amounts owed on credit cards, car loans, medical bills, and payday loans. The average amount claimed in debt collection lawsuits was $1,600 in 2018-2019, the study said.
Once a default judgment is issued, judges will grant an attachment 78% of the time, mostly on state income tax returns, but also on wages, bank accounts and other income.
The fact that so many cases end in a default judgment, with serious consequences such as garnishment of wages, raised red flags for the Commission as to “whether consumers actually received service of process, whether the complaint and subpoena provided meaningful and understandable notification to consumers of the claims.” represented against them and whether consumers understood the court proceedings.
The commission recommended a number of policy changes that would allow more time for service of defendants with a complaint and expand options for mail and alternative methods of service; increasing the amount of information a plaintiff must include in the complaint; and revise the court forms so that they are easier to understand for self-represented litigants.
“This groundbreaking research will help us improve how courts handle collections cases to make the process easier to navigate and fairer, more efficient and more consistent,” said the commission’s chairman, Michigan Superior Court Justice Brian Zahra , in a statement accompanying the report’s release.
The commission also said it will work on pilot programs that offer alternatives to litigation, describing debt collection processes as a costly, time-consuming “lose-lose-lose” situation for creditors, consumers and the courts.
“Given that debt collection accounts for a significant and growing proportion of cases, this work is a critically important step toward our goal of an accessible civil justice system,” said commission vice chair Angela Tripp, director of Michigan Legal Help .
Tripp called on “other branches of government” to also take action to address the problem of debt collection practices.
The report was produced with support from The Pew Charitable Trusts and data consultancy January Advisors.
–Edited by Jill Coffey.
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