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Automated Debt-Collection Lawsuits Engulf Courts

Andrew Martin|The New York Times
Tuesday, 13 Jul 2010 | 11:03 AM ET

As millions of Americans have fallen behind on paying their bills, debt collection law firms have been clogging courtrooms with lawsuits seeking repayment.

Few have been as prolific as Cohen & Slamowitz, a Woodbury, N.Y., firm that has specialized in debt collection for nearly two decades. The firm has been filing roughly 80,000 lawsuits a year.

With just 14 lawyers on staff, that works out to more than 5,700 cases per lawyer.

How is that possible?

The answer to that question is at the heart of a growing debate over the increasing use of the nation’s legal system to collect on bad debts.

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Frances Twitty | Getty Images
Gavel

Like many other firms, Cohen & Slamowitz relies on computer software to help prepare its cases. While many of the cases represent legitimate claims, critics say the lawsuits are too often based on inaccurate or incomplete information about the debtor or the amount owed.

Already, some state legislators and judges have tried to crack down on collection lawsuits, and on Monday, the Federal Trade Commission weighed in, saying the system for resolving disputes over consumer debts was broken and in need of “significant reforms.”

The commission, which says debt collection is its top consumer complaint, proposed that states require collectors to include more information about debts in their lawsuits, including a breakdown of the current balance by principal, interest and fees, and the relevant terms of the original credit contract, if not the contract itself.

The agency also urged states to adopt measures to make it more likely that consumers would show up in court to defend themselves; currently, most do not, resulting in default judgments.

“We are pushing very hard to make certain that debt collectors have sufficient substantiation, particularly when a consumer challenges the debt,” said David Vladeck, director of the commission’s Bureau of Consumer Protection.

The commission, which has limited authority to write debt collection rules, urged states to take action because most collection cases are filed in state courts.

The litigation boom has been propelled by fundamental changes in the way debts are collected, particularly for credit cards. In recent years, credit card companies have increasingly sold off debt they have considered uncollectible to debt buyers, usually for 5 cents or less on the dollar.

The debt buyers, in turn, may try to collect the debt themselves using traditional practices like sending letters or making phone calls to a consumer to try to arrange a payment plan. Increasingly, they are choosing to sue instead.

Collection law firms are able to handle such large volumes of cases because computer software automates much of their work. Typically, a debt buyer sends a law firm an electronic database that contains various data about consumers, including name, home address, the outstanding balance, the date of default and whether interest is still accruing on the account.

Once the data is obtained by a law firm, software like Collection-Master from a company called Commercial Legal Software can “take a file and run it through the entire legal system automatically,” including sending out collection letters, summonses and lawsuits, said Nicholas D. Arcaro, vice president for sales and marketing at the company.

No group has definitive statistics on debt collection lawsuits, but federal regulators, collection lawyers and judges say the numbers have increased and are straining the court system.

Most consumers fail to show up in court, and those who do rarely have a lawyer. A court judgment gives debt buyers the ability to collect on the debt through actions like wage or property garnishment.

“What they are hoping to recover is the full dollar on some of it,” said Robert J. Hobbs, deputy director of the National Consumer Law Center, an advocacy group. “On most of it, they are hoping to recover 40 or 50 cents on the dollar. And they are hoping to do it with as little work as they can.”

Critics say the business model for some debt buyers and law firms relies on such huge volumes of legal actions that mistakes and abuses are inevitable, in part because the lawsuits are often based on little more than a defendant’s name, address and alleged balance.

“It’s the factory approach to practicing law,” said Richard Rubin, a New Mexico lawyer who represents consumers against debt collectors.

Wrong target

Lawsuits are sometimes filed against the wrong people, critics say. Other times, they say, the amount owed is incorrect or includes questionable fees and interest that has been added to the balance.

In addition, it is not always clear if the debt buyer filing suit legally owns the debt, since debt portfolios are often sold several times.

Some collection lawyers complain that new requirements being imposed are holding them to higher standards than even the original creditors.

“In actuality, it’s impossible to comply with,” said Pedro Zabala, a North Carolina lawyer, speaking of a law passed last fall that requires more documentation to file suit.

Fred N. Blitt, the president of the National Association of Retail Collection Attorneys, which represents more than 700 law firms, said the increase in collection cases was an inevitable result of the huge number of people who are not paying their bills. Given the volume of cases, Mr. Blitt maintained that mistakes were few.

“The reality is, if people owe the money, they should pay it,” he said.

Cohen & Slamowitz declined to be interviewed for this article. In a 2009 deposition for a case accusing Cohen & Slamowitz of pursuing a debt that had already been paid, a partner at the firm, David A. Cohen, said the firm had 14 lawyers, though it also hired numerous outside lawyers to appear in court on a per diem basis. It also employed 30 to 40 legal secretaries and paralegals and about 60 people trying to collect debts, he said.

The firm filed 59,708 cases in 2005, 83,665 in 2006, 87,877 in 2007 and 80,873 in 2008, records from the lawsuit show.

As the case load has increased, some state legislators and judges have started to demand more information on the debt.

In addition to the new law in North Carolina, which requires third-party debt collectors to provide more proof of the debt, like an itemization of charges and fees, some local judges are challenging lawyers who are not prepared to back up their claims.

At a civil court hearing in Brooklyn in March, Judge Noach Dear demanded documents from Cohen & Slamowitz supporting its claim that Herman Johnson of Brooklyn owed $3,797.27 in credit card debt. Mr. Johnson disputed the claim.

“What proof did you have that this is the true gentleman that you were trying to pursue?” the judge asked David Robinson, a lawyer for Cohen & Slamowitz, according to a transcript.

“Just his Social, his date of birth, and his address and the account,” Mr. Robinson said.

“That’s all you have?” the judge said. “So if you have somebody’s Social number, date of birth and address, you could sue them without any other information?”

Mr. Johnson’s case was dismissed, and Judge Dear last month issued an order requiring, among other things, that Cohen & Slamowitz provide further proof of a debt if a defendant challenged the firm’s claim.

In an interview, Judge Dear said he did not think the order would necessarily result in a large drop-off in lawsuits. But, he said, given Cohen & Slamowitz’s size, he hoped it would persuade other law firms to follow suit.

“I think personally it will weed out the cases that are no good, and then we’ll get the defendants that truly do owe a debt,” he said.