Debt Collection Practices

Debt collection cases increasingly dominate state civil court caseloads. Currently, debt collection is the most common type of civil case. This increase corresponds to rapidly rising debt loads, high credit card fees, and the economic downturn. Studies show that consumers who have an attorney are more likely to win their case or reach a mutually agreeable settlement. Yet fewer than 10 percent of consumers have such representation, compared with nearly all plaintiffs. Debt collection lawsuits exact a heavy toll on consumers. This includes accrued interest and court fees, garnishment of wages, a ban on accounts, seizure of personal property, and even incarceration (see also Legal Services).

State attorneys general, the Federal Trade Commission, and the Consumer Financial Protection Bureau (CFPB) have received longstanding and substantial complaints about abusive debt collection practices. In 2023, more than half of all debt collection complaints to the CFPB dealt with attempts to collect on a debt that the consumer did not owe.

As debt collection activities have increased, so have complaints about debt collection practices. This can be tied to the growth of the debt-buying industry. Debt buyers are companies that buy large portfolios of defaulted debt for pennies on the dollar. They can attempt to collect on questionable, stale, or discharged debt. They generally receive little or no supporting documentation to prove a debt is owed.

Debt buyers use practices and procedures that can lead to abusive debt collection. These include filing false and fraudulent affidavits in court, knowingly suing the wrong consumer (or for the wrong amount), filing lawsuits despite the expiration of the statute of limitations, and selling or reselling disputed or discharged debt. Debt buyers also pursue debts that were discharged in bankruptcy, resulted from identity theft, or belonged to a decedent.

Unfortunately, most alleged debtors do not appear in court to defend themselves. They may not receive proper notice, do not understand their legal rights, are in ill health, do not have transportation, cannot skip work, or fear going to court because they do not understand the process. The vast majority of debt collection actions end in default judgments entered by the court. Often this occurs without any evidence that the alleged debtor owes the debt or that the amount claimed is valid. Typically, a debt buyer does not even have access to the information needed to support a claim in litigation, including the contract obligating the debtor to pay, documents showing ownership of the debt, or an itemization of the amounts claimed.

The CFPB’s updated debt-collection rules went into effect in 2021. Among the provisions:

• The rules enable up to seven attempted phone calls per outstanding debt per week. Consumers with more than one outstanding debt could receive dozens of calls a week.
• Debt collectors are allowed to reach and correspond with consumers by text or email. The rules also permit the use of private messages on social media platforms to try to locate a consumer who may owe a debt. They do not, however, allow debt collectors to collect the debt itself using social media platforms. Although legitimate debt collectors may seek to use newer communication channels, these same channels could also be used to commit debt collection scams and fraud.
• Debt collectors are prohibited from reporting information about a debt to credit bureaus without first notifying the consumer. Debt collectors also may not sell or transfer a debt that has already been resolved. Once a debt is beyond the statute of limitations for collections lawsuits, the debt collector is not permitted to sue or threaten to sue over that debt. However, it may still attempt to collect it voluntarily.

Asset protection: The seizure of a family’s wages and other assets in a debt collection action can put that family in a dire financial situation, potentially leaving it destitute. As such, every state, the District of Columbia, and the U.S. Virgin Islands has asset exemption laws. These laws are intended to protect specific assets and income from being seized by creditors during debt collection or bankruptcy proceedings. The laws, which vary by state, aim to preserve access to basic necessities while preventing abuses of this system by debtors with high levels of wealth. Protected assets typically include a primary residence, basic household goods, a car, and necessary clothing. However, the existing state asset exemption laws do not adequately protect debtors. The National Consumer Law Center has found that none of the existing laws meets basic standards to protect at least subsistence wages and essential property needed to help consumers continue to support themselves and their families.