Law360 (November 16, 2022, 8:27 p.m. EST) — Debt collection lawsuits “dominate” Michigan’s civil court system and the state should do more to help debtors defend themselves in court, a lawsuit said Wednesday. Michigan Supreme Court.
The study also found racial disparities in debt collection cases and said Michigan trails its peers in consumer protection during the debt collection process.
The report by the Michigan Supreme Court’s Justice for All Commission found that debt collection cases accounted for 37% of all civil court filings in state district courts in 2019, the most recent year for which the data was analyzed. It was the second most common type of case after trafficking cases.
Growth in the volume of debt collection lawsuits in recent years “has been driven almost entirely by corporate debt buyers,” the commission found.
Third-party debt-buying companies are increasingly the plaintiffs behind debt collection lawsuits in Michigan courts and are responsible for 60% of debt collection filings, according to the report. The top three filers by volume in recent years have been third-party debt buyers: Midland Funding filed 20% of Michigan debt collection cases from 2017 to 2019, Portfolio Recovery Association 12% and Jefferson Capital Systems 8.8%, according to the Commission.
The tendency for debt buyers to sue presents “unique concerns,” the commission wrote, because consumers do not have a direct relationship with the debt buyer. When contacted by a debt buyer before or during legal action, a consumer may not recognize the name of the business, may believe that the debt buyer’s communications are a scam, and may ignore attempts. recovery and court documents until it is too late and a default judgment is rendered. . Default judgment is the result in 68% of Michigan debt collection cases, usually because the defendant has failed to respond, according to the study.
Looking at geographic data, the report found that two to three times as many debt collection lawsuits are filed against consumers in majority black neighborhoods compared to majority white neighborhoods at all income levels.
“More information is needed to understand the reasons for these disparate deposit rates,” the commission said, pointing to possible responses to racial disparities in access to low-interest credit and generational wealth disparities that mean black debtors are less likely to be 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, according to the report. Applicants only need to provide an account number and balance owing, with no requirement to provide documentation supporting the amount owed or proving ownership of the debt, unlike in Illinois, Indiana, and Minnesota.
“Other states in the region require documentation such as the original agreement or a monthly billing statement showing that the defendant used the account in question, the balance owing with charges and interest broken down, and documentation showing the chain ownership of the debt if it were sold to a debt buyer,” the report said.
According to the report, less than 0.5% of defendants in debt collection cases had legal representation, while 96% of plaintiffs were represented by a lawyer.
The debts at issue included all non-mortgage consumer debt, including amounts owed on credit cards, auto loans, medical bills and payday loans. The median amount sought in debt collection lawsuits was $1,600 in 2018-19, according to the study.
After the default judgment is issued, judges will grant garnishment in 78% of cases, most often on state tax returns, but also on wages, bank accounts and other income.
The fact that so many cases end in default judgment, with serious consequences such as wage garnishment, raised red flags for the commission about “whether consumers actually received proceedings, whether the complaint and the summons provided meaningful and understandable notice to consumers of the claims against them, and whether consumers understood” the legal process.
The commission recommended a series of policy changes that would give defendants more time to serve notice of prosecution and expand options for mail and alternative methods of service; increase the amount of information a complainant is required to include in the complaint; and revising court forms to make them easier to understand for self-represented litigants.
“This groundbreaking research will help us improve the way trial courts handle debt collection cases to make the process easier to navigate and more fair, efficient and consistent,” said commission chair, the Michigan Supreme Court Justice Brian Zahra in a statement accompanying the release of the report. .
The commission also said it would work on pilot programs offering alternatives to litigation, describing debt collection lawsuits as a costly and time-consuming “lose-lose-lose” situation for creditors, consumers and the courts.
“With debt collection representing a substantial and growing portion of caseloads, this work is a critical step toward our goal of a civil justice system accessible to all,” 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 issue of debt collection practices.
The report was compiled with help from The Pew Charitable Trusts and data advisory firm January Advisors.
–Edited by Jill Coffey.