Hounded For Old Debt, And Losing The Right To Fight Back
December 23, 2015

This story is about practices that affect anyone who's ever signed a consumer contract, and just as we saw in the mortgage foreclosure racket, consumers have no practical rights anymore. Via the New York Times:

The Federal Trade Commission, which examined 5,000 portfolios of debt purchased by the nation’s largest debt buyers, found that only 12 percent included documentation.

The debt collectors do not just use the courts to collect on the money, they flood them. In 2014, the industry filed roughly 20,000 lawsuits in Maryland and more than 67,000 in New York, according to court records.

Philip S. Straniere, a civil court judge in Staten Island, called some of the cases that crossed his desk “garbage.” Some debt collectors, Judge Straniere said, have sought to recoup payments from the wrong person.

Little of that matters, because many defendants do not show up to defend themselves. Some never read nondescript legal notices informing them of the lawsuits. Others who do are too intimidated or ill-equipped to go to court.

Once it begins, the litigation machine is virtually impossible to stop. When defendants are absent, judges have little choice but to find in favor of the debt collectors, according to interviews. Industry consultants estimated that collectors win 95 percent of the lawsuits.

Their practices have attracted state and federal scrutiny. In September, the Consumer Financial Protection Bureau fined Encore and a second debt collector, the PRA Group, for trying “to collect on debts they should have known were inaccurate.”

Mr. Call, Encore’s general counsel, said that litigation was “always a last resort” and was used only to collect on less than 5 percent of the debts the company owned. He added that, like the C.F.P.B., Encore wanted “to ensure that consumers are treated fairly.” A spokeswoman for the PRA Group declined to comment.

But even when borrowers bring class-action lawsuits over practices that regulators have determined to be illegal, the cases are being thrown out because of arbitration clauses, court records show. In Maryland, Midland Funding reached a $1.2 million settlement with the state’s financial regulator, which found that the company had “engaged in unlicensed collection,” the very issue that Mr. Cain could not bring to court. In Kansas, borrowers did not fare any better when they sued Midland Funding, accusing the company of not being properly licensed. Mr. Call said Midland was “appropriately licensed.” A judge granted the company’s motion to compel arbitration.

Once their class actions were dismissed, few plaintiffs pursued arbitration, data analyzed by The Times shows. Encore and its subsidiaries faced 38 arbitration cases from 2010 to 2015 and the PRA Group faced 15, the data shows.

Fred W. Schwinn, a consumer lawyer in San Jose, Calif., thought he had a winner when he brought a class action on behalf of a woman who said she had been improperly sued to collect an old credit card debt. Predictably, Mr. Schwinn said, the debt collector, a unit of SquareTwo Financial, asked the judge to order the case into arbitration.

But Mr. Schwinn discovered an agreement that the SquareTwo unit had entered with the credit card company from which it bought his client’s debt. The agreement stated that the debt collector “shall not use arbitration for collection of debt.”

The judge in the case still ruled in the debt collector’s favor, saying the agreement did not prevent the SquareTwo unit from using arbitration clauses when facing lawsuits from consumers, as opposed to when it was trying to collect those consumers’ debts.

Such decisions are leading lawyers to believe they may have found, in the words of one law firm, the “silver bullet” for killing off legal challenges. In an industry podcast, two lawyers discussed the benefits of using arbitration to quash consumers’ lawsuits. The tactic, they said, is emerging at an opportune time, given that debt collectors are being sued for violating federal law.

The beauty of the clauses, the lawyers said, is that often the lawsuit “simply goes away.”

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