You end up embroiled in a legal battle with the debt collector who has regaled everyone under the sun — your mother, your boss, your ex — with embarrassing details of your supposed financial messiness — and he ends up paying.
A mere revenge fantasy? Not necessarily, thanks to new attention being paid to a law that forces collectors who break the rules to pay the fees of consumers’ lawyers.
Because of the recession, big changes in the debt-collection industry, and a consumer-friendly provision in the law that puts boundaries on bill collectors’ conduct, Minnesota consumers who have suffered harassment are suing in federal court in record numbers. Local attorneys say they can barely file the suits fast enough to keep up with demand.
Lawsuits against debt collectors rising steadily
According to preliminary data obtained from U.S. District Court in Minnesota, the number of suits filed against third-party debt collectors has risen steadily during the last five years, from 116 in 2004 to 163 last year. And those aren’t even the debts people stopped paying when the recession hit: During the first quarter of 2009 alone, 104 lawsuits were filed.
Court statisticians in Minnesota don’t know how many similar suits are being filed in other jurisdictions, but Peter Barry, a Minneapolis attorney who represents consumers and who teaches “boot camps” on suing collectors for lawyers here and around the country, said filings are up nationwide.
“It’s clear to me that the recent uptick in FDCPA case filings is the result of three principal causes,” said Barry. “First, there’s a whole new group of well-educated and formerly well-heeled consumers who have become recently unemployed and understand their rights with regard to debt collectors. Second, there has been serious work done in the United States to educate attorneys in properly selecting and bringing these cases in federal court. Thirdly, paying for lawsuits brought by abused consumers is seen as the cost of doing business in the collection industry.
“The combination has resulted in some phenomenal and well-deserved jury verdicts against debt collectors,” Barry added.
None of the plaintiffs contacted by MinnPost wanted to discuss their debts publicly. And those whose cases have been resolved out of court explain that their settlements bar them from disclosing the outcome.
‘Turning tables’ relatively new phenomenon
Complaints about bill collectors go back as far as the concept of currency itself, but the phenomenon of debtors turning the tables on creditors who resort to unscrupulous tactics is relatively new.
In 1977, Congress outlawed all kinds of collection tactics, including calling debtors at odd hours, harassing them at work, disclosing their debts to others and threatening dramatic, if made-up, consequences, such as arrest or jail. To encourage private enforcement of the Fair Debt Collection Practices Act (FDCPA), lawmakers included a provision designed to make it attractive for lawyers to take on clients who have been harassed but may not be entitled to big monetary damages.
Consumers who win their suits are entitled to collect $1,000 in damages for each violation of the law they can document — ordinarily, not enough of a potential payday for an attorney to make harassed debtors into desirable plaintiffs. So the FDCPA contains a so-called fee-shifting provision: There’s some fine print, but in general the law says that regardless of the size of the plaintiff’s award, their lawyer is entitled to recover the cost of pursuing the suit as well as fees for the time spent on it.
“The FDCPA levels the playing field for consumers and allows them to retain world-class counsel to litigate what would otherwise be a nearly insurmountable claim,” said Barry. “This was as Congress intended.”
For the first couple of decades after the law was passed, filing such suits on behalf of consumers remained a sleepy legal specialty. Typically, creditors dealt with bad accounts by hiring an agency to collect as much as it could on a commission basis. Some collectors used ugly tactics, but most played by the new rules.
1990s S&L scandal spawns a new industry
In the wake of the savings and loan scandal of the early 1990s, the federal government sold off assets from failed financial institutions. Contrary to the common wisdom of the time, the buyers made money — enough of it to spark the birth of an entire industry. In 1995, debt buyers bought $12 billion in consumer debt; by 2004, the amount had grown to $77 billion, according to industry publications.
Because the companies pay pennies on the dollar for the delinquent accounts, they don’t have to collect much to turn a large profit. After a credit card company or another creditor makes an initial attempt to get consumers to pay, it bundles up the accounts and sells them. The buyer may keep them just a few months, passing the accounts they can’t collect on to another buyer. Many of the buyers are law firms that have figured out that collections are more profitable than pursuing debtors in court on behalf of creditors.
As it has grown, the industry has branched out, with agencies specializing in the collection of medical debt and even debts incurred by the dead. (Survivors usually have no legal obligation to pay a deceased loved one’s bills, but that doesn’t stop collectors from asking.)
As an unpaid debt travels down the food chain, the chance that a collector will break the rules goes up. Often the debts in question never existed, were paid or settled, or were discharged in bankruptcy. Collectors often don’t have enough information to weed out the debtors they should not call, or they just don’t care.
“Debt collectors no longer must use individually typed letters and manually dialed telephone calls to contact consumers,” the Federal Trade Commission, which regulates the industry, noted in a February report. “Collectors now are able to easily and relatively inexpensively mass-produce and send letters to debtors.”
At the same time, “Changes in database technologies have dramatically enhanced the ability of debt collectors to aggregate disparate pieces of information about consumers, thus making it cheaper and easier to locate and contact consumers,” the FTC found.
Frequently, collectors in possession of an aging account can’t meet one of the law’s most basic requirements: The ability to respond when a consumer asks them to “verify” the origin and status of the debt.
“If a consumer disputes a debt, the collector is required to obtain verification of the debt and provide it to the consumer before renewing its collection efforts,” the FTC reported. “Many collectors currently do little more to verify debts than confirm that their information accurately reflects what they received from the creditor. This is not likely to reveal whether collectors are trying to collect from the wrong consumer or collect the wrong amount.”
Add to this the fact that the recession means more people are hard-pressed to pay anything.
With recession, complaints against collectors mushrooming
In 2005, the FTC received more than 58,000 complaints about collectors. In 2008, the agency fielded nearly 79,000. The majority of cases involve collectors who push the envelope when it comes to telling debtors their rights or calling their workplaces when they’ve been asked not to, but the number of complaints for truly egregious tactics has mushroomed.
Last year, the FTC heard complaints from consumers who were threatened with arrest, the seizure of their assets or even with violence.
A review of cases filed in Minnesota courts include instances of collectors taking money electronically from accounts belonging to debtors’ children, calling debtors’ aging parents to demand that they pay, leaving detailed messages on office-wide voicemail systems, and threatening consumers with jail time.
The ACA International (the Association of Credit and Collection Professionals), headquartered in Edina, has 3,500 members nationwide. The vast majority of collectors obey the rules, according to spokesman John Nemo. “We estimate there are close to a billion contacts a year between debt collection agencies and consumers,” said Nemo. “One complaint is too many — we’re not trying to excuse unethical behavior. [But] the bad actions are always going to get the lion’s share of the attention.”
Filings in cases that ended up in Minnesota courtrooms show attorneys’ fees can range from a couple of thousand dollars to tens of thousands. In 2000, a judge awarded a consumer $1,000, the maximum damages she was entitled to, but awarded her attorney, Thomas Lyons Jr., more than $44,000, noting that the case required so many hours of legal work because the law firm defendant chose to argue that the obligations arising from writing a bad check did not constitute a debt under the FDCPA. A year earlier, a judge awarded the attorneys in a class-action case more than $98,000.
In the past, the ACA has lobbied Congress to put limits on the fees plaintiffs’ attorneys can charge.
The FTC also has suggested that the law needs updating. In its February report, the agency recommended increasing the damages laid out in the 32-year-old law to keep pace with inflation. The fee-shifting provision, the agency noted, is working the way Congress meant it to.
“This is not some radical or totally unusual idea at all,” said Ann Juergens, a professor at William Mitchell College of Law (and in the interest of full disclosure, the spouse of MinnPost writer Jay Weiner). Many consumer protection laws contain such fee-shifting provisions, she added. “The idea that private parties should be able to enforce [them] is a good one.”
Beth Hawkins writes about schools, criminal justice and other topics. She can be reached at bhawkins [at] minnpost [dot] com.