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The New Reality of Small Debt Collection

posted by Jason Kilborn

Debt collectorsAbout 10 years ago, Rich Hynes wrote an intriguing paper on consumer debt collection, asking "where are all the garnishments?"  Today, Pro Publica's Paul Kiel is out with an answer: Nebraska and Missouri ... and in the future. Kiel's story challenges the longstanding conventional wisdom that debtors are unlikely to face lawsuits and collection action for small debts. That might have been true before the mid-2000s, when Hynes wrote his paper, and in Virginia and Illinois, which Hynes studied, but it's certainly not true after the financial crisis, Kiel reports, especially in certain high-volume-low-dollar-collection-heavy states. I can hardly do justice to Kiel's revealing data collection and analysis, but here are a few highlights to whet your appetite: (1) debt buyers are among the primary drivers of this trend, not collection agencies, and their industry has consolidated and matured recently, (2) the number of lawsuits against consumers on small debts has absolutely exploded starting in about 2006, the year Hynes's article was published (again, thanks almost entirely to debt buyers, "In 1996, there were around 500 court judgments in New Jersey from suits filed by debt buyers. By 2008, that number had reached 140,000."), (3) these buyers repeatedly clean out consumer bank accounts with garnishments seizing an average of only $350, "Plaintiffs in Missouri tried to garnish debtors’ bank accounts at least 59,000 times in 2012." There's more of interest in Kiel's report--a must-read for those (like myself) who have for years downplayed the threat of enforcement of small debts. It really depends where the debtor lives and whether the debt is acquired by a buyer. 

Debt collector image courtesy of Shutterstock


In the California Central Valley, where I worked as a bankruptcy assistant from 2009-2016, 10% of our clients let a debt collection lawsuit go to default judgment with a garnishment or bank levy. During that period California Sheriffs changed their practice of returning funds they held to the debtor to requiring a court order to release the money to the debtor, else they would forward the money to the creditor. Garnishments were easier to stop and recover than levies. Levies happen without warning, except for the judgment, and you learn about them after the money is surprisingly missing from your account - or more technically your funds have been put on a ten day hold but not released to the creditor, giving the debtor time to act. Either way, levy or garnishment, it took a 522 motion to get the court to avoid the lien, which costs as much in legal fees as the average recovery of impounded funds.
Every now and then a proactive debtor would answer a money due lawsuit and negotiate a settlement but the legal costs for that averaged $1,500.
Some debtors are judgment proof except a debtor with a house and car payment who loses 25% of their vulnerable W-2 income to a garnishment gets forced into bankruptcy to avoid losing exempt property.
But yes, we saw a significant increase in debt collections lawsuits for as little as $3,500.

In addition to my bankruptcy practice, I am also a small claims judge for Salt Lake County, so I see these cases from at least a couple of different angles. And I see a lot of them and would see a lot more if the legislature had its way. The legislature is forever trying to raise the small claims jurisdiction limit from $10,000 to $25,000. Imagine trying a case for $25,000 without discovery or even a responsive pleading. We've managed to head off that nonsense every time it has popped up, but it will keep coming back because a significant number of legislators own a piece of a payday lender or collection company.

Which brings me to observation number one. Debt buyers are not the game here; payday lenders and collection companies are. Collection companies' bread and butter are medical and dental providers, and those bills are usually well below my jurisdictional limits, especially the dental. As a side note, it is often difficult to tell if a company is collecting or actually owns all or part of the debt. Throw in A/R factoring and assignments, and things can get complicated. Fortunately, for the purposes of my court at least, it doesn't really matter.

Observation number two is that garnishment is a big stick here, as Utah has no limits on account garnishments (except that in-house commission accounts for sales staff are subject to the 25% limit). This commonly triggers two results. First, people being chased by creditors quickly join the ranks of the unbanked. Second, they run and hide until they find a job. When the first, continuing garnishment writ hits their new employer, they come looking for bankruptcy protection.

Third, an increasing number of retail lenders are going the secured debt route. The major practitioners here are RC Willey Furniture (a Berkshire Hathaway company, so I would expect it to be a conglomerate-wide policy) and Les Schwab Tires, but others are getting on the band wagon. If you think this isn't a thing, just believe that I've seen the latter jack up a truck and take the tires and the former take a water heater out of a home two days before Christmas. After that, they head to court for their deficiency judgments.

Fourth, I've often wondered how USA Discounters got away with it. Apparently they found a small group of courts blissfully ignorant of the Servicemembers' Civil Relief Act. Perhaps if we started having literacy requirements for the bench. I know they would have had trouble getting a judgment out of me against the bulk of their defendants.

The SCRA doesn't have any effect on criminal cases, though, and this is where the depth of Utah's "peculiarity" gets profound. Utah's bounced check statute is something out of Kafka; it has no intent element. If you write a check, it bounces, and you don't make it good in 14 days, you just committed a crime. Many lenders hold post-dated checks that they run on the face date. If it bounces, chances are the borrower will not be able to make good within two weeks, and the lender can call the DA. Right now I'm seeing this in construction cases because the checks are big enough to qualify as felonies ($5,000 or more), and contractors have political pull with county officials, including DAs, but I'm waiting for it to expand from commercial debt to consumer debt. Good way to avoid a bankruptcy discharge, after all. Then we'll have criminalized not only being a small business owner but being a strapped borrower as well, and we can return to the good old days of debtors' prisons.

What an amazing couple of comments! Thanks, Robert and Knute. Apparently, it REALLY matters where the debtor lives!

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