Debt collection lawsuits have become the single most common type of civil case filed in Texas courts.
In the 2020 fiscal year, which included the beginning months of the pandemic, nearly 371,000 debt claims were filed in Texas, mostly in small claims courts. The year before, the number of debt collection cases topped 406,000.
The report was produced by the Aspen Institute’s Financial Security Program, and the authors raise concerns that after the pandemic’s financial toll upended the finances of many families and individuals who were previously financially stable, debt collection cases may surge as pandemic-era consumer protections, like the eviction moratorium, are stripped away.
“Given the scale of household debt in the United States and the potential increase in delinquent loans and unpaid bills, fees and fines resulting from COVID-19-associated income loss, we may soon face a significant and rapid increase in the number of debt collection cases in our courts,” the authors wrote.
A huge amount of American households have debt in collections — a 2017 study by the CFPB put the ratio at 1 in 4 Americans — the burdens imposed by debt collection are not felt equally, according to the report.
Because of the racial wealth gap produced by historic and structural discrimination by government and financial institutions, borrowers of color are more likely to hold debt that undermines wealth-building.
Research shows that creditors call Black and Latinx households twice as much and households in majority-nonwhite neighborhoods with past-due debts are more likely to have debt collection lawsuits filed against them, despite similar rates of default and late payments.
“Borrowers of color experience the most acute impacts, in part because they are disproportionately pursued by creditors,” the report states.
‘Breakdowns’ In The System
The report does not argue that debt itself is a threat to the financial stability of working Americans. Debt can be a tool to help build family prosperity. Nor do the authors come out against the ability for creditors to have a legal mechanism to force someone to pay their debts.
Rather, the report lays out specific “breakdowns” in the system that put an undue burden on individuals being sued. It focuses on four main areas:
– Debt collectors are able to file claims on debts that are invalid, and often win, forcing people to pay money for a debt they didn’t legally owe before the lawsuit was filed;
– People often don’t even know they’re being sued because of a “functionally obsolete” system for notifying people of a debt lawsuit;
– The court processes for debt collection lawsuits are so confusing that people without lawyers fare worse than people with lawyers, yet the vast majority of people are unrepresented;
– “Onerous judgments and badly designed settlement agreements” can force people into financially precarious situations.
The Aspen Institute report is the latest salvo from an array of nonprofits, advocacy groups and researchers calling for improvements to a system that, in 2010, the Federal Trade Commission labeled as “broken.”
An Upward Trend
Household debt has been on the rise in recent years, according to Erika Rickard, who is the project director for the Pew Charitable Trusts’ program on Civil Legal System Modernization.
“We’re seeing an increase in debts on everything from student loan debt to auto loan debt and credit card loan debt but also medical debt, and that’s been an increasing trend both right before and during the pandemic,” said Rickard, who researches debt collection lawsuits, and has worked with the Aspen Institute’s Financial Security Program.
When those debts become the subject of lawsuits, Rickard said research shows that people who have a lawyer in the courtroom are more likely to win outright, or to reach a settlement that allows them to pay back their debt in a way that doesn’t unravel the household’s finances.
Yet most defendants don’t have a lawyer. In the last fiscal year, just 1 in 10 Texans facing debt collection lawsuits had a lawyer. That’s actually one of the highest rates of attorney representation.
Losing By Default
Many more Texans never even showed up to court, and that means the judge automatically ruled that the defendant legally must pay the debt. It’s called a default judgment.
“The debt collector wins the case outright, without having to prove their case, without making sure that the right person was sued for the right amount, that they knew about the case, that the case was timely filed – that it was not outside the statute of limitations or expiration date for when you can file a claim,” she said.
In Texas, that ruling then allows a debt collector to get money taken directly out of the debtor’s bank account to pay back the debt. The Aspen Institute report says that bank account garnishment makes it even harder for families to pay other bills that keep their families housed and healthy.
Rickard said that, for many people, that garnishment is the first time they realize they’ve been sued for a debt, and it is too late for them to have any recourse.
A review of Office of Courts Administration statistical reports shows that, in the five years preceding the pandemic, roughly 1 in 3 debt cases ended in a default judgment.
According to the advocacy group Texas Appleseed, in 2020, amid the pandemic’s devastation, that number jumped to 2 in 3 cases.
Fixing The System
In recent years, Texas Supreme Court Justice Nathan Hecht has been raising concerns about access to the state’s civil justice system, and how to better serve people who aren’t trained lawyers when they need to deal with the courts.
On a podcast produced by Pew, he said the flaws in the system — especially in debt collection cases — snowball into a societal problem.
“When there weren’t so many debt collection cases, there were still these problems. They were getting worse. But a lot of what’s made them worse is the number of them. There’s just so many more of them affecting so many more people,” Hecht said.
In 2020, the Texas Judicial Council laid out a handful of recommendations to improve the process.
Earlier this year, the Texas Legislature directed the courts to implement rules intended to help debtors — after a judge has ruled that they must pay the debt — to protect money from exempted sources like social security and child support from being garnished or seized from their bank accounts.
The legislature and the courts haven’t yet acted on the council’s recommendations that would make the process fairer and easier to navigate for people being sued.
Got a tip? Christopher Connelly is KERA’s One Crisis Away Reporter, exploring life on the financial edge. Email Christopher at [email protected].You can follow Christopher on Twitter @hithisischris.