Debt Collectors Can Sue You, But Court Might Not Let You Sue Debt Collector Back

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A new report claims that a growing number of debt collectors are trying to exploit a legal loophole that allows them to bring potentially frivolous lawsuits against alleged debtors, but bars those defendants from bringing their own legal action against the debt collector. Once again, we’re looking at an abuse of “forced arbitration” — the Supreme Court-backed practice of inserting incredibly restrictive clauses into contracts and other customer agreements. These clauses compel the customer to resolve any legal dispute with the company through binding third-party arbitration instead of in a courtroom. Additionally, most arbitration agreements prohibit the customer from joining together with similarly wronged victims to have their matter heard as one case — even before an arbitrator. Instead, each individual victim must make their own case in arbitration. The few supporters of arbitration clauses are quick to point out that these contract terms also block the company from taking the customers to court. But according to the New York Times, some collectors believe they have figured out how to make arbitration a one-way street in their favor. A Maryland man tells the Times that he learned — after the fact — that a debt collector had successfully sued to garnish his wages, even though the collector wasn’t licensed to collect debts in the state. But when he tried to bring a class action lawsuit against the collector, the company successfully convinced the court to prevent the case from moving forward — not because it lacked merit, but because the man had signed an arbitration clause with the original lender. That’s right, the collector wasn’t invoking any sort of contractual agreement it had with the customer, but an agreement that he — like millions of people every day — unwittingly signed without any ability to change the terms. In the Maryland case, the debt collector couldn’t even prove to the court that this particular customer had an arbitration clause in his original contract with Citi from ten years earlier. Instead, the collector merely showed the court that Citi contracts currently have these clauses in them. And this is a typical issue with debt collectors. A 2013 report from the Federal Trade Commission found that only a small fraction of debt buyers are given adequate supporting documents to even prove that a debt is still owed, let alone that any sort of arbitration clause was signed. Which is apparently why debt collectors want to make it so they can bring lawsuits, but customers can’t. Collection agencies bring thousands and thousands of collection cases before the courts every year, many of them with little to no supporting information. A number of these cases are won because the alleged debtor — who many not even know they are being sued — never musters a defense or even shows up. If a group of wronged consumers were able to bring a class action in court against the agency, they could combine their resources — reducing the legal costs for each member of the class — and be awarded significant damages. In arbitration, each plaintiff’s case is heard separately. While each individual consumer is effectively starting from scratch, the company has the advantage of knowing exactly what the claims will be, because it has been through the same material with other arbitrations. And unlike jury trials, where punitive damages can be used to hold companies accountable and discourage them from further bad acts, damages in arbitration are frequently very limited. As a result of the complicated, high-cost, low-reward setup for binding arbitration, very few customers even pursue this avenue for redress. While the Maryland man mentioned above had reason to believe that there were hundreds of similarly wronged victims in his case, the Times found that the debt collector in this case — a subsidiary of one of the country’s largest firms — has only gone to arbitration in Maryland a total of 38 times over a five-year period. The Consumer Financial Protection recently announced that it has begun drafting rules aimed at reining in the use of arbitration clauses by banks and other creditors. Some members of Congress — urged on by bank lobbyists — attempted to scuttle these rules by adding a rider to the federal spending bill that would require the CFPB to invest additional time and money in researching a topic it had already spent three years looking into. That effort fell short, but you can expect further legislative attempts to block the CFPB from drafting and enforcing these rules.

1. by Chris Morran
2. via Consumerist

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