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AUTOMATED DEBT-COLLECTION LAWSUITS ENGULF COURTSAs millions of Americans have fallen behind on paying their bills,
debt collection law firms have been clogging courtrooms with lawsuits
seeking repayment.
Few have been as prolific as Cohen & Slamowitz, a Woodbury, N.Y., firm
that has specialized in debt collection for nearly two decades. The
firm has been filing roughly 80,000 lawsuits a year.
With just 14 lawyers on staff, that works out to more than 5,700 cases
per lawyer.
How is that possible?
The answer to that question is at the heart of a growing debate over
the increasing use of the nation’s legal system to collect on bad debts.
Like many other firms, Cohen & Slamowitz relies on computer software
to help prepare its cases. While many of the cases represent
legitimate claims, critics say the lawsuits are too often based on
inaccurate or incomplete information about the debtor or the amount
owed.
Already, some state legislators and judges have tried to crack down on
collection lawsuits, and on Monday, the Federal Trade Commission
weighed in, saying the system for resolving disputes over consumer
debts was broken and in need of “significant reforms.”
The commission, which says debt collection is its top consumer
complaint, proposed that states require collectors to include more
information about debts in their lawsuits, including a breakdown of
the current balance by principal, interest and fees, and the relevant
terms of the original credit contract, if not the contract itself.
The agency also urged states to adopt measures to make it more likely
that consumers would show up in court to defend themselves; currently,
most do not, resulting in default judgments.
“We are pushing very hard to make certain that debt collectors have
sufficient substantiation, particularly when a consumer challenges the
debt,” said David Vladeck, director of the commission’s Bureau of
Consumer Protection.
The commission, which has limited authority to write debt collection
rules, urged states to take action because most collection cases are
filed in state courts.
The litigation boom has been propelled by fundamental changes in the
way debts are collected, particularly for credit cards. In recent
years, credit card companies have increasingly sold off debt they have
considered uncollectible to debt buyers, usually for 5 cents or less
on the dollar.
The debt buyers, in turn, may try to collect the debt themselves using
traditional practices like sending letters or making phone calls to a
consumer to try to arrange a payment plan. Increasingly, they are
choosing to sue instead.
Collection law firms are able to handle such large volumes of cases
because computer software automates much of their work. Typically, a
debt buyer sends a law firm an electronic database that contains
various data about consumers, including name, home address, the
outstanding balance, the date of default and whether interest is still
accruing on the account.
Once the data is obtained by a law firm, software like Collection-
Master from a company called Commercial Legal Software can “take a
file and run it through the entire legal system automatically,”
including sending out collection letters, summonses and lawsuits, said
Nicholas D. Arcaro, vice president for sales and marketing at the
company.
No group has definitive statistics on debt collection lawsuits, but
federal regulators, collection lawyers and judges say the numbers have
increased and are straining the court system.
Most consumers fail to show up in court, and those who do rarely have
a lawyer. A court judgment gives debt buyers the ability to collect on
the debt through actions like wage or property garnishment.
“What they are hoping to recover is the full dollar on some of it,”
said Robert J. Hobbs, deputy director of the National Consumer Law
Center, an advocacy group. “On most of it, they are hoping to recover
40 or 50 cents on the dollar. And they are hoping to do it with as
little work as they can.”
Critics say the business model for some debt buyers and law firms
relies on such huge volumes of legal actions that mistakes and abuses
are inevitable, in part because the lawsuits are often based on little
more than a defendant’s name, address and alleged balance.
“It’s the factory approach to practicing law,” said Richard Rubin, a
New Mexico lawyer who represents consumers against debt collectors.
Lawsuits are sometimes filed against the wrong people, critics say.
Other times, they say, the amount owed is incorrect or includes
questionable fees and interest that has been added to the balance.
In addition, it is not always clear if the debt buyer filing suit
legally owns the debt, since debt portfolios are often sold several
times.
Some collection lawyers complain that new requirements being imposed
are holding them to higher standards than even the original creditors.
“In actuality, it’s impossible to comply with,” said Pedro Zabala, a
North Carolina lawyer, speaking of a law passed last fall that
requires more documentation to file suit.
Fred N. Blitt, the president of the National Association of Retail
Collection Attorneys, which represents more than 700 law firms, said
the increase in collection cases was an inevitable result of the huge
number of people who are not paying their bills. Given the volume of
cases, Mr. Blitt maintained that mistakes were few.
“The reality is, if people owe the money, they should pay it,” he said.
Cohen & Slamowitz declined to be interviewed for this article. In a
2009 deposition for a case accusing Cohen & Slamowitz of pursuing a
debt that had already been paid, a partner at the firm, David A.
Cohen, said the firm had 14 lawyers, though it also hired numerous
outside lawyers to appear in court on a per diem basis. It also
employed 30 to 40 legal secretaries and paralegals and about 60 people
trying to collect debts, he said.
The firm filed 59,708 cases in 2005, 83,665 in 2006, 87,877 in 2007
and 80,873 in 2008, records from the lawsuit show.
As the case load has increased, some state legislators and judges have
started to demand more information on the debt.
In addition to the new law in North Carolina, which requires third-
party debt collectors to provide more proof of the debt, like an
itemization of charges and fees, some local judges are challenging
lawyers who are not prepared to back up their claims.
At a civil court hearing in Brooklyn in March, Judge Noach Dear
demanded documents from Cohen & Slamowitz supporting its claim that
Herman Johnson of Brooklyn owed $3,797.27 in credit card debt. Mr.
Johnson disputed the claim.
“What proof did you have that this is the true gentleman that you were
trying to pursue?” the judge asked David Robinson, a lawyer for Cohen
& Slamowitz, according to a transcript.
“Just his Social, his date of birth, and his address and the account,”
Mr. Robinson said.
“That’s all you have?” the judge said. “So if you have somebody’s
Social number, date of birth and address, you could sue them without
any other information?”
Mr. Johnson’s case was dismissed, and Judge Dear last month issued an
order requiring, among other things, that Cohen & Slamowitz provide
further proof of a debt if a defendant challenged the firm’s claim.
In an interview, Judge Dear said he did not think the order would
necessarily result in a large drop-off in lawsuits. But, he said,
given Cohen & Slamowitz’s size, he hoped it would persuade other law
firms to follow suit.
“I think personally it will weed out the cases that are no good, and
then we’ll get the defendants that truly do owe a debt,” he said.
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