Debt Collection Just Hit Record Levels

Inside Subprime: July 26, 2019

By Jessica Easto

As US household debt hits record levels, debt collection appears to be on the rise as well. Although data on debt collection is not gathered at the national level, there are several other indicators that signal to experts that debt collection is back in business—and that the business is often suspect.

Some cities and states have reported that debt-collection lawsuits have spiked in their courts, including New York and Philadelphia. “Our courts are inundated,” said attorney Laura Smith, who works  for Community Legal Services of Philadelphia. She said that collection filings at the Philadelphia Municipal Court doubled between 2016 and 2018—to almost 16,200 cases.

Other localities have seen similar increases. Debt-collections filings at New York City Civil Court have increased from just shy of 47,000 in 2016 to more than 100,000 in 2018. In Texas, filings were up 29 percent in fiscal year 2018 and up 141 percent over the last five years. Delaware consumer-debt filings rose 56 percent.

Big publicly traded debt-collection companies have released data that show collectors are purchasing debt at an increased rate, and many debt buyers have returned to the market this year after a leave of absence. Two of these companies bought and collected a record amount of debt last year. One company’s debt purchases in the United States increased 20 percent and the other’s 23 percent, while their collections increased 11 percent and 9.8 percent respectively.

When debt buyers purchase debt, they usually do so in large bundles, which discount prices to “a few pennies on the dollar.” Then they pursue debtors, demanding the full face-value of the debt with interest. Consumer advocates have reported that “aggressive” debt collection tactics are on the rise, including the pursuit of years-old debt, also called “zombie debt.” These advocates are worried that aggressive debt collections disproportionately affects vulnerable groups, such as low-income individuals and the elderly, while putting even more pressure on an already overstressed legal system.

According to the Federal Reserve, in the first quarter of 2019, US household debt hit a record high—$13.67 trillion—after 19 straight quarters of increasing. The default rates for auto loans, student loans, and credit cards are also up.

But why is debt collection increasing now?

Some point to the Consumer Financial Protection Bureau. The previous administration sought to decrease the level of debt collection, but the current administration has relaxed rules and is seeking to rework a key debt-collection policy.

Many debt-collection claims end in what’s known as “default judgments”, because defendants don’t show up in court, don’t show up with a lawyer to challenge questionable claims, and in some cases, don’t even know they are being sued. Because the defendant failed to take action, a judge can make a ruling, which is usually in favor of the plaintiff (in this case the debt collectors) when the defendant fails to take an action.

Many of these claims involve alleged debts that are decades old—most states allow debt collectors to win judgments with interest for 20 years. That’s much longer than creditors are able to sue borrowers, which is usually just four to six years. These default judgments also allow debt collectors to garnish wages and property.

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