A logical chain of events has occurred over the past few years: The recession has caused more consumer debts to go unpaid which, in turn, has led to more legal battles between consumers and their creditors.
On one hand, debt collectors are suing consumers to collect the unpaid debts. On the other, consumer debtors are filing suits claiming debt collection harassment.
Attorneys across Pennsylvania said both types of litigation have been on the rise in the state over the past few years and it's typically been small firms and solo attorneys that have benefited.
Pittsburgh solo attorney Eugene D. Frank, whose practice includes defending consumer debtors against collection actions, said he's seen an uptick in debt collection suits against consumers in recent years, but not necessarily by the original creditors.
"I am seeing more and more of that as we move along, primarily because you're having a lot of junk debt buyers purchasing these delinquent accounts and using more and more aggressive tactics, including lawsuits," he said.
The term "junk debt buyer" refers to an agency that purchases charged off debt from creditors, often in bulk and for pennies on the dollar, and then attempts to collect from the debtors.
Philadelphia solo attorney Michael P. Forbes said this form of debt buying became an industry unto itself during the savings and loan crisis of the 1980s and 1990s and has grown considerably during the most recent economic downturn.
Forbes said junk debt buyers are filing suits against debtors at an increasing clip and, while he has seen his caseload increase, "most people don't know that they can defend the case and can probably beat it."
According to Forbes, these agencies often have poor documentation or no documentation at all to prove they own the debt and to confirm the amount of the debt.
Frank agreed, saying that because junk debt buyers purchase debt in bulk, they often fail to obtain or retain the necessary records.
Documentation tends to become even more shoddy when those agencies resell the debt to other debt buyers, Frank said.
As a result, attorneys defending debtors in collection actions can often get cases thrown out on the grounds that the collection agencies violated civil procedure.
In addition to the more aggressive collection tactics increasingly being used by junk debt buyers, Frank said debt settlement programs are also partially to blame for driving up collection lawsuits.
Often, the programs advise consumer debtors to stop making payments while a settlement is negotiated, operating under the premise that most creditors won't resort to a lawsuit until the four-year statute of limitations has nearly expired, according to Frank.
Typically, however, debtors find themselves being sued within a year or so of discontinuing payment, Frank said, adding that most suits go unanswered and result in default judgments for the creditors.
Both Frank and Forbes said it's often in the debtor's best interest to hire an attorney to fight collection suits because default judgments can result in bank garnishments and liens against real estate and personal property.
"There's no such thing as judgment-proof," Frank said.
Frank said that because consumer debtor defense work is "more volume-based," it's typically handled by smaller practitioners.
Forbes agreed, saying the defendants in those cases are usually represented by solo attorneys or two-lawyer practices.
The same can be said about the attorneys representing the collectors in those cases.
According to Forbes, most of the firms representing plaintiffs in collections actions against consumers have five or fewer attorneys.
Noah P. Fardo, managing partner of four-attorney Flaherty Fardo in Pittsburgh, which represents creditors and debt collection agencies in collections actions, said there's "no doubt" collection activity has increased over the past two or three years.
"I've said it for the last couple years: The worse the economy gets, the busier we get," he said. "Collections is a recession-proof business."
But while both Frank and Forbes blamed the recent spike in collections actions on so-called junk debt buyers, Fardo said his firm usually draws the line at taking those agencies on as clients.
"We've represented some of the debt buyers and those cases are so picked over, so worked, that I don't like to represent those types of clients," he said.
According to Fardo, debt buyers are "typically looking for lawyers on a strict contingency basis and we don't believe the success rate warrants taking on those types of cases."
Part of the reason for that, he said, is the difficulty many of those agencies have in documenting debt that is often four or five years old.
"We have typically stayed away from aged receivables without proper documentation," he said, but added that he has noticed more and more of the creditors his firm represents inquiring about debt-selling opportunities.
And while he said his firm's creditor clients are "very organized," he has witnessed poor record keeping by both debt buyers and original creditors from the other side of the aisle, defending debt relief companies from creditor law suits.
Fardo said his firm has recently seen an influx of those types of cases, which it accepts provided there are no conflicts with its existing creditor clients.
Through the course of doing that work, Fardo said he's also noticed a trend of creditors failing to present witnesses at arbitration or trial in hopes that debtors will testify against themselves.
"We will often instruct our clients who we represent not to attend hearings with us," he said, explaining that, without a witness, the creditor is unable to prove its case. "We're winning verdicts because credit card companies can be lazy."
But there's another type of creditor-debtor litigation that has kept both plaintiffs and defense lawyers busy recently: debt collection harassment suits.
Both Forbes' and Franks' practices include filing law suits in state and federal court on behalf of debtors who claim their rights have been violated by aggressive debt collectors.
Under the federal Fair Debt Collection Practices Act, consumers can sue third-party debt collectors, but not original creditors, alleging the use of abusive collection tactics.
Frank said those types of cases have remained "pretty consistent" in recent years and Forbes said he's been filing more of those suits since the recession hit.
Like debtor defense work, debt collector harassment claims are mostly filed on behalf of consumers by small firms and solo lawyers, according to Forbes.
But while debt collectors also tend to hire small firms to represent them as plaintiffs, Forbes said he's seen everything from two-lawyer shops to megafirms serve as defense counsel in debt collection harassment cases.
For example, Philadelphia-based Marshall Dennehey Warner Coleman & Goggin, which has more than 400 attorneys, has a consumer and credit law practice group devoted to defending lenders, financial institutions and debt collectors against consumer debtor lawsuits.
Philip B. Toran, a shareholder at the firm and chair of its executive committee, said the practice "has been busy in the last few years."
http://www.law.com/jsp/law/sfb/lawArticleSFB.jsp?id=1202472943270&Growth_of_Consumer_Debt_Litigation_Keeps_Small_Firms_Busy
No comments:
Post a Comment