Debt Collection Can Destroy Lives
Wage garnishment often happens without warning, and it can start a chain reaction of events, starting with overdrawn bank accounts and fees, and leading all the way to homelessness. Most people do not even defend themselves from cases they could win.
--Yet Some Debt Collectors Collect As Much As 80% from People Who Never Owed Anything According to the U.S. Federal Trade Commission
When she was sued for not paying her credit card balance, Leann Weaver of Phoenix, Arizona reacted the way many people in her situation do. Personal and financial troubles weighed her down, and she thought she owed the $2,470. So she never went to court to defend herself.
She was surprised by what happened next. When she tried to pay her bill at the grocery store, her debit card was declined. It turned out the bank had taken more than $200 from her paycheck, a quarter of her wages for two weeks of work at a retail chain, and her bank account was overdrawn. Neither her bank nor her employer had told her it was happening. She eventually lost her apartment and had to move in with her grandparents or face homelessness.
Her story is not unusual.
The number of delinquent debtors has skyrocketed to historic numbers, and creditors are suing them by the millions. Most consumers never offer a defense, and creditors win their lawsuits without having to offer proof of the debts, much less justify the huge interest charges and penalties they often tack on.
After winning, creditors can easily obtain a court order to seize part of the debtor’s paycheck or the funds in a bank account, a procedure called garnishment. No national statistics are kept, but the records kept by some areas tell the story — they're up 121 percent in the Phoenix area since 2005, 55 percent in the Atlanta area since 2004, and in Cleveland, garnishments jumped 30 percent between 2008 and 2009 alone. Bankruptcy could sometimes help. Yet sweeping changes to federal law in 2005 — pushed aggressively by the banking lobby — reduced its effectiveness and complicated the process. They also more than doubled the average cost of filing, to more than $2,000, putting bankruptcy far beyond the reach of many consumers.
“It's a huge national problem,” said Ken Gibert, a former attorney whose website provides resources to people being sued by debt collectors. “Most of the people being sued would like to pay what they owe, but many have suffered some disaster like divorce or losing a job. They're tormented by their difficulties or failures, and they don't defend themselves. And this can set off a chain reaction of disasters which destroy them financially.”
There is also a lot of confusion about how much they really owe—and to whom. “The debt collectors buy the debts from the original creditors or other debt collectors, so the debtors often have never even heard of the company trying to collect money from them. In some cases they've already paid another debt collector for the same debt. And in most cases the amount of money they're being sued for is far larger than anything they've ever borrowed because of interest charges and fees,” said Mr. Gibert.
The U.S. Federal Trade Commission found that one company, Capital Acquisitions and Management, obtained as much as 80% of its revenues from people who never owed the debt. While the FTC sued to stop that company, there is little doubt that many other companies are doing the same thing.
Lack of defense by the people being sued is the most fundamental problem. In many cases, consumers are served with the lawsuit but do not offer any defense. Few can afford lawyers; others are intimidated or confused. In their absence, judges can offer little relief. In the rare event that a consumer battles back, creditors frequently lack the documentation to prove their claim, and the cases are dropped.
“If the consumers were armed with more education about how to defend against these debts, they’d be successful,”
The case of Sidney Jones shows how how harshly the system can work. In January 2001, Mr. Jones, 45, a maintenance worker from California Crossroads, Va., took out a $4,097 personal loan from Beneficial Virginia, a subprime lender now owned by HSBC, a large bank. When he fell behind in payments, Beneficial sued. Mr. Jones did not appear in court.
“I just thought they were going to take what I owed,” he said.
Beneficial won a default judgment of $4,750, plus $900 in lawyers’ fees, with the debt accruing interest at 27.55 percent until paid in full. The bank started garnishing his wages in March 2003 and the bank deducted over $10,000 from Mr. Jones’s paychecks over the next six years. As of spring 2010, he still owed the company $3,965.
Beneficial makes no apologies. They are just doing what the law lets them do when people don't defend themselves.
The working poor “have difficulties maintaining payments on life’s necessities with their full paycheck,” said Angela Riccetti, a lawyer with Atlanta Legal Aid who represents poor clients whose wages are being garnished. “You lose 25 percent of it and everything folds.”
“Going to court is no guarantee of victory, of course,” said Mr. Gibert. “The banks and debt collectors sometimes have what they need to win and are willing to push the cases, but if a consumer knows how to push back, he or she can take most of the profit out of it for the debt collectors, and that makes it likely that the debt collector will either drop the case completely or settle for far less money.”
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Yourlegallegup.com is a company that provides people being sued by debt collectors with a range of articles and information, including a Litigation Manual and Forms designed to help people defend themselves against debt lawsuits.