As Consumer Debt Rises, Collection Lawsuits Flood State Civil Court Systems

According to a new report from The Pew Charitable Trusts, long before court buildings closed and unemployment surged in the face of the COVID-19 pandemic, court dockets had increasingly become dominated by debt collection lawsuits. As Americans confront the economic consequences of the outbreak, including a potential surge in debt, bankruptcies, and defaults, modernizing our court systems is now more important than ever.

Even before the pandemic began, Americans’ debt was on the rise, increasing by $1.5 trillion between 2008 and 2019. And as household debt grew, creditors and third-party firms adopted an increasingly aggressive approach to defaults, using state civil courts to pursue collections via lawsuits known as debt claims. Pew’s report found that debt claims rose from just 1 in 9 state civil cases in 1993 to 1 in 4 by 2013, and this growth has significant implications for courts and consumers.

The report, “How Debt Collectors Are Transforming the Business of State Courts,” examines trends in debt collection lawsuits across state and local civil courts. In the typical debt claim, a business—often a company that purchases delinquent debt from original creditors—sues an individual to collect on a debt, frequently for amounts under $5,000. The analysis found that defendants in these lawsuits rarely have attorneys and that this lack of legal representation has a significant effect on case outcomes. According to a survey of research on debt collection lawsuits from 2010 to 2019, fewer than 10% of debt claim defendants have a lawyer, compared with nearly all plaintiffs, and multiple studies have found that consumers who did have attorneys in a debt claim were more likely than those without representation to win their cases or reach a mutually agreed settlement with the plaintiff.

But why do so few consumers in debt claims have lawyers? One possible reason, indicated by the outcome of a large share of debt collection cases, is that many consumers do not participate in their lawsuits at all—some by choice, others because they did not receive adequate notice that they were being sued. When a defendant does not respond to a suit, the debt collector wins the case by default without having to prove that the correct person was sued for the right amount within the legal time frame.

Over the past decade in the jurisdictions for which data are available, courts have resolved more than 70% of debt collection lawsuits with default judgments for the plaintiff, exacting heavy tolls on consumers. Courts routinely order consumers to pay accrued interest as well as court fees, which together can exceed the original amount owed. Other harmful consequences can include garnishment of wages or bank accounts, seizure of personal property, and even incarceration.

Given these challenges, the report offers some initial steps that courts can take, including reviewing state policies, court rules, and common practices to identify methods to ensure that both sides in debt collection lawsuits have a full opportunity to make their case. Pew researchers looked for promising practices from states that have begun trying to address the challenges of debt claims. From 2009 to 2019, 12 states made policy changes—seven via legislation and five through court rules—to help courts better meet the needs of all debt claim litigants, such as:

  • Confirming that all parties receive notification about lawsuits.
  • Requiring plaintiffs to demonstrate that the named defendant owes the debt sought and that the plaintiff owns the debt.
  • Enhancing enforcement of prohibitions against lawsuits for which the legal right to sue has expired.
  • Modernizing the relationship between courts and their users by providing relevant timely procedural information to all parties.
  • Moving more processes online to make them more accessible to users with or without attorneys.

The COVID-19 pandemic presents a critical opportunity for courts to address the challenges of debt claims cases in advance of a probable surge in filings. State leaders can take these steps now to improve people’s access to, and promote efficiency within, the civil courts to better serve not only parties to debt claims, but ultimately all litigants throughout the system.

Erika Rickard directs and Darcy White is an officer with The Pew Charitable Trusts’ civil legal system modernization initiative.