FTC Hopes to Eradicate Broken Debt Collection Litigation and Arbitration

A report released by the Federal Trade Commission Monday featured the FTC’s complaints about debt collection in our country today.

The report featured the conclusion that “consumers are not adequately protected in either debt collection litigation or arbitration.” The FTC put forth recommendations to both the federal and state governments on how to make the debt collecting system “both efficient and fair”.

The overall goal is to create a change in this country in the way debt is collected without hindering appropriate debt collecting. Thus meaning eradicating a new special set of rules and regulations for collection agencies without hurting the legitimate debt collection process.

It is an increasing issue in the U.S. for third party collection agencies, companies that buy the debts at a fraction of the cost from original creditors, are not compiling enough evidence of the ownership of debts before they accuse or push for a judgement against a debtor. Courts are also giving out judgements too easily to these collection agencies, making it hard on the person being accused of the debt when there is simply not enough evidence of ownership. There are also numerous instances of collection agencies suing for debts beyond their statute of limitations. Many debtors are not even being properly notified until it’s too late and a judgement or wage garnishment has passed.

I covered an article at the end of June that reviewed a publication put out by The Municipal Employees Legal Services of New York’s District Council 37, “Where’s The Proof?”. The publication released valuable information on a study done of some 238 cases that fell under the circumstances listed above over a time period of 18 months.

These types of cases are exactly the kind that are in question by the FTC and studied in this report. Cases that include unfair and illegitimate claims that cannot be backed by sound proof of ownership.

After a workshop in February 2009 the FTC decided that the system was “in serious need of reform” and created a set of proposals to improve the currently failing system.

Among the concerns relating to litigation were:

1. filing suits based on insufficient evidence;
2. failing to properly notify consumers of suits;
3. the high prevalence of default judgments;
4. improperly garnishing exempt funds from bank accounts; and
5. suing or threatening to sue on time-barred debts.

The concerns relating to arbitration included:

1. binding consumers to resolve disputes through arbitration without meaningful choice or awareness;
2. bias or the appearance of bias in arbitration proceedings;
3. procedural unfairness in arbitration proceedings; and
4. requiring consumers to pay substantially more to participate in arbitration proceedings than in comparable court proceedings. – Source

Throughout 2009 the FTC held roundtable discussions with various groups, attorneys, judges and representatives involved in the debt collection industry across the country. A cross country tour included cities like Chicago, San Francisco and Washington, D.C. so they could gather more sound information about these practices across the states.

It’s been found that it’s not just happening in one city, it’s happening across the land which lead the FTC to bring this to Congress’ attention.

Julie Brill, Commissioner, proposed to Congress in a separate personal statement attached, “to formalize the voluntary moratorium currently in place, by enacting a temporary ban on the mandatory arbitration of consumer debt collection disputes.” She continues to explain that the ban should remain enact until the arbitration process can be shown, “to be fair, transparent, and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek”.

The FTC’s principal findings, conclusions, and recommendations for rebuilding the broken debt collection practices in this country are as follows:

• States should consider adopting measures to make it more likely that consumers will defend in litigation.
• States should require collectors to include more information about the debt in their complaints.
• States should take steps to make it less likely that collectors will sue on time- barred debt and that consumers will unknowingly waive statute of limitations defenses available to them.
• Federal and state laws should be changed to prevent the freezing of a specified amount in a bank account into which a consumer has deposited funds that are exempt from garnishment.
• Consumers should be given meaningful choice about arbitration.
• Arbitration forums and arbitrators should eliminate bias and the appearance of bias.
• Arbitration forums should conduct proceedings in a manner which makes it more likely consumers will participate.
• Arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated.
• Arbitration forums should make their process and results more transparent.
• The Commission will continue to closely monitor debt collection arbitration, and evaluate whether creditors and arbitration forums provide consumers with meaningful choice and fair process. – Source

The proposal is awaiting Congress’ final word on the matter.

For heavier reading:

• Repairing a Broken System : Protecting Consumers in Debt Collection Litigation and Arbitration
• Concurring Statement of Commissioner Brill
• FTC Issues Report on Reforming Debt Collection Litigation and Arbitration; Recommends Steps to Protect Consumers and Repair a Broken System