newjerseynewsroom.com

BY GERALD J. ROBINSON

NEWJERSEYNEWSROOM.COM

Debt collectors are having a tougher time in court collecting on delinquent accounts. Reason: they can't prove their cases.

The portion of credit card loans going delinquent reached a peak earlier this year according to the Standard & Poor's/Experian Consumer Credit Default Indices. And when a card holder falls behind, the debtor's financial problem is often compounded by late fees, higher interest rates and penalties.

As delinquencies rose, a tidal wave of credit card cases hit the courts. The wave has been largely propelled by changes in the way credit card issuers now try to collect. Instead of trying to collect on delinquent accounts themselves, they sell off huge bundles of delinquent debt to debt purchasers, usually for 5 cents or less on the dollar.

The debt purchasers may try to collect the debt themselves by the usual routine of phone calls and threatening letters. But more and more often now they turn large batches of the debts over to law firms that are "collection mills." These firms, using computer software to quickly prepare large volumes of documents with low paid clerical help, are flooding the courts with collection cases. Some firms file thousands of suits annually.

Most credit card delinquents don't show up in court when they are sued. That's good for the debt collectors. If the credit card debtor doesn't show up to challenge the suit, the court generally will enter a default judgment. This allows the creditor to collect using wage or property garnishment.

But if the debtor shows up and contests the claim, that's bad for the debt collector. Then the debt collector has to prove its case. First, it has to show that it properly acquired the delinquent's debt from the credit card company. That may not be so easy. Then it has to show that the person being sued actually is the proper debtor, entered into a credit agreement with the credit card company that sold the debt to the debt collector and actually incurred the charges being sued for. That may be even harder.

Most credit collection lawyers don't have this information readily available. In some cases, because bundled debts have been sold and resold, the records simply aren't available.

Often the amount claimed in the lawsuit isn't correct, or interest, fees or penalties are either improper or incorrectly calculated. Sometime lawsuits are actually filed against the wrong persons.

Judges are rebelling against the flood of suits that are clogging their calendars and the lack of proper substantiation of the debts. Now they are demanding that more information be submitted substantiating the amount owed and dismissing cases where it's not supplied. And the Federal Trade Commission has recently proposed that states require debt collectors to include more information about debts in their lawsuits, including a breakdown of the current balance by principal, interest and fees and the terms of the credit contract.

This additional substantiation pressure on debt collectors is making it harder for them to get judgments.

Credit card delinquents who know how to game the system can use the present jammed court system to either escape paying what they owe, or at least pay off their debt at a heavy discount. If the debt collector is challenged in court and can't prove its case, the suit may be dismissed, never to appear again. Even where the debt collector is armed with the proper substantiation, the delinquent may be able to settle the case at a steep discount. Often debt collectors are willing to settle for 40 to 50 cents on the dollar, and offer payout terms as well.

Gerald J. Robinson, Esq., formerly tax counsel to the New York City law firm of Carb, Luria, Cook & Kufeld, is a member of the New York and Maryland bars. He received his B.A. degree from Cornell University, an LL.B. from the University of Maryland and an LL.M. in Taxation from New York University. Prior to entering private practice he served in the Office of Chief Counsel, Internal Revenue Service. He is the author of the treatise, Federal Income Taxation of Real Estate, now in its sixth edition, and wrote the monthly newsletter, Real Estate Tax Ideas, both published by Warren, Gorham & Lamont. He is also a frequent lecturer and contributor to various professional journals.