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Unpaid credit-card bills giving rise to lawsuits |
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Consumer Advocate Bud Hibbs (left) Fort Worth Attorney Jerry Jarzombek |
In a new trend for settling defaulted credit-card debt, debt buyers are filing hundreds of lawsuits each week at the Tarrant County courthouse.
Starting Saturday, some of that caseload could shift to the eight justice of the peace courts in the county. The state Legislature passed a law this year raising the civil jurisdiction limit of justice of the peace courts to $10,000 from $5,000.
Debt collection by lawsuit is new to many North Texans, and most consumers being served are handling it the worst way -- by not showing up in court, according to judges, attorneys and consumer advocates.
"Of the 1,200 cases filed in Tarrant County Court in May, over 1,000 were debt collection, and more than 80 percent went to default judgment because the defendant didn't come to court," local consumer advocate Bud Hibbs said.
When a debtor ignores a collection lawsuit, the debt buyer wins an automatic default judgment, which can lead to garnishment suits against bank accounts and liens on nonexempt property, said Fort Worth attorney Jerry Jarzombek, who routinely handles credit-card debt cases for consumers. (In Texas, your house, furnishings and vehicle are exempt from liens to settle debt.)
Hibbs and Jarzombek said they see this scenario play out time and again.
"They need to show up in court," said Hibbs, author of two books on credit and debt collectors and owner of an advice service for people in debt at www.budhibbs.com. "You don't need an attorney to represent you in JP court, and most of the judges are very fair."
Enter the third parties
Although collection agencies representing creditors cannot sue in the state of Texas for delinquent accounts, third-party companies that buy that credit-card debt can, Jarzombek said.
Credit-card companies are starting to wash their hands of delinquent customers and turn those accounts over in large portfolios to third-party buyers.
"It's a new trend; increasingly, creditors are finding it beneficial to sell these accounts outright," said Nate Thompson, spokesman for the Association of Credit and Collection Professionals International. "It's like the secondary mortgage market."
The trend is turning into an avalanche.
In 1991, $2 billion worth of consumer debt, mostly credit-card debt, was sold to third-party debt buyers, said Rozanne Andersen, general counsel for ACA International.
Last year, that amount grew to $110 billion, she said.
"The purchasing of debt has become a business model and liquidation tool for outstanding receivables," she said.
Debt buyers purchase the portfolios for cents on the dollar amount owed, then work to collect what they can from the borrowers, Hibbs said.
Defendants don't show
The new law also states that companies suing are no longer required to have an attorney represent them in court.
Gary Ritchie, justice of the peace for Precinct 6 in Tarrant County, says he doesn't expect an avalanche of cases as a result of the change in the law, but he does see a large number of credit-card cases come through his court.
Ritchie estimates that two-thirds of his caseload involved debt settlement, with the majority of those cases credit-card debt.
And rarely does the defendant show up, Ritchie said.
"None of them come to court," he said.
Hibbs said most people don't show up for their court date because they are either intimidated by the thought of going before a judge or they think that the serving papers themselves are a scam.
"They think that they are powerless," he said. "They're intimidated by the counts and intimidated by the judges."
But justice of the peace court is more like The People's Court television show, Hibbs said. The judge can ask questions of both parties to determine the settlement of the case.
Kevin Williams, a credit counselor with Money Management International in Fort Worth, said he is seeing more clients served with lawsuits over their credit-card debt, although not yet from those who live in Texas.
He recommends that the consumer send a certified letter to the collector stating the terms under which they could repay the debt. If the collector doesn't agree to the terms, then at least the consumer will have documentation to present before the judge that he or she tried to work with the collector.
Challenge the collector
Jarzombek goes one step further and recommends challenging the collector to prove that the defendant owes the debt. Often, he says, the collector will not have access to the original contract or details of the debt to prove his case and any response from the defendant will cause the debt buyer to walk away from the case.
"You can appear in court by filing a written answer with one sentence: 'I deny the plaintiff's claim,'" he said. "I tell them to show me a contract, to demonstrate that they have the authority to sue."
Often the debt buyer is given a minimal amount of information about the debt at the time of purchase that may not stand up in court, Jarzombek said.
"Debt buyers will usually buy a whole portfolio of accounts," he said. "If you ask them to show the contract or demonstrate they have the authority to collect that debt, they usually can't."
ACA International acknowledges data problems resulting from this transfer of debt, Andersen said. Last month, the ACA revised its code of ethics to reflect a need for better documentation of these delinquent accounts at the time of sale, she said. The Federal Trade Commission is holding a workshop in October on the issue.
"We need to work together to identify solutions to transfer the needed ... documentation," she said. "It should not be optional."
Information given the debt buyer can also be wrong: Mistaken identity was the cause of about one-third of the more than 200 consumer complaints received in 2005 on a consumer hot line run by the American Collectors Association of Texas, according to the former executive director, Dwain James.
It's also important for consumers to know that no one can sue for debt after four years from the default date, Jarzombek said. Another tactic of debt buyers is to try to change that date to the last date of payment or when they acquired the debt, but neither will be accepted in court, he said.
Bottom line: Don't ignore a court summons, and get some legal counsel if you're served.
If you are sued for credit-card debt
Don't ignore the case when you are served with court papers. If you do, a default judgment will automatically allow the debt buyer to put liens on your property and to garnish bank accounts to settle the debt.
Open all mail. Under privacy laws, collection companies cannot put a return address on the outside of envelopes with letters discussing a debt. Don't assume it is junk mail.
Check your records for the default date. A debt-collection suit must be filed within four years of the default, which is not the date of your last payment or when the debt was sold.
Mistaken identity can happen. If you are not the person named in the lawsuit, go to court and prove it. Debt buyers often do not get complete information in the portfolio they are buying on the individual debts and can serve the wrong individual with a lawsuit.
Consult with an attorney. Free legal aid for low-income individuals is available at Legal Aid of Northwest Texas, which has a Fort Worth branch office. To contact Legal Aid, call 800-955-3959 or go to www.lanwt.org/fortworth.asp