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Debt buyers use courts to collect debt, then cite arbitration clauses to deflect legal challenges

Debt collectors who buy up debt and sue to recover the money are deflecting class action suits challenging their practices with arbitration agreements purportedly signed by the debtors with their original lender.

Consumer lawyers criticize the practice as “the legal equivalent of debt collectors having their cake and eating it, too,” the New York Times DealBook blog reports.

Often judges require arbitration even though the debt collectors can’t produce copies of the agreement requiring individual arbitration. In one case, for example, a debt buyer didn’t have a copy of the original arbitration agreement signed with Citibank, producing instead a contract signed with the bank by one of the company’s lawyers.

One deflected suit had claimed a debt buyer was suing in Maryland though it wasn’t licensed to collect debt there. Another blocked suit claimed a debt buyer was suing to collect a debt even though the state statute of limitation on it had expired.

No data tracks how often debt buyers rely on arbitration agreements consumers signed with the original lender. But a Times examination of thousands of court records, combined with interviews of hundreds of people involved in such cases, finds that “debt collection companies have already used the strategy to great success,” the article says.

DealBook spoke with Peter Holland, a lawyer who ran the Consumer Protection Clinic at the University of Maryland’s law school. “It’s beyond hypocritical that the companies can use arbitration to avoid being held accountable in court, all the while using the courts to collect from consumers,” he told the Times.

See also:

ABA Journal: “Debt-buying industry and lax court review are burying defendants in defaults”