The Loyola Consumer Law Review has just released an important paper by Peter Holland of the University of Maryland Francis School of Law. Holland has undertaken the most extensive study of outcomes in debt collections to date, investigating 4400 lawsuits in all 26 Maryland district court jurisdictions in 2009 and 2010, across 11 of the most active debt collectors in state. We’ve embedded it at the end of this post for your convenience.

As readers presumably know well, in the overwhelming majority of cases, these are junk claims that could be beaten if the borrower had the means. In many cases, the debt is invalid by being too old (the statute of limitations has expired), previously discharged (the borrower actually paid it or it was wiped out in bankruptcy). And even when it might be valid, debt collectors can rarely meet the legal standards needed to enforce the obligation (which includes a copy of the original agreement with the borrower’s signature, the payment history that proves the amount owed, and the complete documentation to substantiate all the transfers of the debt from the original lender to the current holder). To add insult to injury, the debt collectors typically can’t begin to prove how the borrower came to owe the amount it says is due. But broke borrowers aren’t in a great position to pay legal fees.

What is striking about Holland’s investigation is how little rigorous work has been done in this area, despite its importance to ordinary Americans. The few previous empirical studies have been small in scale, limited to single counties or courts, and thus could easily be brushed off as not representative (the one exception was not as in depth as the Holland study). This is the first large-scale statistical analysis of this type.

The article makes some important in passing observations:

Even the debt collection industry concedes that most consumers who default aren’t deadbeats; even the very earliest studies forty years ago found that they were “consumers in trouble” pitted against a collection system that “benefits the unscrupulous and penalizes the weak.” Investors in junk debt are even more removed from consumers than they were then, so practices have decayed even further. Many small claims courts are swamped by debt collection cases and many courts and judges simply enter default judgments rather than get bogged down in a case backlog. Even so, one out of four cases are now rejected by judges due to lack of evidence (this contrasts with anecdotal evidence from judges that in more than 90% of the cases, the debt collector can’t produce the evidence needed to prevail).

Here are the main findings:

Only 2 in ten borrowers who were served respond to a summons (one has to wonder what percentage of the summons were “sewer service”) 70% of the time, the debt collector prevails, with the average judgment exceeding $3000 The overwhelming majority of cases aren’t settled (some Maryland jurisdictions provide for “restitution conferences” in court but with no judge presiding) Under 2% of borrowers had an attorney representing them. The few that did engage attorneys got much better results Racial minorities suffer more under this system than whites If debtors who lose or get default judgments fail to appear in the supplementary hearing to find out what assets they have, they risk being charged with contempt and arrested. The bond is typically set as the amount owed the debt collector. Thus debtors’ prisons are alive and well in America

And mind you, these are the results in a state that has been in the vanguard of fighting the worst debt collection abuses. But the study deems these efforts to have had very little impact (this is based on a small sample follow up after rule changes were made in 2012).

In his list of proposed reforms, Holland stresses that (not intending to evoke the 12 step process) that governments and pundits need to recognize where this system is, and that it operates well outside the rule of law. So his common-sense ideas are to bring it back into compliance, by restoring rules of evidence, enforcing rules of attorney conduct (New York State courts did that in foreclosures by requiring that attorneys provide certifications, which procedurally makes it easier to sanction them), to update judicial ruled to give judges instructions regarding cases where defendants do not appear in court, and revise the law school curriculum to clue lawyers-in-training about legal shadow systems like the debt collection underworld.

Admittedly, in foreclosures, banks succeeded in bending the laws and the courts to give them a close to free pass for their flagrant abuses. But debt collectors misconduct is far more pervasive and flagrant, and they are not a well connected or powerful industry. Keeping their bad conduct under the spotlight has good odds of producing meaningful reform.

Peter Holland, Loyola Consumer Law Review, Junk Justice