Category: Debt Collection

  • People’s Pre-Bankruptcy Struggles — New Paper from the Consumer Bankruptcy Project

    Posted by

    Pamela Foohey

    The current Consumer Bankruptcy Project (CBP)’s co-investigators (myself, Slipster Bob Lawless, and past Slipsters Katie Porter & Debb Thorne) just posted to SSRN our new article (forthcoming in Notre Dame Law Review), Life in the Sweatbox. “Sweatbox” refers to the financial sweatbox—the time before people file bankruptcy, which is when they often are on the brink of defaulting on their debts and lenders can charge high interest and fees. In the article, we focus on debtors’ descriptions of their time in the sweatbox.

    Based on CBP data, we find that people are living longer in the sweatbox before filing bankruptcy than they have in the past. Two-thirds of people who file bankruptcy reported struggling with their debts for two or more years before filing. One-third of people reported struggling for more than five years, double the frequency from the CBP’s survey of people who filed bankruptcy in 2007. For those people who struggle for more than two years before filing—the “long strugglers”—we find that their time in the sweatbox is marked by persistent debt collection calls, the loss of homes and other property, and going without healthcare, food, and utilities. And although long strugglers do not file bankruptcy until long after the benefits outweigh the costs, they still report being ashamed of needing to file.

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  • Letting the Money Changers Back in the Temple

    Posted by

    Alan White

    Screen Shot 2018-02-12 at 2.36.55 PMGolden Valley Lending, Inc. is a payday lender that charges 900% interest on consumer loans sold over the internet. Golden Valley relies on the dubious legal dodge of setting up shop on an Indian reservation and electing tribal law in its contracts to evade state usury laws. In April 2017 the Consumer Financial Protection Bureau filed an enforcement action asserting that Golden Valley and three other lenders were engaged in unfair debt collection practices because they violated state usury laws, and also failed to disclose the effective interest rates, violating the federal Truth in Lending law (enacted in 1969).  Screen Shot 2018-02-12 at 2.35.39 PM

     Mick Mulvaney, President Trump’s interim appointee to direct the CFPB, has now undone years of enforcement staff work by ordering that the enforcement action be dropped.  The advocacy group Allied Progress offers a summary of Mulvaney’s special interest in protecting payday lenders, in South Carolina and in Congress, and the campaign contributions with which the payday lenders have rewarded him.

     

     

    Related articles
    Report says Mulvaney has put CFPB probe of Equifax "on ice"

  • Student loans – the debt collector contracts

    Posted by

    Alan White

    Twelve senators have just written EWKHto Education Secretary Betsy DeVos questioning why the Education Department continues to award lucrative contracts to debt collection firms, and criticizing the seriously misaligned incentives embedded in those contracts.

    While most federal student loan borrowers deal with loan servicing companies like PHEAA, Navient and Nelnet, defaulting borrowers in an unlucky but sizeable minority (roughly 6.5 million) have their loans assigned to debt collectors like Collecto, Inc., Pioneer Credit Recovery, and Immediate Credit Recovery Inc. Borrowers assigned to collection firms immediately face collection fees of 25% added on to their outstanding debt. The collection firms harvest hundreds of millions of dollars in fees, mostly from federal wage garnishments, tax refund intercepts, and new consolidation loans borrowers take out to pay off old defaulted loans. Wage garnishments and tax refund intercepts are simply involuntary forms of income-based repayment, programs that could be administered by servicers without adding massive collection fees to student debt. Similarly, guiding defaulted borrowers to consolidation loans, and putting them into income-driven repayment plans, are services that servicing contractors can and do provide, at much lower cost. In short, the debt collector contracts are bad deals for student loan borrowers and bad deals for taxpayers.

     According to a Washington Post story, one of the collection firms to be awarded a contract this year had financial ties to Secretary DeVos, although she has since divested those ties. In other news, the current administration apparently reinstated two collection firms fired under the prior administration for misinforming borrowers about their rights. More in-depth analysis of the collection agency contract issue by Center for American Progress here.

  • Student loans – the other debt crisis

    Posted by

    Alan White
    Screen Shot 2018-01-26 at 11.21.36 AM

    Brookings Institute 2018

    In a low unemployment economy, an entire generation is struggling, and millions are failing, to repay student loan debt. As many as 40% of ALL borrowers recently graduating are likely to default over the life of their student loans, according to a recent Brookings Institute analysis. Total outstanding student loan debt is approaching 1.5 trillion dollars, exceeding credit card debt, exceeding auto loan debt. Two other key points from the Brookings analysis: 1) for-profit schools remain the primary driver of high student loan defaults, and 2) black college graduates default at five times the rate of white college graduates, due to persistent unemployment, higher use of for-profit colleges and lower parental income and assets.

    The rising delinquency (11% currently) and lifetime default rates are all the more disturbing given that federal student loan rules, in theory, permit all borrowers to repay based on a percentage of their income. Most student loans are funded by the U.S. Treasury, but administered by private contractors: student loan servicers. Study after study has found that student loan borrowers are systematically assigned to inappropriate payment plans,  yet the U.S. Education Department continues renewing contracts with these failing servicers. The weird public-private partnership Congress has created and tinkered with since the 1965 Higher Education Act is broken.

    Unmanageable student loan debt will saddle a generation of students with burdens that will slow or halt them on the path to prosperity. Student loan collectors have supercreditor powers, to garnish wages and seize tax refunds without going to court, to charge collection fees up to 40%, to deny graduates access to transcripts and job licenses, and to keep pursuing debts, zombie-like, even after borrowers go through bankruptcy and discharge other debts. Recent graduates cannot get mortgages to buy homes, even if they are not in default, because their student loan payments are taking such a bite out of their monthly incomes. State legislatures have piled on educational requirements for a variety of entry-level jobs (nurse's aides, child care workers, teachers, etc.) while cutting state funding for public colleges and increasing tuition: unfunded job mandates. Finally, the combination of high debt and the harsh consequences of default are widening the racial wealth and income gaps.

    Current reform proposals would make a bad situation worse. For example, it is difficult to see how increasing the percentage of income required for income-based repayment plans will help student borrowers, nor how extending the repayment period before loan retirement would reduce defaults. What is needed instead is to 1) deal with the for-profit school problem, 2) restore the state-level commitment to funding public colleges, 3) fix the broken federal student loan servicer contracting, 4) rethink the collection and bankruptcy regime for student loans and 5) repeal the student loan tax, i.e. the above-cost interest rates college graduates pay to the Treasury. Among other things. More on these themes in later posts.

  • More on Madden

    Posted by

    Adam Levitin

    I have a more refined piece on the problems with the Madden fix bills in the American Banker.  See here for my previous thoughts. 

  • Old-Fashioned Insolvency Policy in India

    Posted by

    Jason Kilborn

    It seems to me a sign of serious regulatory dysfunction when a government expressly uses bankruptcy law as a means of collection, rather than rescue or at least collective redress, with an aim to treating economic stagnation. I've seen several stories recently like this one, touting the new Indian insolvency law and government regulators' strategy of putting pressure on banks to use involuntary insolvency (creditors' petitions) to clean up the NPL problems of a series of major industrial firms. The notion that insolvency law is about collecting NPLs seems at best anachronistic, and likely at least a sign of major dysfunction in other law or policy.

    The right way for one lender (including the government tax collector) to collect one defaulted loan is to engage an ordinary collections process (judgment enforcement)–which itself might well result in the sale of the company, as envisioned in the story linked above. Creditor-initiated bankruptcy/insolvency proceedings should be the nuclear option, engaged only when creditors are worried that the debtor's assets will be dissipated by other enforcing creditors before the later-in-time ones can reach the ordinary enforcement stage. Such cases should be rare. The primary users of modern insolvency law should be debtors responding to positive incentives to seek an orderly opportunity for a global renegotiation of their debts, or an orderly way for the governors of those companies to liquidate and redeploy the assets of their companies more effectively–avoiding in the process a protracted battle about their own liabilities as personal guarantors and/or as directors liable for "insolvent trading." 

    The subtext of the stories I've seen about the new Indian insolvency law seem to be (1) it does not provide an adequate incentive for debtor-companies to seek either rehabilitation or orderly liquidation when they realize they're in obvious financial distress, (2) the ordinary collections apparatus in India must be totally dysfunctional if banks have no incentive to engage it to deal with their NPLs, (3) the new insolvency law also provides an inadequate incentive for creditors to engage it to seek collective redress, since the government has to put pressure on banks to do so, and (4) all of the work on proper, modern insolvency policy in recent years by UNCITRAL, the IMF and World Bank, and many, many others has been lost on Indian regulators. Especially in developing nations like India and South Africa, the battle over the appropriate, modern role of insolvency law as debtor-initiated rescue or exit, as opposed to old-fashioned creditor-initiated collections, continues to rage.

     

  • Plain Meaning Rolls On in Gorsuch’s First [Credit Related] Opinion

    Posted by

    Jason Kilborn

    It was not at all surprising that, for his first (traditionally unanimous) opinion, in Henson v. Santander, the new Justice Gorsuch took on the relatively simple and low-key issue of the definition of "debt collector" in the Fair Debt Collection Practices Act. It was also not surprising that he hewed quite closely to the approach of his predecessor in basing his decision on the "plain meaning" of the words in the statute, complete with grammatical analysis of past participles and participial adjectives (the example adduced, "burnt toast," might describe how the consumer protection industry will view this latest ruling). The FDCPA is as simple as it appears, the Court confirmed:  if you're collecting a (consumer) debt owed to someone else, then you're a debt collector; if you're collecting on a debt owed to you, for your own account, you're not a debt collector, even if, as in Santander's case, you bought the debt from the original creditor with the intention of collecting it for an arbitrage profit later. The notion that Congress did not foresee the debt buying industry and its explosive growth when it wrote the FDCPA in the 1960s, and it certainly would have wanted to constrain abusive collections practices by debt buyers as much as by debt collectors was … wait for it … a matter for the present Congress to clarify. You can almost see Scalia whispering in Gorsuch's (or his clerk's) ear as the opinion is drafted. Well, at least there's something to be said for predictability.

  • Midland Got It Right (Sort Of)

    Posted by

    Adam Levitin

    The Supreme Court got it right in Midland Funding LLC v. Johnson, which holds that it is not a violation of the Fair Debt Collection Practices Act to file a proof of claim in a Chapter 13 bankruptcy based on a debt whose statute of limitations has expired.  

    I suspect that I might be the only bankruptcy professor whose name doesn't start with the last two letters of the alphabet who isn't outraged by Midland (which gives a nice shout out to our former co-blogger Katie Porter's scholarship!), and I'm going to catch hell for writing this, but one of the great things about tenure is that I can say things like this.  So here goes.  I don't think Midland is a very persuasive opinion; it's not the reasoning I would adopt, but I think it gets the right answer, even if it is uncomfortable as a policy result (it's hard to defend an industry whose economics are dependent upon careless trustees and debtors). 

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  • Book of the Year

    Posted by

    Katie Porter

    EvicitedCoverCredit Slips readers are invited to share the best credit/finance book of this year. The book can be a monograph, fiction, textbook, anything. It doesn't have to be published this year; just that you found it this year.

    My nomination is Evicted by Matthew Desmond. It's an ethnography of evictions in Milwaukee and compellingly describes the problems of financial distress. The book describes how tenants struggle to make rent, and the strategies used by landlords, with the help of the courts and sheriff's department, to collect if they cannot. The site for the book contains amazing photographs– check it out.

    While the book focuses on evictions for nonpayment of rent, the foreclosure crisis also wreaked havoc on millions of lower-income Americans who may never own a home. When the property owner was foreclosed upon, the tenants found themselves on the street. The scarce and uneven protections available led to the enactment of the Protecting Tenant at Foreclosure Act. That law expired two years ago, leaving at-will tenants in about half of states vulnerable to eviction immediately after foreclosure.

    Evicted describes the heartache that comes with home loss: the strain on family relationships, the mental anguish, the physical illness, and other harms. These problems are all too familiar to those who study consumer bankruptcy, but Desmond's work is a powerful story of financial distress that ensnares families who cannot make ends meet.

  • Creative Avoidance of Potential FDCPA Liability

    Posted by

    Gary Neustadter

         On May 19, 2015, Clark County Collection Services, LLC ("CCCS"), a Nevada debt collector, obtained a default judgment in Nevada Justice Court against Patricia Arellano on an assigned medical claim of $371.89. Two months later, on July 27, 2015, Arellano filed a class action in federal district court in Nevada, against CCCS and its lawyers, alleging FDCPA violations associated with the state debt collection action.

         A week later, on August 4, 2015, CCCS and its lawyers responded with some creative lawyering. CCCS obtained a writ of execution from the Nevada Justice Court. The writ, stating an amount owing of about $825 (including fees, costs, and interest added to the principal amount of the judgment), commanded the sheriff to levy on the Arellano FDCPA cause of action pending in federal district court. Because Nevada law permits execution on a judgment debtor's pending cause of action against another, the sheriff levied the writ, posted notice of sale once each week, for three consecutive weeks, in the Nevada Legal News, and thereafter held a sale of the cause of action on November 19, 2015. CCCS, likely the only bidder at the sale, purchased the cause of action with a credit bid $250.

         On January 21, 2016, CCCS filed a motion to dismiss the federal district court action (or in the alternative for summary judgment) arguing, among other things, that by virtue of the execution sale it now owned the FDCPA claim against itself and that Arellano therefore lacked standing. The district court agreed and entered an order dismissing the action. Ms. Arellano has appealed to the Ninth Circuit and the case is pending. Her opening brief (Plaintiff-Appellant's Opening Brief, Arellano v. Clark County Collection Services, LLC, No. 16-15467 (9th Cir. July 29, 2016), ECF No. 9), argues that federal law preempts and therefore precludes this use of the Nevada enforcement procedure by a debt collector because, so used, the procedure undermines the deterrent and remedial purposes of the FDCPA. The brief also argues that an FDCPA claim is akin to a tort claim and that use of the Nevada enforcement procedure to purchase the claim amounts to the assignment of a tort claim that is prohibited by common law.

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