The Federal Trade Commission announced Monday it is calling for an overhaul of the current system for resolving consumer debt collection disputes, citing problems with how courts settle debt collection lawsuits. According to the FTC, often collectors do not properly notify plaintiffs that lawsuits have been filed and, beyond that, many of these suits contain faulty information.

Additionally, the FTC pointed out that debt collection lawsuits are often settled through default judgments, as many plaintiffs fail to show up for court hearings, which usually results in a garnishment of wages.

These concerns, released in a report on Monday, come at a time when debt collections filings are piling up. According to the The New York Times, one New York law firm has filed 80,000 debt collection lawsuits each year for the past decade.

Other debt attorneys with whom we spoke have seen an increase in business, but pointed out that the upswing has little to do with an increase in debt-ridden individuals.

“In this economy, fewer and fewer companies can afford to keep bad debt on their books for nearly as long,” Seattle-based attorney Matthew King said.

Additionally, more cases are actually making it into the courtroom as the threat of litigation no longer entices debtors to settle with collectors. The increase in volume has lead many law firms to use computer software to prepare cases. Programs such as Commercial Legal’s Collection-Master can be used to send out collection letters and prepare summonses, but their use can lead to other problems.
“The software has been in existence for many years and merely reduces the costs of collection for the attorney/collection agency,” Seattle-based attorney Matthew King explains to MainStreet. “The drawbacks, however, can be that the information on the pleadings can be inaccurate or out of date.”

As a result, attorneys who do not adequately review the computer-generated court filings could end up sending a summons to the wrong individual.

“I had it happen to me,” Josh Horn, an attorney at Philadelphia law firm Fox Rothschild LLP told MainStreet. “Someone claimed that I was a West Virginia resident who owed money on a timeshare when, in fact, it was someone else with the same name who had incurred the debt.”

This means that the first thing you should do if served with a debt collection lawsuit is review the documents carefully to confirm that the debt actually belongs to you. You can also send a validation letter to the collector to reconfirm the debt.  If it is yours, don’t ignore it.

“If you cannot afford an attorney, file an answer with the Court,” King says, acknowledging that many debtors don’t respond to the litigation because they fear legal fees. “[Your] answer must admit or deny each and every sentence in the Complaint. If you admit the debt, they can easily get a judgment against you. If you deny the debt, then they must show that you are actually liable for [it].”

King says that those who deny the debt should try to negotiate with attorneys or creditors while they are awaiting their court hearing as reaching an agreement will “save the damage to your credit that a judgment can cause.”

Additionally, those facing a debt-related court case may be able to obtain an attorney pro bono at a free legal clinic through the state or local bar associations. Or, as a last resort, they can consider filing for bankruptcy.
In their report, the FTC suggests that states impose stricter regulations regarding debt collection lawsuits. They would like states to require that debt collectors provide a breakdown of the debt by principal, interest and fees and institute preventative measures so that collectors can’t sue for funds outside of the statute of limitations or freeze bank accounts exempt from garnishment. The FTC also suggests that states adopt measures to make it more likely that plaintiffs will show up in court, in an effort to reduce default judgments.

The FTC says that further investigation is needed before they can make additional recommendations. In the interim, those with serious debt can check out this MainStreet article for suggestions on how to deal with debt collectors.

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