The New Economy Project, a nonprofit that works to promote community economic justice, recently issued a report entitled, “The Debt Collection Racket in New York: How the Industry Violates Due Process and Perpetuates Economic Inequality.” The report shines a spotlight on the ways in which debt buyers and debt collection agencies target low-income neighborhoods and communities of color.

One of the most egregious practices is using the court system to drain consumers’ financial assets. The report notes that, in 2011, approximately 200,000 debt collection lawsuits were filed in New York. Often, debt collectors who file these lawsuits engage in “gutter service” or “robo-signing.” Gutter service occurs when notifications of lawsuits aren’t delivered to consumers and are instead metaphorically thrown in the gutter. As a result, consumers don’t know that they are the defendant in a debt collection lawsuit and can’t come to court to defend themselves.

In robo-signing cases, debt collection agencies have employees attest that the debt in question has been researched and validated prior to bringing suit in court. In reality, though, employees often sign the affidavits without ever having reviewed the files. The study found that, “In 9 out of 10 cases, an employee of the debt buyer – who had no connection to the original creditor – fraudulently testified to facts that only the original creditor could possibly know.”

The New Economy Project analyzed the debt collection lawsuits from 2011 and released startling findings:

• “Debt collectors filed 195,105 lawsuits against New Yorkers.
  Debt collection lawsuits accounted for 8 out of 10 of all default judgments entered.
• Overall, 42% of debt collection lawsuits resulted in default judgments — but debt buyers obtained default judgments in an estimated 62% of their cases.
• Only 2% of all New Yorkers sued had legal representation.
• Debt buyers brought more than half of all debt collection lawsuits.
• Debt buyers obtained an estimated $230 million in judgments against New Yorkers.
• Among the 90 debt buyer lawsuit files examined, not a single case went to trial or was resolved on the merits.
• Debt buyers virtually never prevailed in contested cases, but relied on winning cases by default or by intimidating unrepresented people into making settlement agreements.”

But the study also correlated the highest number of default judgments with New York communities that are predominately non-white and low income. It concludes, “Abusive debt collection practices are directly linked to broader economic discrimination, financial distress, and wealth inequality.”

The study concludes by recommending measures that could be taken to help correct these inequalities. For example, it urges the New York State Office of Court Administration to require that debt buyers submit affidavits from original creditors. It suggests that the New York State Department of Financial Services require debt buyers “to document debts when attempting to collect on them.” It also urges aggressive enforcement actions when bad players break the rules.

The full study can be downloaded here: http://www.nedap.org/resources/documents/DebtCollectionRacketNY.pdf