Thursday, May 14, 2009


Today I wrote a little self-help guide for a friend who faces a debt quandary. I post it below.

I often write about debt and the unfair relationship it represents. I wanted to share this overview to reinforce my thoughts about creditors, debtors, debt and the legal processes that operate in this area. In short, debt collection in America reveals the essential conflict between JUSTICE and LAW in our legal system. By examining the legal processes and power disparities that operate in these small debt cases, we see clearly that our system cares far more about vested contract rights than it cares about fair procedure. Civil litigation itself favors the powerful. Even in cases in which the weaker party has legal merit, litigation imposes such expense, confusion, technical intimidation and inconvenience that the weaker party rarely gets a chance to assert his arguments in a fair forum. Even if he does, he may not know the "proper form" in which to submit his arguments. And that can lose him the case on "formal" grounds, no matter how substantial his arguments.

We can bicker over who's to blame for the credit mess in this country. We can blame consumers for being improvident. We can blame creditors for putting too much faith in financially weak borrowers. We can blame mass media for implanting insidious impulses to buy things in weak minds, leading to mass economic stupidity. We can even blame the health care system and crushing education costs for creating a nation of perennial, powerless debtors. Depending on your political views, you will either blame the strong party or the weak party. No matter where you stand, however, these issues are real and pervasive. Debt is a fact of life in America. In my view, it is not a good fact. But we must live with it and consider its social impact on powerless people.

Our Framers said that debt was the cousin of slavery. The more I live with debt and witness its emasculating effects on people, the more I see the truth in that dictum.

Thanks for reading.


I would be glad to give you a few options, but since I do not know all the facts, please use your discretion in applying them. You said first that you "might owe this debt." That is extremely significant. If there is no valid debt, your original creditor cannot transfer it to a third-party (ie, a collection house). You said that the collection house sent you a letter and you didn't recognize the person who says you owe money. That is very common; debt is a "business." It is rare that original creditors ever bother to pursue older debts. Instead, they sell the RIGHT TO SEEK YOUR DEBT to a third-party collection house for, say, half the debt value. Then the collection house "steps into the creditor's shoes" and tries to throttle you for the full debt amount. In this way, the creditor wins because he gets "something" from what appeared to him an "uncollectible" debt, while the collection house stands a chance to make a profit by paying $400 for something from which he might get $1000. It's very nasty. And you're the "target" for the collection house's potential profit. If they don't wring you for more than they paid for your debt, you are a "loss" for them. Corporations don't like "losses."

Having said this, collection houses masquerade as law firms. In fact, they are little more than sweatshops where nonlawyers line up in cubicles, get on phones and harass people for money. You will never talk to a lawyer if you call a collection house. Instead, you will get an unreasonable clerk who will browbeat you into making admissions. Don't do it. The law can do nothing against you until the collection house PROVES you owe a valid, legal debt. They can only do this with genuine evidence. Obviously they have filed a lawsuit. They must have some evidence to substantiate their claims. DO NOT make their job easier by suggesting you "might owe" the debt or by answering other questions, such as "how much you make" "where you work," "whether you have any savings," etc. They are just trying to make you seal your own coffin, no matter how nice they might try to make it sound. In short, do not give them ANY information. If you ever do call them, get information FROM THEM, not the other way around. I would advise against an "informational" or "explanatory" letter. I think it's great that you care about honor and decency. Sadly, the law cares not for these things, nor do collection houses. In most cases, collection houses USE people's sense of honor against them by making them confess they owe far more than they do, or they owe it to someone (like the collection house) who does not have a right to it. This may seem hard to grasp, but being a "good person" will never help you in a legal matter. You will get trampled. That's why I don't practice anymore!

Still, the collection house has the burden here. They have to show that you: (1) owe a VALID debt; and (2) they properly obtained your debt from your original creditor. Additionally, you are right to be scared of defaults. Defaults represent a collection house's most significant legal weapon. This is perverse, because defaults mean that the opposing side in a legal dispute simply did not answer, allowing the claimant to win even if he is wrong. In our system, we think that fairness should prevail. Fairness in a legal case implies that BOTH SIDES have a full opportunity to explain themselves without regard to wealth, status or situation. Collection houses do not want to give you such a "fair opportunity." After all, fairness reduces their chances for a quick win, and time is money. They just file the lawsuit in some distant court, hope to scare you with legal-looking papers, then rely on your ignorance. They trust--and expect--that you will not answer the complaint. If you default, you LOSE your fair opportunity to contest their evidence. That totally undermines our justice system. But again, our system has less to do with justice than power, and collection houses are more powerful than working individuals like you.

Even against this unfair background, you have options. But you must understand that a lawsuit has been filed. Informal answers will not suffice to protect your rights. To legally answer a complaint, you must APPEAR IN THE COURT WHERE THE COMPLAINT WAS FILED. That is the only way to stop the default clock. In routine collection actions like this, debtors almost never appear. Nonetheless, look to see WHERE they filed the lawsuit. Before you are liable for any debt, a State court must have JURISDICTION over your person. If the collection house filed against you in Maryland, but you live in Massachusetts, a default judgment in Maryland will not affect you at all. And under the Constitution, Massachusetts courts would not be bound to enforce it by garnishment. Of course, if you had some contact with Maryland (ie, you did business there or something) you might be liable. But in most cases--especially collection cases--collection houses file lawsuits in the most obscure places, often in States that have no jurisdiction over the debtor. They simply trust the debtor's ignorance to win by default or "fright." They also minimize the chance that the debtor will appear in court against them because it is well-nigh impossible for a wage-earner in California to appear in a Maine court. This increases their chances for a default win.

So my first option is: Check the court in which the suit has been filed. If it is in Hawaii or something, you can be assured that you will never be garnished in Massachusetts. They can get all the defaults they want against you in Hawaii, but you can block them by showing up in a Massachusetts court and saying: "I have no contact to Hawaii." In this sense, the law favors you.

If the court is local, you must either: (1) Appear in court to answer the complaint; or (2) Settle out of court by private contract with the collection house. Now, I doubt you have the time or energy to litigate this case. But if you truly believe that the amount is wrong or that you do not owe the money at all, it might be worth submitting an answer with all the legal formalities. If you do, the collection house might just give up. They do not like wasting time on individual cases because that would hurt their margins. Before you do this, however, I encourage you to call the collection house to ask for some very basic information. Ask them FROM WHOM they bought the debt. Also ask them for any documents they have that provide evidence that you owe a debt. With that information, you can intelligently answer them in court with facts relevant to the legal standard.

If all this fails, and it appears that you do owe money, you can only avoid default and garnishment by bargaining with the collection house. This is unappetizing, but remember that the collection house has THOUSANDS of files like yours. They are trying to squeeze SOMETHING out of each, even if not the full amount they have a right to demand. If the face value of all their files is $15,000,000, but they only paid $5,000,000 for them, they still win if they squeeze just $6,000,000 from everyone. They want to resolve cases fast, and if it looks like you don't have the resources to pay the amount, they will settle for far less than the amount to which they are entitled. This is not "kindness" or "generosity." It is merely an acknowledgment that you do not have the financial capacity to give them all they want. That said, do not volunteer any specific information about your bank accounts, your identification numbers, your savings, any sources of income or your employer. Do not even mention your wife or any other person who lives with you. Just say you are broke and there is simply no way you could pay the full amount. Offer them something. If they take it, the original debt EVAPORATES (it's called "Discharge" in legal jingo). Just make sure you get it IN WRITING that your new payment arrangement discharges the old debt and fully resolves the matter.

This is probably the most practical option if you actually DO owe money. It keeps you out of court, and it saves you paying the full amount. You might even convince them to take pennies on each dollar owed. Plus it gets rid of the case for good. Again, you must insist on a WRITING that says your compromise payment "discharges" the old debt, and that the collection house promises to dismiss the lawsuit. If they don't provide these things, you could pay the compromise AND STILL face full liability for the debt! You definitely don't want that.

Well, sorry to have gone on for so long, but I wanted to give you a full overview. This whole area of law bothers me on a fundamental level. I have dealt with creditors myself over the years, and I can't tell you how weak and insignificant it made me feel. Debt really represents a form of tyranny in this country. Creditors enjoy so many advantages over debtors that it really mocks the "fairness principle" that people naively ascribe to the law. Yet that is the central irony I discovered in all this. If the law FAVORS the creditor, what does that say about the law? It really doesn't care about "little people" at all.

I wish it were not naive to think that the law stands for justice, honor and good. But the longer you live, the more you find that it is naive to believe it does.

1 comment:

Anonymous said...

very nicely written, I agree