Some debt collectors employ the litigation method to extract money from borrowers. They purchase the debt from creditors at a fraction of the amount and initiate a lawsuit to recover the full amount. Debt collectors believe that resorting to legal processes can guarantee a quick recovery of money; more so, when the borrower does not reply to the complaint filed. In case the borrower does not file a timely response to the complaint, the court can order a default judgment and the collector can claim the full amount owed from the borrower.
Consumer advocates state that they come across various cases where the borrower is not even aware that a lawsuit has been instituted against him. Sometimes, the amount that the collector claims from the borrower is not actually owed by the borrower. Often times, debt collectors sue people who don’t actually owe a debt. Some collectors file a complaint without informing the borrowers and are successful in obtaining a default judgment and an award of the debt amount owed. A senior staff attorney at the New Economy Project, a consumer advocacy group, stated that most of the cases reported reveal that the borrowers do not receive any notice of the complaint filed and they fail to answer the complaint. The consequences of such failure lead to wage garnishment and account seizures. The borrower wakes up to an empty bank account and the collectors leave with the money, legally.
A consumer protection attorney stated that debts are often sold and purchased. Therefore, the person suing the borrower may not be the original lender and may not have the original agreement or any documents in support of the loan.
State regulators sent a letter to the Consumer Financial Protection Bureau, stating their concerns with rising debt collection lawsuits deliberately instituted by collectors. In an attempt to curb such lawsuits, Federal legislators in New York took efforts to prevent Portfolio Recovery Associates and Sherman Financial Group (the U.S.’ largest debt collection companies) from obtaining $16 million in debt collection lawsuits. The companies agreed to pay $475,000 as a penalty for violating the law by actively pursuing time-barred debts.