The COVID-19 pandemic has sparked policymakers’ interest in eviction suits, but debt collection cases have received far less attention, even as they overwhelm civil cases across the country. Despite a documented need to modernize how the courts handle these lawsuits and address the barriers they impose to financial security, particularly for communities of color, the necessary reforms are rarely included in the legislative action of the state.
As with evictions, pandemic-related financial strains and growing household debt are already generating more lawsuits that the courts are struggling to handle. But debt disputes are governed by a patchwork of federal regulations, state laws, court rules and industry standards, which experts have called a “mole swoop” approach to handling these challenges.
To educate state legislators on these issues, the National Council of State Legislators (NCSL) recently hosted a webinar to provide guidance on what has been and can be done to improve court efficiency and ensure fair outcomes. for all parties. Guest speakers included Delegate Al Carr (D), a Maryland state legislator working on recovering medical debts in court, and David Reid, general counsel for the trade association of debt buyers Receivables Management Association International and a frequent contributor to legislative efforts in this area. space.
Panelists discussed the role state legislators play in clarifying and updating laws to better meet the needs of parties involved in consumer claims. In many states, debt collection suits continue to be governed by general codes of civil procedure, which are insufficient to cope with the growing number of lawsuits brought by a handful of represented debt buyers and service companies. financiers against consumers who lack lawyers. Policies should reflect these transformations in the use of courts, and state justice systems should take an active role in managing cases in a way that fairly and efficiently meets the needs of their contemporary users. To do this, legislators could clarify specific documentation and proof-of-claim requirements for each particular type of debt (e.g., credit card, medical, payday loan), rather than maintaining general rules that s apply to all general civil or contractual claims. They could also expand lawsuit notification requirements to ensure that the majority of consumers in these cases who do not have a lawyer still receive and understand the notice of lawsuit against them. While much of this can be accomplished at the judicial level by updating court rules, Carr noted that state legislators can use their oversight role of the judiciary to “force a conversation by introducing legislation.” in order to “put these questions to the courts” and push forward the reforms.
To that end, the webinar also highlighted recent legislative efforts that have been successful in improving court processes at various stages of debt collection lawsuits. For example, Maryland’s Medical Debt Protection Act, passed in May 2021, aims to manage the number of lawsuits filed by requiring hospitals to verify patient eligibility for financial assistance before incurring debt in court. The legislation also limits a hospital’s ability to use a court order to seize a patient’s wages, assets, and even home to satisfy a debt.
Also last year, the New York Legislature passed the Consumer Credit Fairness Act to refine court rules for debt collection suits. Civil courts are now required to send additional notice to consumers at two key points in a case: after they have first been notified of a legal action and if a default judgment or automatic decision in favor of the plaintiff is requested. These communications also inform consumers of the implications of a legal case, outline next steps, and direct consumers to legal resources written in plain language and available in English and Spanish. The new law also requires the court to maintain a website with resources for self-employed consumers.
Similarly, the Texas Legislature recently ordered the state Supreme Court to “establish a simple and expedited process” for defendants to seek relief from seizures of bank accounts and assets after a judgment has been issued. was rendered against them. As in New York, the new law specifies that notices must contain instructions, be written in plain language and incorporate Spanish translations.
In addition to these examples, state legislators across the country are also updating laws to lower the statute of limitations for consumer debt lawsuits, reduce postjudgment interest rates, and determine criteria for exemption from wage garnishment and seizure of assets. Ohio recently reduced its statute of limitations for debt cases from eight to six years to match national averages. Nevada has capped interest rates on judgments to more accurately reflect modern bank rates. And Colorado’s recent decision to increase the value of a foreclosure-protected family’s home is an important step toward updating garnishment and asset seizure exemptions to more accurately reflect the cost of modern living and the value of homes. Changing these outdated laws helps ensure that consumers do not go into further debt after legal intervention and are still able to make ends meet by paying off the debts they owe.
Guided by these promising practices, state legislators can do much to continue to manage the prevalence of debt collection litigation and better align the civil law system with the characteristics of modern court users and their legal needs. For these efforts, it is essential to understand and examine current gaps in policy and court case data to better identify additional pain points and monitor the impact of any reforms. Lawmakers would also benefit from working with various stakeholders, including the courts, consumers and their advocates, and industry players. Closing the NCSL webinar, David Reid noted that it is “much easier to reach common ground” when he has “open lines of communication” with consumer and court advocates, a perspective adopted by states such as Michigan and Utah, which are considering holistic reforms in this space.
State legislators interested in watching a recording of the webinar can visit the NCSL website, which also offers policy resources on debt collection lawsuits and other information on key challenges facing civil courts.
Natasha Khwaja works on The Pew Charitable Trusts Civil Legal System Modernization Project.