The title isn’t exactly what The New York Times‘ Dealbook blog post wrote about in December, but it’s the lesson one should draw from it. Debt collectors can use the courts to sue debtors, but when debtors sue back, collectors can hide behind arbitration clauses to make the suits go away. The Times characterized it as a hypocritical miscarriage of justice—and it is.
The trick the collectors use works like this: A debtor (allegedly) defaults on a debt owed to a creditor. The creditor has or will sell this debt to a collection agency, which then tries to collect on it by filing a collection action. Luckily for the debt collector, the debtor does not appear in court, so the court has no other option but to give the collector a default judgment. After that, the collector can use various methods to enforce the judgment, but if the debtor bands together with others by filing a class action against the collection: They’re out of luck. The debt collector asks the court to dismiss the case thanks to arbitration clauses the debtors signed with the original creditor.
Importantly, it doesn’t matter whether the debtor has a clear defense to the collection action, e.g. mistaken identity, retired debt, or even the statute of limitations running out. So long as the collector can point to an arbitration clause, the debtor is stuck.
But once they lose, however, debtors tend to give up. Discouragingly, debt collectors claim that they faced only a few dozen arbitration claims brought by debtors—in the last several years.
The Dealbook post can be found here.
There are three lessons for debtors. One, the post doesn’t discuss whether the collectors engaged in “sewer service,” which is filing false lawsuits against debtors and hoping they’ll stick. Collectors who do that and hide behind arbitration clauses might only be vulnerable to state action, which might not be as effective for debtors as a normal civil suit would be. Two, debtors should check their mail vigilantly because some of the debtors in the blog post didn’t do that. They received bland summonses that warned of the peril of not appearing in court. Finally, if you owe money to a debt collector, and a class action won’t work, then it’s time to consider consulting with an experienced New York bankruptcy lawyer. An arbitration agreement is no good against a discharge order.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
