Over the past 50 years, wage stagnation, as well as already high and rising housing, health care, and education costs have dramatically increased debt loads for the average family. Moreover, recovery from the Great Recession has been uneven. Data show that families of color, Americans born after 1970, and households earning less than $60,000 annually are the least likely to have recovered the wealth they lost in the financial crisis.2 And now, the COVID-19 health and economic crisis has laid bare existing inequities and will perpetuate these families’ economic struggles. Before the crisis, many lower-income families had little to no margin for an unexpected expense and were just one financial shock away from the risk of eviction or homelessness. The pandemic is that financial shock to many lower-income families. Massive unemployment and lost wages are also worsening the affordable housing crisis, with a particularly harsh impact on renter households, which are more likely to be people of color. These impacts will worsen over time, as immediate income shortfalls result in missed or late bill payments, adding late fees and related penalties to swelling debt burdens and increasing the chance of exposure to debt collectors and debt buyers.
Due to this context of rising inequality and a related rise in consumer debt, there has been substantial growth in the collection industry in recent decades. A subset of the collection industry, debt buying, emerged in the wake of this growth in consumer debt. Debt buyers purchase debts from lenders and other creditors at a deep discount and then attempt to collect the debt themselves, often without underlying documentation. Debt buyers typically make use of the courts to collect debts and are frequently able to win court judgments against people, even those who do not owe the debt. The impacts of this system can be severe—after a default judgment, wages are frequently garnished, forcing the consumer to pay a debt they may not owe.
In California, state laws regarding fair debt collection have been strengthened in recent years. California’s Fair Debt Buying Practices Act (CFDBPA), passed in 2013, attempts to make the process fairer by increasing the documentation required for debt buyers to sue people in court.3 This report seeks to answer the following questions: How did the passage of the CFDBPA impact the debt buyer litigation landscape in the state of California? What impact did it have on the number of cases filed and on the number of cases ending in default judgments, which are automatic wins for the debt buyers? Did it have an impact on the amount of documentation provided by debt buyers?
The evidence of success is mixed, but the CFDBPA appears to have had a modest positive impact. This report reveals that total case filings and filings by top debt buyers declined in the years after the passage of the CFDBPA. However, default judgment rates, rates of representation, and the lack of documentation provided in collections cases still show that the decks remain stacked in favor of debt buyers and against consumers. Debt buyers in California continue to abuse the court system to pursue likely document-unsupported debts, and California borrowers are still at risk of default judgments and garnishments that will force them to pay debts they may not owe. On the one hand, the CFDBPA may have been one factor contributing to the decline in the total number of case filings and the decline in filings by top debt collectors, and the legislation likely led to a modest increase in cases that were supported by minimum required documentation. On the other hand, case filings were likely down for macroeconomic reasons, filings have been inching upwards in more recent years, and case documentation remains insufficient in the majority of all cases.
This report discusses the national impact of debt collection and summarizes applicable debt collection legislation, including the national Fair Debt Collection Practices Act (FDCPA), the California Rosenthal Fair Debt Collection Practices Act (Rosenthal Act), and the California Fair Debt Buying Protection Act (CFDBPA). Then methodological notes are provided: This report analyzes original data collected from the superior courts in the top 10 most populous counties in the state. The first dataset includes filing and case status information for the 437,644 collections cases filed by the top 20 debt buyers in California (a dataset that represents approximately half of all collections cases filed in the most populous counties in California during the study period). The second dataset includes case documentation and outcome data for a random sample of 400 court cases that were filed between January 1, 2012 and December 31, 2017.
Key Findings Include the Following
- Consumer complaints continue to highlight debt collection in California as a major problem. Complaints about debt collection still represent one in five complaints submitted to the Consumer Financial Protection Bureau (CFPB), and thousands of complaints are submitted each year on the topic. Analysis of the complaints reveals that one in every four complainants allege that the debt is not theirs, indicating serious and persistent documentation problems.
- Collection cases filed by top debt buyers declined after the implementation of the CFDBPA but have inched upwards since. Case filings by top debt buyers in the most populous counties in California fell from a high of almost 120,000 in 2012 to a low of around 32,000 in 2015 but were up to almost 52,000 in 2017. Recent reporting indicates that cases have continued to rise since 2017. The decline in case filings may be associated with the passage of the CFDBPA, but research indicates that filings were down nationally, making it difficult to draw a causal link between the legislation and the decline. Additionally, fewer than one in three cases filed during the study period were subject to the CFDBPA because they were concerning debts purchased prior to January 1, 2014.
- The number of cases filed by the top debt buyer law firms and attorneys suggests robo-signing, particularly for cases not subject to the CFDBPA. This analysis indicates that the top four debt buyer firms are filing almost two in three collections cases filed in the most populous counties, or approximately 275,000 cases during the study period, and that the high volume may indicate a lack of meaningful attorney review. The top eight individual attorneys alone filed two in five cases. The share of filings remained steady, but the number of filings fell for cases subject to the CFDBPA, mirroring the decrease in the overall number of case filings.
- Almost two out of every three cases that were resolved resulted in default judgments in favor of the plaintiff. For resolved cases not subject to the CFDBPA, the default judgment rate was 63.7%, and for those cases subject to the CFDBPA, the default judgment rate was 66.3%. Collections after a default judgment occur both voluntarily and involuntarily, and 27% of all cases ended in wage garnishment, an involuntary payment that is taken directly from a person’s wages. Almost one-third of cases were dismissed, and failure to provide notice was the most common reason for dismissal. Cases were dismissed for lack of proper documentation only 4% of the time, and consumers mounted successful defenses in only 2% of cases.
- Defendants are almost never represented in court. Over 98% of defendants did not have representation by an attorney. In the small number of cases where defendants had attorneys, the case was dismissed 100% of the time. When consumers represented themselves, their cases were dismissed 70% of the time, a worse outcome than for those who were represented by attorneys, but a better outcome than for those who never appeared in court.
- Top debt collectors may have seized over $700 million between 2012 and 2017 through garnishment. With 27.3% of all cases ending in garnishment (or approximately 117,000 cases over the study period) and an average judgment amount of $5,925, the top debt collectors stand to seize over $700 million in the top 10 most populous counties alone.
- Debt buyers continue to win cases without sufficient documentation. A majority of cases (61%) were filed without the minimum documentary evidence required by statute. Furthermore, the evidence provided in some cases was insufficient to establish proof of debt. Almost one in four default judgments were granted in cases where the minimum required documentation was not provided, suggesting that evidentiary requirements were not reliably enforced even for cases subject to the CFDBPA. Required documentation was less likely to be filed when cases were processed by clerks of court.
- Documentary evidence is insufficient to establish the validity and ownership of debt. Although many cases were filed without evidence tying the current person to the correct debt in the correct amount, dismissals due to insufficient documentation are uncommon, representing only 4% of dismissals. Many cases end in default judgment despite their lack of documentation: for cases that were subject to the CFDBPA, almost 25% of all default judgments were for cases lacking legally required documentation.
- Court clerks play an outsized and questionable role in determining case outcomes. Many cases were adjudicated by court clerks and assistant clerks even though clerks are not trained to make legal judgments. In rare cases, judges intervened to hold plaintiffs to higher proof of debt standards, but clerks decided at least 30% of all cases. In these cases, almost 80% resulted in default judgments for the plaintiff, compared to a rate of 65% for all cases.
Lastly, this report provides policy recommendations that highlight the need for thoughtful and thorough implementation and enforcement efforts by the courts themselves.
Key Recommendations Include
- Enforce existing documentation requirements. Debt buyers should be prohibited from bringing lawsuits against consumers unless, at a minimum, they meet the “proof of debt” standard that the CFDBPA sets out. Courts should stringently enforce these standards, especially with respect to documentation that the CFDBPA requires of debt buyers prior to entering default judgment against consumers. To the extent that courts are not aware of the legal requirements, clerks and judges may benefit from more outreach, education, and/or guidance from the Judicial Council, the policymaking body of California’s state court system. A checklist of applicable civil procedures, for instance, could help clerks make basic determinations about whether cases provide a minimum of required evidence without encroaching upon the role of judges.
- Strengthen existing state law with respect to required documentation to establish proof of debt. To the extent that some debt buyers are complying with the documentation requirements of the CFDBPA on its face, there is evidence that the legal requirements are not strong enough to protect against the wrong consumer being sued for the wrong amount. "Proof of debt" must be established through detailed information and original account-level documentation about the consumer and the debt. The documentation requirements could also be strengthened by requiring that debt buyers disclose key documents automatically at the start of litigation.
- Share debt collection case information publicly online. The Judicial Council could share more debt collection case information with the public in a centralized system accessible online to better understand the debt collection litigation landscape and what reforms are needed to protect consumers from abusive or unfair practices and ensure that debt buyers adhere to state law. Increased transparency in case data would, in particular, better protect consumers of color who have been shown in national and state studies elsewhere to be disproportionately impacted by debt collection.
- Discourage debt buyers from acting as “lawsuit factories” by holding them accountable through existing enforcement mechanisms if they initiate unwarranted legal actions. Courts should not be entering default judgments against consumers in cases where debt buyers bring unsubstantiated legal actions. Moreover, because of the harms that collections lawsuits inflict, Attorney General Xavier Becerra and private bar attorneys should pursue monetary penalties against debt buyers if they pursue collection actions in court without first meeting the “proof of debt” standard as per the CFDBPA.