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Debt Documentation Requirements in State Courts and Access to Credit

Abhay Aneja, Luis Faundez, Dalié Jiménez, Claire Johnson Raba, Prasad Krishnamurthy, and Manisha Padi • September 10, 2024

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This working paper contains preliminary findings on the causal effect of state debt documentation requirements on access to credit.

Debt collection lawsuits dominate the dockets of state courts and debt collection is a large and growing industry.1 In 2023, an estimated 6,431 debt collection agencies in the U.S. earned $20.9 billion in revenue.2 A large proportion of debt collection lawsuits result in default judgments against defendants. Even when defendants file an answer, they are rarely represented by counsel. Judgments against defendants result in financial distress: wage garnishments, bank levies, property liens, and even forced home sales. A growing number of cases are brought by third-party debt buyers who purchase the debt from the original creditor.3 Scholars, advocates, and judges have raised the concern that plaintiff creditors—especially debt buyers—are often unable to demonstrate basic facts, such as who owes the debt, the amount of the debt, and whether the plaintiff has the right to enforce it.

In response, several states and courts have increased documentation requirements for plaintiffs in debt collection lawsuits, especially for debt buyers. The required documentation varies by state but generally includes: (1) a statement of the debt owed, including the amount due, principal, interest, and fees, (2) a copy of the original debt instrument or contract, and (3) documentation of the plaintiff’s ownership of debt, including copies of all bills of sale. In theory, debt documentation requirements could lower recovery rates–the amount of a defaulted debt that the lender can recover–and thereby lower the total return to creditors, leading to less consumer credit. Unsurprisingly, debt buyers typically argue that restrictive debt collection laws result in reduced access to credit and an increased cost of credit.4 There are several studies of the impact of debt collection laws on the credit market.5 These studies typically find that more debt collection laws lead to less consumer credit. However, regulation of debt collection takes many forms–e.g. licensing requirements, prohibited practices, sanctions for violations, and documentation requirements–and these studies do not distinguish between these different methods of regulation.

In this working paper, we estimate the effect of enhanced debt documentation requirements on credit access using a difference-in-differences approach. We designate states that passed documentation reforms as treated states and those that did not as controls. We then compare the difference in credit access between treated and control states before and after the documentation reforms.

We find no evidence that enhanced debt documentation requirements lead to lower credit access. In particular, we find no statistical evidence of a decline in the number of open credit cards, credit card access, or total credit card debt after the passage of enhanced documentation requirements.

Given the existing literature, our results suggest that the effects of debt collection regulation can vary substantially with the type of regulation. For example, licensing requirements and fines for violations may have a different effect on the credit market than documentation requirements. More research is required to understand the specific mechanisms through which debt collection regulation can affect access to credit.

Policymakers should understand that documentation requirements may not affect credit access to the same extent as other debt collection regulations, and that credit access is only one dimension along which to evaluate the effects of debt collection regulation. For in-depth looks at how documentation of debt requirements impacted court outcomes, see our case studies on California, Connecticut, and Harris County, Texas.6

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