How State Policies Affect Court Judgments in Debt Collection Lawsuits: a Comparative Study Across Four States
Frederick F. Wherry and Hannah Hill • October 08, 2024
When defendants engage with civil courts about debt collection lawsuits across the United States, they encounter courts that are governed by different policy environments. Drawing on quantitative and qualitative evidence, this study uses a comparative design to investigate whether a debtor sued in a policy environment with fewer consumer protections is more likely to receive a default judgment as a case outcome than those sued in a policy environment with more consumer protections. We used the National Consumer Law Center’s (NCLC) scorecard to determine how many relevant protections those policy environments provided in four jurisdictions: Harris County, Texas; New Haven County, Connecticut; Philadelphia County, Pennsylvania; and St. Louis County, Missouri.
We define states that implemented laws to receive a grade of B or better in the NCLC scorecard as having more consumer protections and those earning a grade of C or worse in the NCLC scorecard as having fewer consumer protections. We filtered our analysis to completed debt cases, totaling 190,085 across the four jurisdictions between 2020 and 2022. Using a difference-in-difference design, we measured whether and how more protections may lead to reductions in default judgments as well as reductions in other negative outcomes for defendants.
Findings
Legal representation is associated with a 91.1% decrease in a defendant’s likelihood of receiving a default judgment, emphasizing the efficacy of and need for legal guidance.
After courts ended COVID shutdowns and resumed normal services, plaintiffs who were both third-party debt collectors and bulk filers like LVNV Funding LLC, Midland Credit Management, and Portfolio Recovery Associates LLC were 35.4% more likely to obtain a default judgment than other plaintiffs who are original creditors and do not file cases in bulk.
Less than 1% of plaintiffs filed more than 50% of the lawsuits in the docket for 3 out of the 4 jurisdictions. The court docket in each jurisdiction was dominated by about 10 companies who are the repeat-players in the courts.
Notification to a defendant that they are being sued sometimes does not happen. Across the four jurisdictions, only New Haven County requires the plaintiff to verify the defendant’s correct address.
Banning wage garnishments appears to be a contributing factor to fewer default judgments. However, the potential reduction in the likelihood of a default judgment is not realized when the plaintiff is a bulk filer, suggesting that consumer protection policies do not meet their intended aims against high-frequency, bulk filers.
Defendants sued in states with a higher NCLC scorecard grade were a little more than twice as likely receive a default judgment than defendants sued in the two states with a lower grade.
Attention to default judgments may be overshadowing another court outcome that can have similar consequences. These are the consent agreements—which reflect payment plans entered between the parties. The rate of consent agreements sometimes nears the rate of default judgments. Many defendants entering into these agreements may not be aware of the potential costs and benefits of doing so.
Key recommendations regardless of policy environment
Improve the availability and quality of legal information. Compared to plaintiffs, defendants regularly encounter several challenges when they try to navigate the court system on their own. The information they receive about how to manage each step of the legal process is typically unclear and difficult to understand for people without a legal education. The courts should provide clear information online and in-person at the court, improve forms to include needed legal information, and employ court navigators who can help court users find the right courtroom and court-relevant services.
Prevent consent agreements without informed consent. Judges should explain what a consent agreement means, that continuances are available, and that consent agreements can be modified if both parties agree. This could give defendants more time to become informed of the costs and benefits to entering into the agreement.
Make it easier for defendants to request continuances. Continuances allow a party to postpone the court hearing to a later date. It is crucial for defendants to know that they can exercise their right to a continuance - as plaintiffs do – to carefully weigh their options and to reassess their financial capacity to enter into a consent agreement or to pursue other strategies of defense.
Courts should develop scripts to encourage informed participation. In Philadelphia Municipal Court, a script developed by local legal aid is available for a defendant to read upon entering the room explaining what continuances are and how to ask for them, as well as what default judgments and consent judgments are in layperson’s terms. See Appendix A for an example of a script that is likely to encourage the informed participation of defendants.
Ban wage garnishments. Wage garnishments encourage aggressive debt collection practices and occur in ways that give defendants little or no time. Wage garnishments should only occur when the defendant is given a 30-day warning before the first deduction.
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