Top 5 Tips to Fight Junk Debt Lawsuits

Law professor Peter Holland offers five tips to fight a junk debt lawsuit.

ByABC News
August 18, 2012, 8:11 AM

Aug. 18, 2012 — -- intro: Creditors who buy consumers' old debt for pennies on the dollar have increasingly won bogus lawsuits, but consumers can begin to fight back by taking a few easy steps.

One judge in Brooklyn, N.Y., this week called about 90 percent of credit card lawsuits, often the source of debt junk suits, "flawed."

A common example of junk debt is credit card debt that a private company purchases from banks, or another original creditor. Original creditors or junk-debt buyers can sue the borrower for the money.

Peter Holland, a professor at the University of Maryland Francis King Carey School of Law, wrote the paper "Defending Junk-Debt-Buyer Lawsuits," which was published in the Journal of Poverty Law and Policy in June. In Maryland, one junk debt creditor filed more than 7,000 lawsuits in November and December 2011 alone, he wrote. Another Maryland creditor filed 130 lawsuits on one day in March 2011.

He said many defendants in these lawsuits don't have the resources for an attorney, but he said they can still use the following five tips if they are on the receiving end of a junk debt suit.

quicklist:title: Don't ignore a lawsuit.text:

Holland said the most important thing to keep in mind is that more than 90 percent of cases are won by default judgment because the sued party doesn't appear in court.

Holland, who works with borrowers the University of Maryland's Consumer Protection Clinic in Baltimore, said one common tactic of creditors' lawyers is to tell you that you don't need to show up in court.

"People are too scared to show up and defend themselves," he said. "Rule No. 1: Show up in court and make them prove their case. File an answer. Don't ignore it."

quicklist:title: Contact your state attorney general's office and state bar association. text:

While many people who have a large amount of debt may not be able to afford to hire an attorney when faced with a junk-debt lawsuit, Holland said many states have other legal services available.

Holland and law students from the University of Maryland provide pro-bono services to the local Consumer Protection Clinic, but he said there were similar services around the country, given the increasing number of junk-debt lawsuits.

"This is the No. 1 case in small claims court. They are clogging the courts across the country. Everybody understands there is rampant fraud in the industry," he said.

quicklist:title: Check for robo-signing. text:

Holland said borrowers should look for an indication of robo-signing in the junk-debt documentation. Like the foreclosure robo-signing debacle that led to a $25 billion settlement this year, many creditors also use illegal, robo-signing procedures when buying junk debt.

Defendants should even use the Internet to search the names of the people who signed the documents to make sure they are authentic signatures of real people.

"You'd be amazed. I've seen five different versions of a person's signature. The forgery and robo-signing are rampant," he said.

quicklist:title: Read the creditor's documentation. text:

The creditor may also claim that borrowers owe more money than their actual debts because a bank has tacked on extra fees that were never agreed upon.

Holland has seen junk debt repurchased from creditor to creditor as many as six times, with lost paperwork along the way.

"If it's a junk-debt lawsuit, they have to prove a chain of title showing they own it," Holland said.

quicklist:title: Avoid settlements negotiated in the hallway. text:

Holland said the opposing attorney will sometimes try to cut a deal with defendants in the hallway outside the courtroom if they seem vulnerable or intimidated. But often these settlements are "set up to make you fail," he said.

"They'll tell you, 'I know you don't want to go before a judge'," Holland said. Then they will set up an unrealistic payment plan that could leave you liable for the full judgment amount if you miss a payment.

Holland, however, suggests you do communicate with the opposing counsel in case you need to ask opposing counsel for supporting documents. If its documentation or arguments are weak, he said you or your attorney might consider calling opposing counsel to ask it to dismiss, which can have "very quick results."