Jan. 6, 2016 – The Wisconsin Legislature is currently considering companion bills that would dramatically change the pleading requirements for claims arising from consumer credit transactions under the Wisconsin Consumer Act (Act).
These changes would permit junk-debt buyers to bring claims with little documentation of the alleged debt and remove important protections for consumers currently found in the Act. In addition, the proposed changes would likely increase courts’ workloads amidst an avalanche of junk-debt buyer lawsuits that have been filed the last decade.
This article overviews the junk-debt buyer industry, provides examples of how other states and regulators have addressed abuses through stricter pleading requirements, and how Wisconsin’s legislature is proposing to ease pleading requirements.
Overview of the Junk-Debt Buyer Industry
The Federal Trade Commission (FTC), a federal agency whose mission is, in part, to prevent business practices that are deceptive or unfair to consumers, receives more consumer complaints about debt collectors than about any other single industry.1
This may reflect the fact that there are a staggering 77 million Americans who have debt in collections that is reported in their credit files.2 Many of the complaints the FTC receives have their origins in the quality and quantity of information collectors have about debts.3
In late 2009, the FTC initiated a study of the debt collection industry after expressing concerns that debt collectors “may have insufficient or inaccurate information when they collect on debts, which may result in collectors seeking to recover from the wrong consumer or recover the wrong amount.”4
In its study, the FTC concluded that the most significant change in the debt collection business in recent years has been the advent and growth of debt buying.5 “Debt buying” refers to the sale of debt by creditors or other debt owners to buyers that then attempt to collect the debt or sell it to other buyers.6
Creditors typically sell a debt after they have not received payment for a certain period of time, and they have either charged-off the debt or decided the account is just no longer worth pursuing.7
Mary Catherine Fons (Marquette 1984) has operated the Fons Law Office in Stoughton, and has practiced consumer protection law exclusively since 1994. She can be reached at (608) 873-1270.
Ivan Hannibal (U.W. 2004) is the founder of the Consumer Rights Law Office, a Madison-based law firm. He has spent most of his career representing consumers against predatory businesses. He can be reached at (608) 852-6702.
This type of debt is often referred to as “junk debt” or “zombie debt” because it is considered uncollectable by the creditor, and because it often includes accounts that are old or even past the statute of limitations. Or, the junk debts have been discharged in bankruptcy, do not accurately reflect the amount actually owed on the account, or do not belong to the person identified on the account.
The buyers of these debts, in turn, are often referred to as “junk-debt buyers.”8 Oftentimes, junk-debt is sold multiple times, resulting in the inability of a junk-debt buyer to prove that it actually owns the debt. To prove ownership, junk-debt buyers must provide documentation of an unbroken chain of title back to the original creditor.
Whereas creditors have some sort of business transaction with the consumer, junk-debt buyers are total strangers to the underlying transaction.9 Junk debt is usually sold in what is referred to as “portfolios,” each of which can contain hundreds, thousands, or tens of thousands of individual consumer accounts.
In conducting the study, the FTC acquired and analyzed data on more than 5,000 debt portfolios, containing nearly 90 million consumer accounts that had a face value of $143 billion.10 The results of the FTC’s study were shocking to all but industry insiders. Among other things, the FTC found that:
Debt buyers paid, on average, only 4 cents on the dollar (of debt face value) for the debts they purchased;
Most debt portfolios did not receive any documents related to the debts sold at the time of sale, such as credit agreements and account statements;
Debt sellers generally disclaimed all representations and warranties regarding the accuracy of any information they provided to the debt buyers, essentially selling the debts on an “as-is” basis;
Debt buyers often did not receive the information needed to accurately itemize account balances by category, such as principal, interest, and fees associated with the accounts.11
One well-known legal commentator who has studied the bulk sale of consumer debt in depth described some of the inherent problems in the junk-debt buying process like this:
The junk-debt buyers routinely lack the documentation to prove the terms and conditions of underlying credit card contracts and usually lack the proof necessary to show the entire chain of assignment. That the original creditor elected to sell an account is a red flag that the account has defects and little–if any–documentation. Indeed almost every agreement between original creditor and initial purchaser (and between the original purchaser and each subsequent assignee) is made without representations and warranties, without recourse, and often without any duty on the part of the seller to investigate the accuracy of what it is selling.12
Most junk-debt buyers, in an attempt to maximize profits, try to collect the full face value of debt they purchase using the cheapest means possible before getting the judicial system involved. If dunning letters and phone calls to the alleged debtor do not result in a payment, many junk-debt buyers commence an action in state court.
The overwhelming majority of junk-debt lawsuits go unanswered and result in default judgments against the named defendants. According to an article in the The Wall Street Journal, approximately 94 percent of debt collection cases in the U.S. result in a default judgment.13 The use of default judgments to collect consumer debt has been so successful for junk-debt buyers that it has reshaped the business model for the entire debt collection industry.
Other States and Regulators Imposed Stricter Pleading Requirements
Many states have enacted measures in recent years to curb common junk-debt buyer practices of bringing lawsuits on debts outside the statute of limitations, for the wrong amount, against the wrong person, or that have been discharged in bankruptcy, as well as suing on debts without proof of the debt or proof of ownership of the debt.
The measures enacted in other states uniformly require junk-debt buyers to provide customers and courts with more information related to the alleged debt in their complaints, and to produce documentation proving the debt buyer actually owns the alleged debt it is suing on.
In North Carolina, for example, a debt-buyer complaint must: 1) be accompanied by a copy of the writing evidencing the original debt which contains a signature of the defendant; 2) have copies of account documents attached, and 3) include proof of ownership of the debt for every transfer of ownership.14
These new increased disclosure and documentation requirements for debt buyer complaints are mirrored in Maryland15 and Maine.16 New York now requires affidavits to accompany complaints, including affidavits of non-expiration of the statute of limitations, facts and sale of account by the original creditor, facts and purchase of account by the debt buyer plaintiff, and purchase and sale of account by a debt seller.17
States have also enacted detailed rules on the evidence a debt buyer must file with the court before it is entitled to a default or summary judgment.18
Recent federal and state enforcement actions to address debt buyer abuses have also established stricter pleading requirements for debt buyers, imposing additional disclosure and documentation requirements.19
For example, the Consumer Financial Protection Bureau has required two of the largest junk-debt buyers to possess detailed original account-level documentation and all chain of title documentation before any lawsuit can be commenced.20
Also, as a result of two New York Attorney General enforcement actions, two large junk-debt buyers must include the name of the original creditor, the date of the last payment, and an identification of the complete chain of title of the debt, in all debt collection complaints.21
Wisconsin Legislature Proposes Easing Pleading Requirements
Unlike other states that have passed laws strengthening pleading requirements for actions brought by junk-debt buyers, the Wisconsin Legislature is currently considering bills to ease pleading requirements under the Wisconsin Consumer Act.
The bills – 2015 Assembly Bill 117 (which has already passed the Assembly) and 2015 Senate Bill 92 – would significantly change the pleading requirements for debt collection lawsuits against Wisconsin consumers (those brought by debt buyers and original creditors) by changing the provisions found in Wis. Stat. section 425.109, the statute that governs complaints arising out of consumer credit transactions.
The bills reduce documentation requirements for the amount of the debt. The proposal drastically reduces the documentation a collector would be required to provide a customer along with a complaint. Instead of having to provide “an accurate copy of the writings evidencing any transaction,” as the law currently requires, collectors will only need to provide one single billing statement.22 This change would allow lawsuits to be filed on the limited documentation available under the junk-debt buyer business model.
The bills eliminate the requirement to itemize the exact amount being sought. The proposal allows a collector to pick any date “after the default,” as reflected on a single billing statement, and state that amount in the complaint, replacing the current requirement to state the exact amount the debt buyer is seeking at the time of the lawsuit. The proposal also removes the current requirement to provide an itemization of the amount being sought.23 This means that a collector would no longer need to specify what portion of the amount it seeks is related to charges, late fees, or interest.
The bills change the requirements for entering judgment on deficient pleadings. The proposal changes the current language of Wis. Stat. section 425.109(3), which prohibits any judgment to be entered either: 1) on any pleadings which fail to comply with the pleadings requirement; or 2) in any instance where the merchant fails to provide the requested writings. The proposal allows only that no default judgment can be entered on pleadings that fail to comply with either requirement.24 This change will require each court to conduct an analysis of every complaint to determine whether the statutory pleading requirements have been met before it grants any default judgment.
The bills add special proof requirements for pleading abuse remedies. The bills prohibit customers who were sued in violation of the new pleading requirements from recovering remedies, including costs and reasonable attorney fees, unless the customer can prove the collector’s failure to comply was “willful or intentional.”25 Currently, if a customer proves any violation of the WCA, that customer is entitled to applicable remedies as set forth in Wis. Stat. section 425.301 to section 425.311, and an award of costs and reasonable attorney fees, as set forth in section 425.308. The proposal creates a special exemption from the WCA penalties for collectors that violate the pleadings requirements, unless the customer can meet the heightened burden of proof.
The bills expand the applicability of the new pleading requirements. The proposal would make the new pleading requirements apply to debt buyers as well as original creditors by changing those governed from “creditors” to “merchants.”26 Currently, Wis. Stat. section 425.109 applies only to “creditors” which, under Wisconsin case law, does not apply to junk-debt buyers. Rsidue, LLC v. Michaud, 2006 WI App 164, 295 Wis. 2d 585, 721 N.W. 2d 718. The eased disclosure and documentation requirements would apply to debt buyers. The new requirements fit the limited amount of information and documentation available in the junk-debt buyer business model.
Wisconsin consumers will receive fewer disclosures and less documentation in debt collection complaints governed by the Wisconsin Consumer Act if the current proposal becomes law. In addition, Wisconsin courts will likely see more lawsuits where the plaintiff lacks adequate proof of the debt and lacks proof of ownership of the debt, and will need to examine each complaint to determine compliance with the new statute.
The bills shift the burden of combatting the documented abuses in the junk-debt buyer industry to Wisconsin consumers. Wisconsin could instead follow the lead of other states and regulators that have implemented stricter pleading requirements that prohibit entities without the necessary proof of a debt from filing suit on that debt and that require proof of ownership of a debt before allowing a lawsuit to be filed on that debt.
Maintaining the current documentation requirements and remedies, or creating additional requirements, provides needed clarity in pleadings for Wisconsin consumers, for debt collectors, and for the courts. Easing pleading requirements in Wisconsin, as the legislature is proposing, would likely have opposite effect.
1 U.S. Federal Trade Commission, The Structure and Practices of the Debt Buying Industry (2013) (hereafter “FTC Study”). See Executive Summary.
2 Caroline Ratcliffe, Signe-Mary McKernan, Brett Theodos, Emma Cancian Kalish, Delinquent Debt in America, Urban Institute, (July 20, 2014), p. 7.
3 FTC Study, Executive Summary.
7 Peter A. Holland, Defending Junk-Debt-Buyer Lawsuits, Clearinghouse Review, Vol. 46, No. 1-2, May-June 2012, p. 14, U of Maryland Legal Studies Research Paper No. 2012-24 (hereafter Holland).
8 Holland at 13.
10 FTC Study, Executive Summary at p. 6.
11 FTC Study at 23, 25, and 34-37.
12 Holland at 14.
13 Jessica Silver-Greenberg, Lender Drops Pursuit of Debt, The Wall Street Journal, June 24, 2011.
14 N.C.G.S. 58-70-150.
15 Maryland Rule 3-306.
16 32 MRSA § 11019.
17 N.Y. Court Rules 208.14-a, 208.10.14-a, 212.14-a & 202.14-a.
18 N.C.G.S. § 58-70-155; 32 MRSA § 11019.
19 See Consumer Financial Protection Bureau Consent Order against Encore Capital Group, Inc., Midland Funding, LLC, Midland Credit Management, Inc. and Asset Acceptance Capital Corp. (Sept. 9, 2015) (hereafter Encore Consent Order); Consumer Financial Protection Bureau Consent Order against Portfolio Recovery Associates (Sept. 9, 2015) (hereafter PRA Consent Order); N.Y. Attorney General Assurance of Discontinuance against Portfolio Recovery Associates (May 2014) (hereafter PRA Assurance of Discontinuance); and N.Y. Attorney General Assurance of Discontinuance against Sherman Financial Group, LLC. (October 2013) (hereafter Sherman Assurance of Discontinuance).
20 Encore Consent Order, ¶ 131; PRA Consent Order, ¶ 119.
21 PRA Assurance of Discontinuance, at 12; Sherman Assurance of Discontinuance, at 11-12.
22 AB 117, Sections 4,8 & 11; 2015 SB 92, Sections 4, 8 & 11.
23 AB 117, Section 5; SB 92 Section 5.
24 AB 117, Section 9; SB 92, Section 9.
25 AB 117, Section 10; SB 92 Section 10.
26 AB 117 Section 2; SB 92 Section 2.