Latest reports show that total household debt in the United States reached $15.84 trillion. Credit card balances have gone up $71 billion since 2021. At the same time, the consumer price index rose nearly 8%—the largest rise since 1982. With rising prices and interest rates, individuals could face daunting increases in their month-to-month payments. Even in the best of times, millions of Americans are sued each year for the collection of these consumer debts and encounter a complicated, backlogged civil legal system. State policymakers are beginning to examine their debt collection laws to assess how these fit into a broader discussion of improving and modernizing the civil court process. State innovations to modernize and create efficient and equitable court processes can happen at all five stages of a civil case.
5 Stages of a Debt Collection Lawsuit in Civil Court
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Initiation: Courts will typically do two things upon receiving a complaint: (1) enter the case into their case management system and (2) screen the case to make sure it was properly filed.
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Notification: Notice processes vary from state to state and often are not required to use plain language or provide enough information for the defendant to understand the claim being made, such as the name of the original creditor.
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Response: At this stage the defendant files an answer or appears before the court. It is here that many defendants first get access to legal information and resources to meaningfully engage with the lawsuit.
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Resolution: This stage is where an outcome is decided: the case is decided on the merits with both parties in front of the judge, the parties come to an agreement, or the case is dismissed or withdrawn for a variety of reasons. The most common outcome at this stage is a default judgment, where the defendant doesn’t engage with the court so the company suing automatically wins. Courts have resolved more than 70% of debt collection lawsuits with default judgments according to a recent analysis of available court data.
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Enforcement: After judgment is reached, creditors have a plethora of tools to enforce the judgment like wage garnishments or property seizure. Debtors may also be subject to accrued interest and court fees which may keep debtors in a cycle of debt. Recent data from Utah suggests that potentially only half of judgments end up reported as satisfied to the court.
Opportunities for Modernization at All Five Stages
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Initiation: Ohio recently reduced its statute of limitations from eight years to six years (the national average), while North Carolina has reduced it from six years to three years since the last account activity. This limits the number of cases that can flood court dockets and increases the chances the consumer will be able to recognize and respond to the debt claim if they owe it.
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Notification: Maryland and Wisconsin have used legislation to require that the name of the original creditor of the debt be included on the complaint so that defendants can identify where the debt is from, which is especially important in cases brought by third party debt buyers.
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Response: According to a recent University of Miami Law Review survey, 776 plain language laws have been enacted throughout the states. However, many court forms are still lacking in plain language standards, making it confusing for defendants to understand their lawsuit notice, its implications and know what to do next. New York’s legislature required the courts to send additional notices with statutory plain language text to provide defendants with information about how to engage with the lawsuit and access legal resources. Alaska provides court-based self-help services customized to debt collection lawsuits.
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Resolution: Wisconsin and Minnesota have laws that outline what specific documentation and proof of a debt claim must be present and reviewed before a default judgment can be entered. This includes proof that the defendant used the account in question, the amount is accurate, and the plaintiff is the rightful owner of the debt. Alabama, California, Maine and South Carolina have all made it easier to set aside a default judgment.
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Enforcement: States have taken many different approaches to protect debtors from destitution due to the enforcement of monetary judgments against them. At least 15 states exempt a minimum portion of money in the debtor’s bank account and many states protect a portion of the debtor’s residence and household goods from seizure. States may also consider ways to reduce overall judgment amounts to increase the number of judgments which are reported satisfied. For example, Utah found that small claims court judgments were much closer to the original amount in controversy than district court judgments where attorneys’ fees and other costs are associated.
This resource was produced by the National Conference of State Legislators with support from The Pew Charitable Trusts.
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