A sum uncertain: preserving due process and preventing default judgments in consumer debt buyer lawsuits in New York.

• Author: Duffy, Conor P.
• Position: Introduction through I.Background C. Debt Collection Lawsuits 1. General Overview and the Role of Debt Collection Lawsuits in the Debt Buyer's Business Model, p. 1147-1173

Introduction I. Background on Consumer Credit, Debt Collection, and Debt Collection Lawsuits A. Consumer Credit and Debt Collection 1. Consumer Credit 2. Debt Collection: Industry and Players 3. Debt Collection: Process B. Debt Collection Regulation 1. Federal Regulation: The Fair Debt Collection Practices Act 2. New York State and New York City Debt Collection Regulation C. Debt Collection Lawsuits 1. General Overview and the Role of Debt Collection Lawsuits in the Debt Buyer's Business Model 2. Debt Collection Lawsuits in New York City II. Conflict: Preventing Inappropriate Default Judgments in Debt Buyer Lawsuits A. The 2009 New York City Civil Court Directive B. What Is a Sure Certain? The Directive's Conflict with New York Case Law for Verification of a Debt C. New York's Proposed Consumer Credit Fairness Act D. Debt Collection Reform in Other States 1. Legislative Efforts 2. Reforms Adopted by Courts III. Solutions: Requiring Proof and Defending Due Process A. What Constitutes a Sum Certain? B. New York Should Enact the Consumer Credit Fairness Act C. The Civil Court Should Revise Its Directive on Default Judgments for Purchased Debt to Comply with New York Case Law D. New York Should Consider Amending the Debt Collection Procedures Law Conclusion INTRODUCTION

Since the mid-2000s, the Civil Court of the City of New York ("Civil Court") has been overwhelmed by debt collection lawsuits. Between 2006 and 2008, debt collectors filed approximately 300,000 lawsuits per year, and although these numbers have decreased since this peak period, (1) debt collection lawsuits continue to clog Civil Court dockets. (2) These judgments are especially troublesome because they disproportionately impact New York City's low- and moderate-income communities and communities of color. (3) Moreover, because a judgment remains on a defendant's credit report for at least five years in New York, it can prevent a person from obtaining employment or a promotion, housing, and access to other credit. (4) Debt buyers, entities that purchase defaulted debts, file many of these lawsuits. (5) Although debt buyers claim that they reduce the losses that creditors incur in extending credit to consumers, (6) they also pursue litigation for profit] Debt buyers purchase bad debt for pennies on the dollar and pursue collection, in part, through litigation. (8) Frequently, however, debt buyers do not purchase enough documentation or information to support a consumer collection lawsuit. (9) To make matters worse, consumer defendants often lack notice of these lawsuits and many are unable to afford an attorney. (10)

If a defendant does not respond to the summons and complaint, or fails to appear in court at any point in the litigation, the debt buyer can apply for a default judgment. (11) Moreover, if the debt buyer's claim is for a sum certain or a sum which by computation can be made certain, a court clerk--not a judge--will review the application for the default judgment. (12) Under New York's Civil Practice Law and Rules (CPLR), if the debt buyer's claim is for a sum certain, the clerk may enter judgment so long as the debt buyer attaches an affidavit to the application stating that, among other things, it purchased the defendant's debt in a "pool of debts." (13) This practice, however, does not comply with New York case law, which requires plaintiffs at the default judgment stage to prove the facts constituting the claim, and that there is "no reasonable question about the amount of the judgment" sought. (14) This Note examines this conflict, the various approaches to preventing inappropriate default judgments in debt buyer lawsuits, and provides solutions to the problem of inappropriate debt buyer default judgments.

This Note proceeds in three parts. Part I provides background information on consumer credit, debt collection, and consumer debt lawsuits. Part II examines the conflict in New York over the evidentiary standard that plaintiffs in consumer debt cases must satisfy to obtain a default judgment, proposed legislation on this issue, and how other jurisdictions have responded to the problems of debt buyer lawsuits. Finally, Part III advocates for the passage of the Consumer Credit Fairness Act in New York or the adoption of a court rule that ensures due process and prevents improper default judgments.

1. BACKGROUND ON CONSUMER CREDIT, DEBT COLLECTION, AND DEBT COLLECTION LAWSUITS

This Part provides background information on consumer credit, debt collection, and consumer debt lawsuits in New York. Section A briefly examines consumer debt and the debt collection industry, and details the stages of debt collection. Section B outlines the regulation of debt collection at the federal, state, and municipal levels. Section C examines common problems round in debt collection lawsuits, the explosion of debt buyer lawsuits in New York City, default judgments in New York, and the relevant procedural rules necessary for understanding the conflict described in Part II.

1. Consumer Credit and Debt Collection

   1. Consumer Credit

      In the wake of the most severe economic crisis since the Great Depression, unemployment persists and many households continue to struggle with debt. (15) As of June 2012, Americans had more than $849 billion outstanding in revolving credit (16)--mostly from credit cards. (17) Indeed, credit card debt has increased rapidly over the past two decades. (18) Between 1990 and 2005, the amount of outstanding credit card debt in the United States jumped by 238%, from $237 billion to $802 billion, (19) and between 2000 and 2006 credit card borrowing rose by approximately 30%. (20) Moreover, in the years preceding the financial crisis of 2008, credit card fees increased, making it more difficult for many to pay down their balances. (21) Since the financial crisis of 2008, however, consumer credit card debt has diminished. (22)

      Nonetheless, credit cards continue to be profitable for lenders. (23) One reason for this profitability is that a credit card lender's best customers are not those "who dutifully pay off their balance every month," but rather the revolvers who "charge a lot and pay only a little every month, carrying a sizeable balance and racking up interest and late fees." (24) Not surprisingly, the terms of the most common credit card agreements are favorable to lenders. (25) Indeed, these agreements often include hidden fees and charges obfuscated by terms that "were designed in large part to add unexpected--and unreadable--terms that favor the card companies." (26)

      Credit card profits, however, have come at a great cost to...