Repairing A Broken System

Repairing A Broken System

Protecting Consumers in Debt Collection

Litigation and Arbitration

Federal Trade Commission

July 2010

Repairing A Broken System:

Protecting Consumers in Debt Collection

Litigation and Arbitration

July 2010

Federal Trade Commission

Jon Leibowitz, Chairman

William E. Kovacic

J. Thomas Rosch

Edith Ramirez

Julie Brill

This report also is available on the Internet. The online version of this report contains hyperlinks

to news releases, reports, articles, transcripts, brochures, policy statements, and other information

referenced in this report. You can find the report at

ftc.gov/os/2010/07/debtcollectionreport.pdf. You can also access the Internet

page for the roundtable discussions, with links to many related documents, at

ftc.gov/bcp/workshops/debtcollectround/index.shtm.

Protecting Consumers in Debt Collection Litigation and Arbitration

Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Chapter 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 2: Litigation Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

I.

II.

III.

IV.

V.

The Legal Framework of Debt Collection Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Consumer Participation in Debt Collection Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Evidence of Indebtedness in the Debt Collection Litigation Process. . . . . . . . . . . . . . . 14

Statutes of Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Garnishment of Exempt Funds in Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Chapter 3: Arbitration Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

I. The Arbitration Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

II. Meaningful Consumer Choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

III. Fair Arbitration Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Chapter 4: Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Appendix A: Debt Collection Roundtable Panelists. . . . . . . . . . . . . . . . . . . . . . A-1

Appendix B: FTC Contributors to Debt Collection Roundtables. . . . . . . . . . . . B-1

Appendix C: Agendas for Debt Collection Roundtables. . . . . . . . . . . . . . . . . . . C-1

Appendix D: Debt Collection Roundtables Public Comments. . . . . . . . . . . . . . D-1

Appendix E: Sample State Debt Collection Checklists. . . . . . . . . . . . . . . . . . . . E-1

Repairing A Broken System

Protecting Consumers in Debt Collection Litigation and Arbitration

Executive Summary

Creditors and collectors seek to recover on consumer debts through the use of litigation

and arbitration. Based on its extensive analysis, the Federal Trade Commission (“FTC” or

“Commission”), the nation’s consumer protection agency, concludes that neither litigation nor

arbitration currently provides adequate protection for consumers. The system for resolving

disputes about consumer debts is broken. To fix the system, the FTC believes that federal and

state governments, the debt collection industry, and other stakeholders should make a variety of

significant reforms in litigation and arbitration so that the system is both efficient and fair.

Credit benefits consumers by allowing them to obtain goods and services without paying the

entire cost at the time of purchase. This lets consumers make purchases they might not otherwise

be able to afford, and allows them to benefit from goods and services immediately while paying

for them over time. Because consumers sometimes fail to pay their creditors, debt collection

plays a vitally important role in the consumer credit system. Debt collection benefits individual

creditors, of course, who are repaid money they are owed. More importantly, however, by

providing compensation to creditors when consumers do not repay their debts, the debt collection

system helps keep credit prices low and helps ensure that consumer credit remains widely

available.

Sometimes consumers are unable or unwilling to pay their creditors. Such payment

problems often worsen during times like the recent economic downturn. When consumers do not

pay their debts, creditors and collectors may decide to commence proceedings against consumers

to compel payment. Debt collection proceedings are an important means through which

creditors and collectors can collect amounts they are owed.

Collectors use two types of proceedings to compel payment on consumer debt. They may

file an action in court alleging that a consumer has not paid and seeking a judgment from the

court that he or she owes the debt. Alternatively, if permitted by the credit contract or other

agreement between the creditor and the consumer, the collector may commence an arbitration

proceeding. In the proceeding, the collector may claim that the consumer has not paid and seek

an arbitration award stating that the consumer owes the debt. In that situation, the collector

would then ask a court to confirm the arbitration award and enter a judgment against the

consumer. Collectors may seek to recover on judgments against consumers through garnishing

bank accounts and wages, or through other means.

As part of a comprehensive assessment of the debt collection system, in late 2007 the FTC

convened a public workshop to identify consumer protection problems and possible solutions

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to those problems. In a February 2009 workshop report, the Commission concluded that the

debt collection system is in serious need of reform and set out concrete proposals to improve the

system. With regard to debt collection litigation and arbitration, the Commission concluded that

“certain debt collection litigation and arbitration practices appear to raise substantial consumer

protection concerns.” Among the concerns relating to litigation were: (1) filing suits based on

insufficient evidence; (2) failing to properly notify consumers of suits; (3) the high prevalence

of default judgments; (4) improperly garnishing exempt funds from bank accounts; and (5)

suing or threatening to sue on time-barred debts. The concerns relating to arbitration included:

(1) binding consumers to resolve disputes through arbitration without meaningful choice or

awareness; (2) bias or the appearance of bias in arbitration proceedings; (3) procedural unfairness

in arbitration proceedings; and (4) requiring consumers to pay substantially more to participate in

arbitration proceedings than in comparable court proceedings.

Although it identified these concerns, the FTC concluded that it needed more information

before recommending specific solutions. To obtain more information, during the latter part

of 2009 the FTC convened public roundtables in Chicago, San Francisco, and Washington,

D.C. These events brought together representatives of the debt collection industry, consumer

advocates, private attorneys, academics, government officials, arbitration providers, judges, and

others. To supplement the information gleaned from the discussions at these roundtables, the

Commission also solicited and received public comments.

During the time that the FTC was conducting its roundtables, there were major

developments in the use of arbitration to resolve debt collection disputes. In July 2009, the

Minnesota Attorney General (“Minnesota AG”) filed suit against the National Arbitration

Forum (“NAF”), the leading debt collection arbitration forum, alleging that NAF had engaged

in consumer fraud, deceptive trade practices, and false advertising. NAF purportedly held itself

out as an impartial arbitration forum when in fact it had financial ties to key members of the

debt collection industry. Days after the suit was filed, NAF entered into a settlement with the

Minnesota AG, which required NAF to cease providing debt collection arbitration services. In

the wake of the settlement with NAF, the American Arbitration Association, which had handled

some debt collection arbitrations, imposed a moratorium on conducting such arbitrations. A

number of large banks also announced that they would discontinue the use of mandatory predispute arbitration provisions in their credit card contracts.

At this critical juncture, the FTC believes that articulating its views would be helpful in

reforming the system of debt collection litigation and arbitration. Based on the record from the

roundtables (including the associated public comments) and its experience in debt collection

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Protecting Consumers in Debt Collection Litigation and Arbitration

matters, the Commission’s principal findings, conclusions, and recommendations with respect to

debt collection litigation are:

YY States should consider adopting measures to make it more likely that consumers

will defend in litigation. Very few consumers defend or otherwise participate in debt

collection litigation, resulting in courts entering default judgment against them. States

should take steps to ensure that: (1) consumers receive adequate notice when actions

have been commenced; and (2) the costs to consumers of participating in such actions

are not prohibitively high.

YY States should require collectors to include more information about the debt in

their complaints. Complaints often do not contain sufficient information to allow

consumers in their answers to admit or deny the allegations and assert affirmative

defenses. To assist them in doing so, states should consider requiring that debt

collection complaints include: (1) the name of the original creditor and the last four

digits of the original account number; (2) the date of default or charge-off and the

amount due at that time; (3) the name of the current owner of the debt; (4) the total

amount currently owed on the debt; (5) the total amount owed broken down by

principal, interest, and fees; and (6) the relevant terms of the underlying credit contract,

if the contract itself is not attached to the complaint.

YY States should take steps to make it less likely that collectors will sue on timebarred debt and that consumers will unknowingly waive statute of limitations

defenses available to them.

OO

OO

OO

In circumstances where it is difficult to determine the correct statute of

limitations, it would be advantageous if states developed more clear and uniform

statutes of limitations.

Consumers do not understand that in many states a statute of limitations

constitutes an affirmative defense which may preclude collectors from

successfully suing to collect, so they rarely assert this affirmative defense.

These states should assign to collectors the burden of proving that debts are not

time-barred and require that they include the date of default and the statute of

limitations in their complaints.

Consumers are not aware that collectors cannot lawfully sue to recover on timebarred debt. To prevent deception, collectors who seek to collect debt they know

or should know is time-barred should disclose that they cannot lawfully sue

the consumers. Consumers likewise do not know that in many states making a

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partial payment on a time-barred debt revives the entire debt for a new statute of

limitations period. Collectors in these states should disclose to consumers that

making a payment will revive such debt.

YY Federal and state laws should be changed to prevent the freezing of a specified

amount in a bank account into which a consumer has deposited funds that are

exempt from garnishment. When banks freeze the accounts of consumers who

receive government payments such as Social Security (which are exempt from

garnishment), it may result in significant hardship for consumers, including many who

are indigent. To alleviate such hardship, federal and state laws should be changed to

limit the amount that banks can freeze in accounts receiving exempt funds.

The Commission’s principal findings, conclusions, and recommendations relating to debt

collection arbitration are:

YY Consumers should be given meaningful choice about arbitration. Consumers

currently have little, if any, choice regarding mandatory pre-dispute arbitration

provisions in contracts. Creditors should draft their consumer credit contracts in a way

that ensures consumers are aware of their choice whether to arbitrate, and provides

consumers with a reasonable method of exercising that choice. The public and

private sectors should increase efforts to educate consumers, so that they have a basic

understanding of arbitration and its consequences. They should evaluate whether,

and under what conditions, options beyond the initial choice about arbitration must be

offered in consumer credit contracts.

YY Arbitration forums and arbitrators should eliminate bias and the appearance

of bias. Especially in the wake of serious concerns relating to the conduct of NAF,

arbitration forums should take significant and concrete steps to prevent bias and the

appearance of bias. Forums should develop, adopt, and vigorously enforce standards

prohibiting bias and the appearance of bias for themselves and their arbitrators.

Forums should diversify their rosters of arbitrators, rotate matters randomly among

arbitrators, and limit the number of matters each arbitrator handles. Forums should

make the process and procedures they use for selecting arbitrators as transparent as

possible.

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Protecting Consumers in Debt Collection Litigation and Arbitration

YY Arbitration forums should conduct proceedings in a manner which makes it more

likely consumers will participate.

OO

OO

Consumers frequently do not appear in arbitration proceedings. While it is not

clear to what extent notification problems cause low participation rates, arbitration

forums should adopt measures to increase the likelihood they have valid addresses

for consumers, track and document delivery of notices, and use envelopes which

make it clear that their contents are important while not disclosing consumer debts

to third parties. Arbitration forums and arbitrators also should conduct a closer

assessment of consumers’ assertions that they did not receive adequate notice.

Arbitration forums should establish rules that limit the total cost to consumers of

arbitrating a dispute to the cost that they would pay to defend against a similar

proceeding in court.

YY Arbitration forums should require that awards contain more information about

how the case was decided and how the award amount was calculated. Arbitrators

rarely accompany awards with an opinion setting forth a statement of the law and an

application of the law to the facts, which makes it difficult to understand the basis for

the award. Arbitration forums should require that arbitrators issue reasoned opinions

setting forth: (1) the law applied; (2) how the law was applied to the facts; and (3)

how the amount of the award was calculated, including how the amount of principal,

interest, and fees awarded was determined.

YY Arbitration forums should make their process and results more transparent. For

the public to assess the costs and benefits of arbitration, and for consumers to decide

whether to agree to arbitration, the process used and the results reached must be more

transparent. To promote such transparency, Congress should consider creating a

nationwide system requiring arbitration forums to report and make public arbitration

awards and decisions.

YY The Commission will continue to closely monitor debt collection arbitration,

and evaluate whether creditors and arbitration forums provide consumers with

meaningful choice and fair process. As appropriate, the Commission will report its

views on new debt collection arbitration models to policymakers, industry, consumer

groups, and the general public.

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The Commission believes that reforms such as those discussed in this report should be

undertaken to ensure that the debt collection litigation and arbitration systems adequately protect

consumers without unduly burdening legitimate debt collection. The agency is interested in

continuing to work with interested parties on implementing these recommendations and taking

other steps to improve debt collection litigation and arbitration.

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Protecting Consumers in Debt Collection Litigation and Arbitration

Chapter 1

Introduction

In February 2009, the Federal Trade Commission issued a comprehensive report with

findings, conclusions, and recommendations concerning consumer protection issues related to

debt collection. Among other things, the Commission’s report, Collecting Consumer Debts: The

Challenges of Change – A Workshop Report,1 concluded that “certain debt collection litigation

and arbitration practices appear to raise substantial consumer protection concerns.”2 The report,

however, also concluded that the FTC needed more information to formulate recommendations

as to how these concerns should be addressed.

To obtain this information, during the latter part of 2009 the FTC convened public

roundtables in Chicago,3 San Francisco,4 and Washington, D.C.5 These events brought together

representatives of the debt collection industry, consumer advocates, private attorneys, academics,

government officials, arbitration providers, judges, and others6 to discuss potential consumer

protection problems arising in debt collection litigation and arbitration as well as possible

solutions to those problems.7 To supplement the information gleaned from the discussions at

these roundtables, the Commission also solicited and received public comments.8

1.

Federal Trade Commission, Collecting Consumer Debts: The Challenges of Change – A Workshop Report

(2009), available at http://www.ftc.gov/bcp/workshops/debtcollection/dcwr.pdf (hereinafter Challenges of

Change).

2.

Id. at i-ii.

3.

See Transcript I, Aug. 5, 2009, available at http://www.ftc.gov/bcp/workshops/debtcollectround/090805CHIL/transcript-90805.pdf; Transcript II, Aug. 6, 2009, available at http://www.ftc.gov/bcp/workshops/

debtcollectround/090805-CHIL/transcript-90806.pdf. Citations to the transcripts in this report will follow the

format “Tr. X at a,” where “X” indicates the roman numeral of the transcript cited and “a” denotes the page

number of the transcript on which the reference can be found.

4.

See Transcript III, Sept. 29, 2009, available at http://www.ftc.gov/bcp/workshops/debtcollectround/090929SANF/90929ftc.pdf; Transcript IV, Sept. 30, 2009, available at http://www.ftc.gov/bcp/workshops/

debtcollectround/090929-SANF/90930ftc.pdf.

5.

See Transcript V, Dec. 4, 2009, available at http://www.ftc.gov/bcp/workshops/debtcollectround/091204-DC/

transcript.pdf.

6.

A list of roundtable participants is set forth in Appendix A to this report. A list of FTC contributors is set forth

in Appendix B to this report.

7.

The agendas for each of the roundtables are included in Appendix C to this report.

8.

A list of the individuals and entities that submitted public comments is included in Appendix D to this

report. Comments can be found at the following three locations: http://www.ftc.gov/os/comments/

debtcollectroundtable1/index.shtm; http://www.ftc.gov/os/comments/debtcollectroundtable2/index.shtm; and

http://www.ftc.gov/os/comments/debtcollectroundtable3/index.shtm.

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Based on the information received at and in connection with the roundtables as well as

the Commission’s extensive experience in debt collection matters, this report makes findings

and conclusions as to debt collection litigation and arbitration and their effect on consumers.

The report also makes a variety of recommendations concerning how changes in law, court

procedures, and industry practice could improve the system of debt collection litigation and

arbitration.

Chapter 2 addresses debt collection litigation, nearly all of which occurs in state courts. The

report finds very few consumers defend or otherwise participate in debt collection litigation. The

Commission therefore recommends state and local governments consider making a variety of

reforms to service of process, pleading, and court rules and practices to increase the ability of

consumers to defend or otherwise participate in debt collection litigation. The report also finds

complaints and attachments in debt collection cases often do not provide adequate information

for consumers to answer complaints or for judges to rule on motions for default judgment. The

FTC therefore recommends that courts more rigorously apply existing rules to require that

collectors provide adequate information and that jurisdictions consider adopting rules mandating

the information which must be included in or attached to the complaint. The report additionally

finds that state statutes of limitations on filing actions to recover on debt are sometimes variable

and complex, and generally not understood by consumers. The Commission suggests that

states consider modifying their laws to make it simpler to determine the applicable statute of

limitations, and to require that collectors provide consumers with important information about

their legal rights when collecting debt they know or should know is time-barred. The report

further finds that consumers suffer significant hardship when funds in consumer bank accounts

exempt from garnishment under existing law are frozen pending a state court determination

of whether the funds are subject to garnishment. To prevent such hardship, the Commission

recommends that federal and state governments change the law to limit the amount that banks

can freeze in accounts receiving exempt funds.

Chapter 3 addresses debt collection arbitration. The report finds that consumers are not

given meaningful choice whether to enter into arbitration and that the debt collection arbitration

process is fundamentally unfair to them. Creditors, collectors and arbitration forums should

adopt changes to ensure that: (1) consumers are given a meaningful choice about whether to

arbitrate and a reasonable method of exercising that choice; (2) neither arbitration forums nor

arbitrators are biased or appear to be biased; (3) consumers are given adequate notice of the

commencement of arbitration and their costs of participating in arbitration are limited to the costs

the consumers would have incurred to defend against similar proceedings in court; (4) arbitrators

issue reasoned, written decisions to support their awards; and (5) arbitration and its results are

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Protecting Consumers in Debt Collection Litigation and Arbitration

sufficiently transparent to instill confidence in use of arbitration as alternative to the public

court system. The FTC will continue to closely monitor, evaluate, and report, as appropriate, on

whether debt collection arbitration models are providing consumers with meaningful choice and

a fair process. Chapter 4 provides a brief conclusion.

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Protecting Consumers in Debt Collection Litigation and Arbitration

Chapter 2

Litigation Proceedings

I. The Legal Framework of Debt Collection Litigation

Every debt collection action begins with a consumer credit obligation. If a consumer credit

account appears not to be paid timely, the creditor will usually attempt to obtain payment from

the consumer. This usually entails a series of letters and telephone calls from the creditor to

convince the consumer to pay.

If the creditor is not able to collect on its own, it may contract with a contingency collection

agency to collect the debt. The creditor also may resell the debt to a “debt buyer” for some

fraction of the amount the creditor is owed. Selling debt of all types (e.g., credit card debt,

telecommunications debt, medical debt, or utility debt)9 has become an increasingly common

industry practice during the past decade. Debt buyers may then collect on the debts they

purchase, employ contingency collectors, or resell the debt to other debt buyers. Indeed, much

purchased debt is resold one or more times as it moves through the debt collection system,10

often making it more difficult for consumers to recognize the debt being collected because the

owner of the debt is not the original creditor.

If collection efforts are unsuccessful, the debt may be referred to a collection attorney to file

a lawsuit to collect on the debt.11 The number of collection cases on court dockets has increased

in recent years.12 Collectors may also employ litigation more quickly than in the past; industry

sources “have noted that the growth of the debt-buying industry has resulted in increases in

collection lawsuits because entities that purchase delinquent debt often use collection law firms

as their primary tool for recovery.”13 A collector may obtain a court order requiring the consumer

to pay the debt, either through a judgment in litigation or through an arbitration proceeding

9.

Challenges of Change, supra note 1, at 13 (citing DBA, Inc. comment).

10. According to the U.S. Government Accountability Office, as many as half of all credit accounts purchased

directly from original creditors eventually are resold. U.S. Gov’t Accountability Office, Credit Cards: Fair

Debt Collection Practices Act Could Better Reflect the Evolving Debt Collection Marketplace and

Use of Technology (Sept. 2009), available at http://www.gao.gov/new.items/d09748.pdf (hereinafter GAO

Report).

11. Depending on the terms of the contract giving rise to the debt, collectors may commence private arbitration

proceedings rather than lawsuits in court. These issues are discussed extensively in Chapter 3.

12. See, e.g., Challenges of Change, supra note 1, at § VI.C.1; see also sources cited in GAO Report, supra note

10, at 41.

13. GAO Report, supra note 10, at 41 (citing Kaulkin Ginsberg and the National Association of Retail Collection

Attorneys).

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followed by a court proceeding to confirm the arbitration award and reduce it to a judgment.

Once collectors obtain a judgment, they have additional, powerful tools at their disposal – wage

garnishment and property garnishment – to collect on the judgment.

Debt collection lawsuits almost invariably are filed in state courts, where state law is the

main source of the applicable substantive and procedural standards. Each state generally sets

its own substantive standards governing the rights and obligations of creditors and debtors with

regard to debts. Each state also applies its own rules of civil procedure and evidence and uses

them to determine whether service of process was adequate, the pleadings contained appropriate

and sufficient information, and judgments should be granted. These substantive and procedural

standards may vary considerably by state and, in some instances, within a state depending on the

local jurisdiction or whether they are used in small claims court or civil court.

Although debt collection litigation is primarily a matter of state law, the conduct of

collectors in these cases is also subject to federal law. The Fair Debt Collection Practices Act

(“FDCPA”)14 prohibits debt collectors15 from engaging in unfair, deceptive, and abusive acts or

practices and identifies specific conduct that is banned. The FDCPA sets forth some standards

to which collectors must adhere in connection with debt collection litigation in federal or state

court. For example, as interpreted by numerous federal courts, the FDCPA prohibits collectors

from threatening to sue or suing on a debt on which the applicable state statute of limitations

has run.16 Many states have enacted their own statutes similar to the FDCPA which govern the

conduct of debt collectors.17

II. Consumer Participation in Debt Collection Litigation

Fundamental fairness dictates that the legal process afford consumers a reasonable

opportunity to defend themselves. To ensure that consumers have such an opportunity, they

must receive adequate notice of the commencement of a lawsuit and have a method of defending

14. 15 U.S.C. §§ 1692-1692p.

15. “Debt collectors” are persons engaged in the collection of debts owed to another, with certain exceptions.

Creditors collecting on their own debts generally are not “debt collectors” for purposes of the FDCPA.

Debt buyers – persons who collect debt on their own behalf that they have purchased from creditors or debt

collectors – are covered by the FDCPA if the accounts were in default at the time the debt buyers purchased

them. FDCPA §§ 803(4), 803(6); 15 U.S.C. §§ 1692a(4), 1692a(6); see also Ruth v. Triumph P’ships, 557 F. 3d

790, 796-97 (7th Cir. 2009); FTC v. Check Investors, 502 F. 3d 159, 171-72 (3rd Cir. 2007). Section 5 of the

FTC Act, 15 U.S.C. § 45(a), broadly prohibits unfair or deceptive acts or practices, including those of creditors.

16. See Kimber v. Fed. Fin. Corp., 668 F. Supp. 1480, 1489 (M.D. Ala. 1987); see also cases cited infra at note

106.

17. See, e.g., Cal. Civ. Code §§ 1788-1788.33; Fla. Stat. §§ 559.55-559.785; Ill. Comp. Stat. 425/1-25.

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Protecting Consumers in Debt Collection Litigation and Arbitration

themselves that is not unduly costly. Most alleged debtors fail to answer complaints or otherwise

defend themselves in debt collection actions.

There was a broad consensus among roundtable panelists that relatively few consumers who

are sued for alleged unpaid debts actually participate in the lawsuits. Although no empirical data

were presented or submitted, panelists from throughout the country estimated that sixty percent

to ninety-five percent of consumer debt collection lawsuits result in defaults, with most panelists

indicating that the rate in their jurisdictions was close to ninety percent.18

Roundtable panelists and commenters differed widely on why there is such a high default

rate in debt collection litigation. In general, industry representatives asserted that most debtors

who default do so because they owe the debt and therefore recognize that disputing it would

be futile. Consumer advocates, on the other hand, generally attributed the low participation

rate to debtors not receiving notice of the action or to procedural hurdles that make it difficult

and expensive for debtors to defend. The Commission is unaware of any empirical data

bearing on this question, making it difficult to draw definite conclusions as to why consumers

do not participate. Nevertheless, given how few consumers appear and the risk of adverse

consequences from not appearing, the Commission believes that the public would benefit from

efforts to increase consumer participation in debt collection litigation.

18. See, e.g., Abrams, Tr. V at 18 (well over 60%); Buckles, Tr. I at 24 (85%); Domestic Policy Subcommittee

Minority Staff Report of the House Oversight and Government Reform Committee (Domestic Policy

Minority Staff) Comment, 3-4 (80% in New York City and Massachusetts, citing Urban Justice Center,

Debt Weight: The Consumer Credit Crisis in New York City and its Impact on the Working Poor, 1 (Oct.

2007), available at www.urbanjustice.org/cdp); Evans, Tr. V at 19 (70-80%); Fisher, Tr. V at 193 (70%);

Groves, Tr. V at 22-3 (80-90%); Lipman, Tr. I at 21-2 (85-90%); MFY Legal Services (MFY) Comment

at 1-2 (90% of New York City debtors fail to answer in suits filed by seven largest debt collection law

firms, citing MFY’s 2008 report, Justice Disserved: A Preliminary Analysis of the Exceptionally Low

Appearance Rate by Defendants in Lawsuits Filed in the Civil Court of the City of New York, available

at http://www.mfy.org/Justice_Disserved.pdf); Moiseev, Tr. I at 21 (85-90%); Moore, Tr. IV at 18 (80%

based on California Creditors’ Bar Association informal survey); Neighborhood Economic Development

Advocacy Project (NEDAP) Comment at 2 (75% default rate in New York City and 90% rate of failure

to answer collection suit); Redmond, Tr. V at 22 (percentage is “certainly very high”); Surh, Tr. IV at 55

(95%); The Legal Aid Society, Neighborhood Economic Development Advocacy Project, MFY Legal

Services, and Urban Justice Center – Community Development Project, Debt Deception: How Debt

Buyers Abuse the Legal System to Prey on Lower-Income New Yorkers (May 2010), 8, available at

http://www.nedap.org/pressroom/documents/DEBT_DECEPTION_FINAL_WEB.pdf (hereinafter Debt

Deception) (finding among 336 collection cases brought by the 26 most litigious debt buyers in New York City

that 81% of cases initially resulted in default judgments for the debt buyers); but see also Moore, Tr. IV at 151

(95% of cases that go to judgment are by default).

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A. Notice to Consumers of Debt Collection Litigation

When a collector files an action against a consumer, it must serve a copy of the summons

and complaint on that individual. Jurisdictions vary in their requirements for who may serve

process and how they must do so.19 In some cases, service requirements depend on the court

in which the action is filed, such as a small claims court or a court of general jurisdiction.20

Typically, process servers are required to complete an affidavit attesting to the fact that they

made service on a specific individual at a particular time and place.

Service of process informs defendants that an action has been commenced and permits

them to exercise their rights to defend the action. If a defendant does not receive process, she is

unlikely to know of the lawsuit, typically leading to the entry of a default judgment.

Service of process may be inadequate or improper for many reasons. For example, process

may fail to reach the consumer if it is delivered to an old or otherwise incorrect address or it is

delivered to the wrong person, such as someone with a similar name.21 Some process servers

may simply not serve the consumer but falsely assert that they have done so.22

Roundtable participants differed as to whether inadequate or improper service is prevalent.

Many consumer advocates and judges who adjudicate debt collection cases stated that

19. See, e.g., Buckles, Tr. I at 29-30, 74-75 (Michigan); Edelman, Tr. I at 47 (Illinois – substitute service);

Leibsker, Tr. I at 26 (Cook County, Illinois); Lipman, Tr. I at 28-29 (Iowa). For state-specific rules, see

generally NAPPA Membership Directory and Civil Rules Guide, Fall 2009, passim; Feerick Center for Social

Justice at Fordham Law School (Feerick Center) Comment, passim.

20. See, e.g., Iowa R. Civ. P. 1.302(3); V.R.C.P. 3. See also Mass. Ann. Laws Unif. Small Claims Rule 2(b).

21. See, e.g., Edelman, Tr. I at 47-48 (wrong person is served either at old address or with name similar to intended

defendant).

22. This is sometimes referred to as “sewer service” – the server throws the documents “down the sewer” and then

falsifies its affidavit of service. See, e.g., United States v. Brand Jewelers, Inc., 318 F. Supp. 1293 (S.D.N.Y.

1970); see also, e.g., Coffey, Tr. V at 24 (“predominantly, the reason that people are not showing up [in

court] in these kinds of cases is because of sewer service”); Faulkner, Tr. V at 25-26 (“Sewer service is a big

problem” such as when service in a collection case purportedly took place at the consumer’s home after that

consumer was evicted following foreclosure, and the home was obviously empty); NEDAP Comment at 2

(sewer service is the primary reason most defendants do not appear in court).

8

Protecting Consumers in Debt Collection Litigation and Arbitration

inadequate or improper service occurs frequently.23 One local official reported that her agency’s

comprehensive investigation of process servers in New York City revealed that “many are not

performing service. They are filling out false affidavits of service. They are not going to the

addresses. They are not sufficiently checking the addresses.”24 A Chicago judge explained

similarly that one of his colleagues had conducted a “spot audit” of one process server and found

that he “claimed to be in areas thirty miles apart in the Chicago-land area within minutes . . . .

And we [asked,] ‘Is he Superman?’”25

In contrast, collection industry representatives at the roundtables generally asserted that

inadequate or improper service is not prevalent in debt collection cases.26 According to some,

service problems are rare and play a very small role in the failure of consumers to appear and

defend.27 Similarly, representatives of professional process server organizations maintained that

many or most process servers do serve properly, but acknowledged that not all do so.28

Most of the information available as to problems with service of process is anecdotal or

relates to particular local jurisdictions, specifically, large metropolitan areas. The Commission

23. See, e.g., Appleseed, Due Process and Consumer Debt: Eliminating Barriers to Justice in Consumer Credit

Cases (Feb. 2010), 12, available at http://ny.appleseednetwork.org/LinkClick.aspx?fileticket=dFHdRj22C

XY%3d&tabid=252 (hereinafter Appleseed Report); Brown, Tr. I at 23 (many consumers who come in at

garnishment stage after default judgments have been entered against them claim they never received service

of summons and complaint); District Council 37 Municipal Employees Legal Services (DC 37) Comment at

6-7 (of 238 New York City debt collection defendants represented by the DC 37 legal services from January

2008 through June 2009, 65 defendants, or 27.3% of the total, first learned of the lawsuit when their wages

were garnished or their bank accounts restrained); Donnelly, Tr. I at 35, 45 (fraudulent service detected upon

“spot audit”), 79-80 (“I’m not sure how big the problem [of improper service] is. I suspect that it’s larger than

we as judges know, and the New York lawsuit brings that to bear.”); Hillebrand, Tr. IV at 42-43 (familiar with

numerous instances of consumers who first discovered they had been sued and a default had been taken when

wages or bank accounts were garnished); Maurer, Tr. IV at 73-75 (when consumers with defenses to debt

collection cases claim not to have been served and to have first learned of suits at garnishment stage, Maurer’s

clinic seeks evidence including the original proof of service in the underlying case and has found numerous

instances of improper service); MFY Comment at 1; Moiseev, Tr. I at 33, 37 (instances of faulty claims by

process server of “simultaneous service”); Debt Deception, supra note 18, at 9 (finding that 71% of collection

suit defendants who called a New York City legal hotline were either not served or served improperly, and

more than half received no notice of the lawsuit at all); see also Gargano, Tr. IV at 35.

24. Tepper, Tr. V at 47 and 64.

25. Donnelly, Tr. I at 35.

26. See, e.g., ACA International (ACA) Comment at 10-11; Needleman, Tr. V at 34-35.

27. See, e.g., Gagnon, Tr. V at 35 (only 0.02% percent of her law firm’s consumer defendants file motions to

vacate judgment claiming lack of service); Leibsker, Tr. I at 62 (only about 1% of people at most are not

served; “in general, people are getting served”); Needleman, Tr. V at 34-35 (“the percentage of nonservice is

extraordinarily small . . . I don’t think that’s the main issue of why [consumer defendants] are not coming [to

court]”).

28. See, e.g., Certified Civil Process Servers Association of Texas (CCPSA Texas) Comment at 2; Estin, Tr. IV at

38; National Association of Professional Process Servers (NAPPS) Comment at 2; Tamaroff, Tr. IV at 56-58;

Yellon, Tr. V at 61-63, 69-70.

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Repairing A Broken System

is not aware of any reliable, nationwide empirical data on the prevalence of service of process

problems, including whether the problems found in some jurisdictions are present throughout

the country. Nevertheless, the very high rate at which consumers do not appear and the service

of process problems documented in some jurisdictions give the Commission a sufficient basis

to conclude that efforts to improve service of process in debt collection litigation would benefit

consumers in many locations.

The FTC believes that service of process problems should be addressed at the state and

local level. The nature and scope of service of process problems likely vary by jurisdiction

and process servers ordinarily are regulated and overseen at these levels, through state law and

court procedural rules. Further, the Commission recommends that state and local jurisdictions

consider adopting four types of measures that some jurisdictions have already undertaken.

First, randomly conducted audits would be useful in determining the nature and extent of

the service problems, if any, that exist in debt collection cases filed in specific jurisdictions. An

audit by a judge in Cook County, Illinois, for example, revealed more extensive and serious

service of process problems than some of his colleagues thought existed.29 Audits also could

reveal individual process servers or agencies engaging in unlawful practices. The New York

Attorney General’s office conducted such an audit and, finding a variety of unlawful servicing

practices, criminally prosecuted the process server.30

Second, jurisdictions should also consider amending service of process rules to require

greater verification. Some jurisdictions have modified these rules to make it more likely that

the correct consumers are served.31 For example, in response to the efforts of a working group

of judges, consumer advocates, and creditor representatives, Massachusetts recently changed

its small claims court rules to require that collectors in most debt collection cases verify the

29. Donnelly, Tr. I at 35.

30. The records of the process server, American Legal Process, revealed numerous instances in which process

servers claimed: to be at two or more locations at the same time; to be at two locations in sequence when

physically impossible in light of the time required to travel the distance between them; to have served

documents at times before those documents were received; to have attempted service at times before the court

index number had been purchased; and to have notarized signatures when physically impossible to do so. In

re Hon. Ann Pfau v. Forster & Garbus et al., Index No. 2009-8236 (Erie County Supreme Court), Attorney

Affirmation of James M. Morrissey (July 2009).

31. See, e.g., Appleseed Report, supra note 23, at 13-15 (New York City Civil Court Uniform Rules § 208.6

requires a new notice to be mailed by the court to each consumer debt defendant as a second notice

mechanism, and default judgment may not be granted when notice is returned to court as undeliverable);

Tepper, Tr. V at 63-65 (New York City Department of Consumer Affairs) (service of process can improve

by: (1) ensuring process servers are paid enough to motivate them to do their jobs properly; (2) using new

technologies to monitor the location of process servers throughout the day; and (3) promulgating laws or rules

requiring enhanced bookkeeping and record keeping). See also Mass. Ann. Laws Unif. Small Claims Rule

2(b); State of Connecticut Judicial Branch, Report of the Bench/Bar Small Claims Committee 3-4 (2009).

10

Protecting Consumers in Debt Collection Litigation and Arbitration

current addresses of consumers by consulting reliable sources (such as municipal or motor

vehicle records) and attest, under penalty of perjury, that they have engaged in such verification

efforts.32 Likewise, a bench and bar working group in Connecticut recently recommended that

debt collectors consult two reliable sources to verify a consumer’s address and attest, under

oath, that they consulted such sources.33 The requirements adopted in Massachusetts and under

consideration in Connecticut may be useful models for other jurisdictions.

Third, some jurisdictions now require, in addition to regular service of process, use of the

United States mail to provide consumers with supplemental notice of debt collection lawsuits.

For example, North Carolina requires debt buyers to provide consumers with written notice of

their intent to file suit thirty days prior to initiating suit; the notice must include relevant debtrelated information such as an itemized accounting of amounts sought and proof of ownership

of the debt.34 New York City requires that collectors prepare a notice about the lawsuit, which

the court clerk sends to the purported debtor by United States mail, and local law provides that

the court may not enter a default judgment if the notice is returned as undeliverable.35 These

supplemental notice mechanisms can be an important backstop if ordinary service efforts are

problematic or unsuccessful. In New York City, following the adoption of these mechanisms,

more consumers are appearing in court and many of the consumers who do appear explain that

the clerk-mailed notices were their only notice of the pending legal action.36 Other jurisdictions

may benefit from implementing similar supplemental notice requirements.

Finally, law enforcement actions and judicial sanctions could help deter fraud by process

servers. Some states recently have taken action against bogus process servers. The New York

Attorney General, for example, filed civil and criminal actions against process servers who

had engaged in widespread misrepresentations and “sewer service” in debt collection litigation

32. Mass. Ann. Laws Unif. Small Claims Rule 2(b).

33. State of Connecticut Judicial Branch, Report of the Bench/Bar Small Claims Committee 3-4 (2009). See also

Connecticut Rules Committee for the Superior Court, proposed practice book revision § 24-9, published in

Connecticut Law Journal, 58C-59C (May 19, 2009) (version of Bench/Bar Committee’s recommendation that

was proposed by the Rules Committee).

34. N.C. Gen. Stat. §§ 58-70-115(5) and (6).

35. N.Y. City Civ. Ct. Unif. Rules § 208.6 (2009); see also N.Y. City Civ. Ct. Chief Clerk’s Memorandum CCM176 (Apr. 1, 2008).

36. Appleseed Report, supra note 23, at 13-15.

11

Repairing A Broken System

matters.37 These suits allege over 100,000 instances of faulty service in New York State which

resulted in default judgments against consumers.

B. Costs of Defending in Debt Collection Litigation

Assuming that consumers have been properly served, roundtable participants suggested

additional reasons that they may not answer or otherwise defend against debt collection suits.

Representatives of the collection industry generally asserted that the primary reason is that

consumers know they owe the debts and do not have any viable defenses, although some

industry representatives conceded that consumers’ trepidation about the legal process and

inability to retain counsel may also play a role.38 Consumer advocates said that consumers may

not answer or otherwise defend because they cannot take time off work without pay, are afraid of

courtroom processes and unfamiliar with their options, have complex and multiple demands in

their lives, have transportation difficulties, or cannot obtain effective representation.39

37. See, e.g., People v. Zmod Process Corp. DBA Am. Legal Process & Singler, Index No. 2009-4228 (Erie County

Supreme Court) (Apr. 2009) (civil suit); People v. Singler & Zmod Process Corp. dba Am. Legal Process, Inc.

(Apr. 2009) (felony complaint). See also In re Pfau v. Forster & Garbus et al., Index No. 2009-8236 (Erie

County Supreme Court) (July 2009) (civil petition to vacate default judgments obtained against consumers in

debt collection cases, filed against numerous attorney collectors who used American Legal Process to serve

process and obtained default judgments in New York).

38. See, e.g., Asset Acceptance, LLC (Asset) Comment at 2; Buckles, Tr. I at 24 (“[M]ost of the people, in my

opinion, don’t file an answer because they have no defense.”); Leibsker, Tr. I at 62 (consumer fear of court,

lack of representation, and lack of money to repay debt are reasons for high default rate); Portfolio Recovery

Associates (PRA) Comment at 2; Needleman, Tr. V at 33 (“some of them . . . owe the money, and . . . they’re

not sure . . . what to do”); Zezulinski, Tr. V at 50 (consumers don’t appear because of “helplessness and

hopelessness. . . . They owe the debt. They just don’t know what to do about it.”). See also Donnelly, Tr. I at

62 (very few consumers at garnishment hearings raise claims they were never served); but see also Groves, Tr.

V at 23 (transportation or getting off work may play a part); Needleman, Tr. V at 33-34 (consumer priorities,

hardships, fear, and misinformation from debt settlement companies and the internet advising consumers not

to respond are among the reasons for the high consumer nonappearance rate); Redmond, Tr. V at 46 (“it’s

certainly true that the biggest reason [for consumer court nonappearance] is . . . just the human nature of not

wanting to go through [the court] experience”).

39. See, e.g., Abrams, Tr. V at 17-18, 57 (numerous problems may be affecting consumers, such as housing

emergencies, medical bills, lack of transportation, and other more high-priority complexities; consumers

commonly exercise their “natural inclination . . . to try [to] ignore [the lawsuit] and hope it will go

away”); Appleseed Report, supra note 23, at 21; Bragg, Tr. I at 25 (lack of representation and advice is

a cause of consumer non-appearance); Coffey, Tr. V at 24 (sometimes consumers do not appear because

they do not recognize the entity suing them, have other things going on in their lives, or do not want the

stress of a court appearance); Evans, Tr. V at 19 (difficulty getting off work due to finances, fear of the

system, and hopelessness because consumers don’t have representation on their side are among the causes

of nonappearance); Hillebrand, Tr. IV at 43 (some consumers don’t appear from misunderstanding the

court papers they receive); Rosmarin, Tr. V at 38-41 (fear and unfamiliarity, lack of legal representation,

misunderstanding the summons, not recognizing the entity suing them, not understanding that they need to

appear, and believing it’s a case of mistaken identity are among the reasons that consumers who receive service

may not appear in court).

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Protecting Consumers in Debt Collection Litigation and Arbitration

Although no empirical data were submitted bearing on which, if any, of the many possible

explanations are correct, the FTC believes that it is worthwhile to encourage measures that could

increase consumer participation in debt collection litigation. Roundtable participants suggested

a number of measures to reduce the costs to consumers or otherwise encourage them to defend.

If lack of understanding and fear about the litigation process is deterring some consumers from

appearing in court, then jurisdiction-specific consumer education materials40 explaining the

debt collection litigation process in clear and concise terms could encourage participation. In

addition, if counsel assisted consumers in connection with debt collection litigation, it might

demystify the process and help consumers understand their rights and assert defenses.41 In some

jurisdictions, pro bono attorneys, legal services attorneys, or students from law school clinics

appear in court to offer such assistance.42 State and local courts, bar associations, law schools,

and others should consider measures to increase the availability of counsel to assist consumers in

debt collection litigation.

Other roundtable participants stated that the costs of appearing in court to defend debt

collection lawsuits may deter some consumers from participating. Consumers may lose income

if they are absent from work, or they may lack reliable transportation to and from the courthouse.

To reduce such costs, roundtable participants suggested increasing the use of technology and

making available alternative ways to communicate and participate.43 For example, holding

hearings by telephone or Internet might enable consumers to lose less time from work and spend

less money on transportation.44 Likewise, online exchanges of information about the debt, such

as evidence of indebtedness, might eliminate the need for, or reduce the length of, a hearing.

40. The Commission engages in extensive consumer education on a wide variety of topics, including debt

collection. Because the procedures and rules related to debt collection litigation are jurisdiction-specific, state

and local officials would be better placed than the FTC to develop accurate and helpful consumer education for

particular jurisdictions. See also Appleseed Report, supra note 23, at 22-23 (discussing court website, public

access terminals, pro se resources, and forms available at New York City courts, including a check-off list and

explanations of available defenses in consumer debt collection actions).

41. Accord Rosmarin, Tr. V at 50-51.

42. See, e.g., Appleseed Report, supra note 23, at 33-34; Drysdale, Tr. V at 206; Drysdale Comment at 1; Loftus,

Tr. V at 206-07; MFY Comment at 3 (CLARO programs in courthouses in 4 of the 5 New York City boroughs).

Some other courthouse-based programs to assist consumers in debt collection matters include CARPLS in

Chicago (www.carpls.org) and an incipient Fair Debt Collection “Attorney for the Day” program run by the

Boston Bar Association Volunteer Lawyers Project. See also Rosmarin, Tr. V at 50-52; but see Debski, Tr.

V at 29 (claiming that such programs may unethically involve “poaching clients or soliciting clients at the

courthouse steps while they’re in an emotional state”).

43. Such technological measures should be made available to consumers who are able to access and use them, but

their use should not be required of consumers who are unfamiliar with or lack access to them.

44. See, e.g., Debski, Tr. V at 29-30 (“I think that a lot of times . . . the consumer or debtor should be allowed to

appear by telephone . . . . They wouldn’t be missing work. They would be able to . . . maybe take a break from

work and appear at the court.”).

13

Repairing A Broken System

State and local jurisdictions thus should consider whether there are lower-cost methods of

adjudicating collection disputes.

Participating in litigation is particularly costly for consumers if collectors are unprepared

to proceed when consumers appear in court. Collectors often seek continuances or dismissals

without prejudice; when courts grant such requests and set a new hearing date, the consumer is

required once again to bear the costs of taking off work and coming to court.45 To discourage

collectors from engaging in these practices, courts should consider awarding consumers the costs

of preparing for and attending the canceled hearing, including their lost wages and transportation

costs.

III. Evidence of Indebtedness in the Debt Collection Litigation

Process

A. Debt Collection Pleadings and Related Information

1. Complaint Information

Most states have adopted notice pleading requirements for civil litigation, including

debt collection litigation, although some states continue to use more elaborate code pleading

requirements.46 Many state notice pleading systems are modeled on the notice pleading

requirements included in the Federal Rules of Civil Procedure (“F.R.C.P.”). Under F.R.C.P.

8(a), the complaint must include: (1) a “short and plain statement” of jurisdiction; (2) a “short

and plain statement” of the claim; and (3) a demand for judgment.47 The United States Supreme

Court recently explained that F.R.C.P. 8(a) requires that a complaint “give the defendant fair

notice of what the . . . claim is and the grounds upon which it rests”48 by making a “claim to

relief that is plausible on its face.”49 In such a claim, “the plaintiff pleads factual content that

45. See also Appleseed Report, supra note 23, at 27, 30 (recommending that New York state courts should limit

adjournments as repeated court appearances create hardship for consumers and suggesting that plaintiffs may

sometimes “use repeated adjournments strategically” to encourage settlements or default judgments if the

consumer cannot continually appear).

46. Code pleadings require more detailed factual pleading than notice pleadings. Code pleadings state the

“ultimate facts” making out each element underlying a cause of action. See John B. Oakley, A Fresh Look

at the Federal Rules in State Courts, 3 Nev. L.J. 354 (2002); Charles Alan Wright & Arthur R. Miller,

5 Fed. Prac. & Proc. Civ. § 1218 (3d ed. 2010). Some examples of code pleading states include Florida,

Illinois, Louisiana, Nebraska, and Pennsylvania. Z.W. Julius Chen, Following the Leader: Twombly, Pleading

Standards, and Procedural Uniformity, 108 Colum. L.R. 1431 (2008).

47. Fed. R. Civ. P. 8(a).

48. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal cites omitted). See also Berman, Tr. V at 141;

Berman Comment at 2.

49. Twombly, 550 U.S. at 570.

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Protecting Consumers in Debt Collection Litigation and Arbitration

allows the court to draw the reasonable inference that the defendant is liable for the misconduct

alleged”50 and allows the court to infer “more than the mere possibility of misconduct.”51 In

answering the complaint, F.R.C.P. 8(b) requires only that the defendant admit or deny every

element of the plaintiff’s claims, and F.R.C.P. 8(c) requires that the defendant state any

affirmative defenses he or she wants to assert. If the complaint is “so vague or ambiguous that

the [defendant] cannot reasonably prepare a response,” the defendant can move the court to order

the plaintiff to file a more definite statement.52

Many roundtable participants expressed views as to the nature and quality of information

collectors should be required to include in their complaints. Numerous consumer representatives

asserted that debt collection actions too often are filed against the wrong consumer, seek the

wrong amount, or both, or are otherwise based on erroneous information.53 To address these

concerns, most consumer advocates favor complaints that set forth detailed debt-related

information54 including: (1) the name of the original creditor and redacted original account

number;55 (2) the amount owed to the original creditor;56 (3) the date of last payment;57 (4)

the cause of action;58 (5) the governing state law;59 (6) the amount the consumer currently

owes, broken down by principal, interest, fees, and other charges;60 (7) information about the

50. Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949 (2009) (internal cites omitted).

51. Iqbal, 129 S. Ct. at 1950.

52. Fed. R. Civ. P. 12(e).

53. See, e.g., Bromberg, Tr. V at 163; DC 37 Comment at 3; Edelman, Tr. I at 123, 135-37, 151-53, 171-72; Elder

Comment at 1; Martin, Tr. V at 155; Maurer, Tr. IV at 156; NEDAP Comment at 3; Pittman, Tr. V at 187.

54. See, e.g., AARP Comment at 11-15 (emphasis on information possessed by the creditor prior to initiating suit);

Appleseed Report, supra note 23, at 23-26; Consumers Union Comment at 2, 4 (emphasis on information

possessed by collector and shared with consumer prior to initiating suit); Edelman, Tr. I at 136-37, 171-72;

Flory, Tr. IV at 170; Greater Boston Legal Services (GBLS) Comment at 2-3; Hillebrand, Tr. IV at 163, 17273; Kinkley, Tr. IV at 159, 163; Lyngklip, Tr. I at 143; Maurer, Tr. IV at 156; National Consumer Law Center

(NCLC) Comment at 5 (emphasis on information possessed by collectors prior to initiating suit).

55. See, e.g., Appleseed Report, supra note 23, at 25; Consumers Union Comment at 2; Hillebrand, Tr. IV at 163,

172-73; Kinkley, Tr. IV at 163.

56. See, e.g., Consumers Union Comment at 2; Hillebrand, Tr. IV at 163; Kinkley, Tr. IV at 163.

57. See, e.g., Appleseed Report, supra note 23, at 25; Consumers Union Comment at 2; Edelman, Tr. I at 136;

Hillebrand, Tr. IV at 163; Kinkley, Tr. IV at 163.

58. See, e.g., Hillebrand, Tr. IV at 163; Kinkley, Tr. IV at 163.

59. See, e.g., Lyngklip, Tr. I at 143-44.

60. See, e.g., Appleseed Report, supra note 23, at 25; Consumers Union Comment at 2; GBLS Comment at 2-3;

Hillebrand, Tr. IV at 163; Kinkley, Tr. IV at 159, 163.

15

Repairing A Broken System

applicable statute of limitations and from when it runs;61 and (8) information as to the full chain

of assignments of the debt.62

Several judges who participated in the roundtables expressed concern that the information

in many debt collection complaints appears to be inadequate.63 They reported that the most

common question of consumer defendants in debt collection cases is, “Where is this from?”64

That is, consumers are often puzzled by the allegations that they owe a debt to an entity they do

not recognize,65 and they are puzzled about the timing and amount of the alleged debt. Some

judges stated that more information should be included in debt collection complaints so that

consumers can understand who is suing them, on what basis, and for how much.66

Some collector representatives emphasized that, although they regularly provide more

information in their complaints, in a notice pleading system they are only required to provide

limited information.67 Most collector representatives favored including enough information

in the complaint itself to enable the defendant to easily recognize and understand the debt on

which the complaint is based.68 Other collector representatives, however, favored including

more information in their complaints, such as: (1) the name of the original creditor and a

redacted version of the original account number for purchased accounts, perhaps accompanied

by a statement that the account was transferred from the original creditor to the current owner;69

61. See, e.g., GBLS Comment at 2-3; Kinkley, Tr. IV at 159.

62. See, e.g., Appleseed Report, supra note 23, at 25; GBLS Comment at 2-3; Edelman, Tr. I at 136; Lyngklip, Tr. I

at 143.

63. See, e.g., Donnelly, Tr. I at 146; Moiseev, Tr. I at 113.

64. See, e.g., Donnelly, Tr. I at 89; Fisher, Tr. V at 150; Moiseev, Tr. I at 91; Nordlund, Tr. V at 146.

65. See discussion about the growth of debt buying, supra, at Chapter 2, § I. When debt is purchased by a new

entity, in some instances consumers may mistakenly believe that their lack of familiarity with the entity

indicates that they never incurred the alleged debt.

66. See, e.g., Donnelly, Tr. I at 146, 154-55; Fisher, Tr. V at 150, 164, 167; Moiseev, Tr. I at 155-57; Nordlund, Tr.

V at 146.

67. See, e.g., ACA Comment at 15; Asset Comment at 4; Bender, Tr. V at 159; Buckles, Tr. I at 108-09; Moore, Tr.

IV at 186; NARCA Comment at 7-8; Newburger, Tr. IV at 191-92, 198; PRA Comment at 3; Sinsley, Tr. I at

102-03.

68. See, e.g., ACA Comment at 16 (complaint should contain sufficient information to evaluate the claim

for indebtedness); Bender, Tr. V at 159-60 (“Responsible collection attorneys want there to be sufficient

information attached to a complaint so that a consumer is fully informed regarding what his or her

responsibilities are alleged to be.”); Moore, Tr. IV at 153 (through pleading “I’m also trying to give the

consumer enough information so that they know why I’m suing them”); Myers, Tr. V at 198; Newburger,

Tr. IV at 154-55 (some firms are “careful about pleading in a way that the consumer can identify what the

account is that’s being sued”); Olshan, Tr. V at 189 (“We need to find ways for there to be transparency through

information in the pleading.”); Ray, Tr. IV at 169-70.

69. See, e.g., Buckles, Tr. I at 133; Moore, Tr. IV at 153; Newburger, Tr. IV at 154-55; Olshan, Tr. V at 145, 154;

Ray, Tr. IV at 169; Sargis, Tr. IV at 175.

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Protecting Consumers in Debt Collection Litigation and Arbitration

(2) the date of default or charge-off and the amount of the debt at that time;70 and (3) the

amount of interest demanded and the basis for how the interest amount was computed, perhaps

accompanied by a statement of fees and other charges incurred since the time of charge-off.71

The function of debt collection complaints in a notice pleading system is to provide

sufficient information so that: (1) consumers can determine whether to admit or deny the

complaint allegations and assert affirmative defenses in their answers; and (2) judges can

determine whether to grant a motion for a more definite statement or enter a default judgment.

To ensure that sufficient information is provided, the Commission believes collectors generally

should include the following information in complaints: (1) the name of the original creditor72

and the last four digits of the original account number; (2) the date of default or charge-off and

the amount due at that time; (3) the name of the current owner of the debt; (4) the total amount

currently due on the debt; and (5) a breakdown of the total amount currently due by principal,

interest, and fees.73

Based on the evidence gathered in connection with these proceedings, the FTC believes that

many debt collection complaints do not provide this information to consumers. The Commission

recognizes that the rigorous application of existing rules in individual cases could mitigate

this problem, but some jurisdictions may want to consider more systematic solutions. Several

jurisdictions now require that all debt collection complaints include the kind of information the

Commission believes is appropriate.74 The FTC recommends that jurisdictions consider adopting

such requirements to the extent that application of existing rules does not result in sufficient

information being set forth in debt collection complaints.

70. See, e.g., Berman, Tr. V at 141-42; Moore, Tr. IV at 152, 164; Newburger, Tr. IV at 154, 164-65; Olshan, Tr. V

at 145, 154. See also Naves, Tr. IV at 87 (creditor account record information “is inherently reliable from our

perspective, because [creditors] are using that to conduct their business. The dates that we get for a charge-off,

the dates that we get for date of last payment, the dates that we get for original default are the dates that are

provided by the companies that have a responsibility to keep those records and they are indeed the records by

which they manage their businesses.”).

71. See, e.g., Moore, Tr. IV at 152; Newburger, Tr. IV at 164-65; Olshan, Tr. V at 145.

72. In its February 2009 workshop report, the Commission advocated requiring more information be provided

to consumers under the FDCPA’s validation notices. This included the name of the original creditor and an

itemized breakdown of a debt into principal, interest, and other fees and charges. Challenges of Change,

supra note 1, at § VI.A.2.b.

73. As explained below in Part IV, the FTC recommends for other reasons that debt collection complaints include:

(1) the date of default or last payment on the debt, and (2) the applicable statute of limitations on the debt.

74. See, e.g., Mass. Ann. Laws Unif. Small Claims Rules 2(a), 2(b); Michigan Court Rules 3.101; N.C. Gen.

Stat. §§ 58-70-115, 58-70-145, 58-70-150, 58-70-155 (2009); see also Fairfax County, Virginia General

District Court Best Practices: Default Judgments/Debt Buyers and Purchased Debt-Default Judgment Checklist

(2009); State of Connecticut Judicial Branch, Report of the Bench/Bar Small Claims Committee at 4, 10

(2009).

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Repairing A Broken System

2. Complaint Attachments

Roundtable participants expressed widely varying views as to the information that collectors

should be required to include as attachments to complaints. Consumer advocates tended to favor

extensive attachments to complaints, such as the underlying contract giving rise to the debt75 or

evidence of the underlying contract (including the applicable terms and conditions and the signed

account application), copies of account statements or other records of the debt, and the chain

of title showing how the collector came to own the particular obligation.76 Consumer group

representatives emphasized that some states require certain complaint attachments including a

copy of the contract giving rise to the cause of action,77 or a summary statement with the precise

amount of the claim and any interest and a bill showing services rendered and sold.78 Other

states require even more extensive attachments. In cases involving credit card debt, one state

requires that the plaintiff attach “the actual documents, including evidence that the consumer

was the one who signed the account application, a copy of the account agreement, and a copy of

billing statements.”79

Some judicial participants said that the inclusion of attachments with debt collection

complaints would be useful. Other judges, however, expressed reservations about imposing such

a requirement because the additional paper filed would add to the difficulty the courts already

have in managing the documents they receive.80

75. Consumer advocates recently supported proposed legislation in Massachusetts that would require the contract

be attached as part of a debt collection complaint. See Mitchell-Munevar, Tr. V at 156. Likewise, a bill

pending in Minnesota would require debt buyer plaintiffs to attach the original contract, an affidavit setting

forth the date and amount of the last payment, and written proof that the plaintiff does, indeed, own the debt.

See Minnesota S.F. No. 2689 (2009-2010). Similarly, New York’s proposed “Consumer Credit Fairness Act,”

Assem. B. 7558/S. 4398, Leg. 232 Sess. (N.Y. 2009), would require that the contract or other instrument on

which the action is based be attached to a consumer debt collection complaint.

76. See, e.g., Barry, Tr. I at 138; Bromberg, Tr. V at 162 (“you have to have copies of the cardholder agreements,

amendments, chains of assignment, proof of assignment . . . [and] copies of bills”); Brown, Tr. I at 171-72;

Edelman, Tr. I at 136-37; Kinkley, Tr. IV at 159, 194; Mitchell-Munevar, Tr. V at 190 (supporting “an up-front

submission of more documentation” because no discovery is ordinarily permitted in Massachusetts small

claims courts); Wu, Tr. V at 147.

77. See, e.g., Carpenter, Tr. V at 148 (Pennsylvania); Coleman, Tr. IV at 178 (California: either attach the contract

or state its relevant terms); Drysdale, Tr. V at 171 (Florida); Lyngklip, Tr. I at 131 (Michigan); MitchellMunevar, Tr. V at 156 (a proposal before the Massachusetts legislature would require contracts be attached to

complaints); Myers, Tr. V at 200 (North Carolina’s new statute as to debt buyers).

78. Md. Rule 3-306. See also Bender, Tr. V at 142.

79. Wu, Tr. V at 147 (describing Arkansas law); see also Danner v. Discover Bank, 99 Ark. App. 71, 72 (Ark. Ct.

App. 2007).

80. See, e.g., Fisher, Tr. V at 167; Surh, Tr. IV at 193.

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Protecting Consumers in Debt Collection Litigation and Arbitration

Collectors and creditors raised concerns about including documentation with the complaint.

One collector representative stated that collectors should be required to include information

about contracts in complaints but not to attach the contracts to complaints, in part because “in the

21st century, contracts are not always in writing.”81 A debt collection attorney from California (a

state where the contract must be attached or the relevant terms of the contract must be stated in

the complaint) objected that “to require [the contract itself be included as] an attachment would

be to change California law.”82 Similarly, one collection attorney from Michigan (a state which

requires attaching the underlying contract) disfavored attaching copies of the contract assigning

a debt to its present owner.83 In discussing whether the chain of title for a purchased debt should

be attached to the complaint, another collector representative maintained that attachment should

not be required, and that the chain of title should not be produced unless the consumer contests

the claim that the plaintiff owns the debt.84

As with information in the complaint itself, the information contained in attachments to

the complaint needs to be sufficient for consumers to determine how to answer the complaint

allegations and for judges to decide motions for a more definite statement or for a default

judgment. Although some consumers and courts would benefit if they knew more about the

debt, including information about the underlying contract and transaction history, mandating the

attachment of extensive documentation about the debt (such as contracts and account statements)

would result in increased costs to collectors and court systems. The Commission therefore

recommends that courts rigorously apply current court rules to require that contracts or other

documentation be provided with complaints only if they are necessary for consumers to answer

the complaint or for courts to decide whether to grant motions for more definite statements or

for default judgments. Jurisdictions should also consider specifying documents (or explanations

in lieu of documents) that must accompany complaints if judicial application of existing rules in

individual cases would not be sufficient to change the information set forth in complaints.

B. Default and Summary Judgment Checklists

If a defendant does not answer or otherwise defend a debt collection action, a default

judgment may be entered against the defendant. First, the clerk of the court must enter a

default if “a party against whom a judgment for affirmative relief is sought has failed to

81. Olshan, Tr. V at 153-54.

82. Coleman, Tr. IV at 178.

83. Buckles, Tr. I at 132-3. Note that some Michigan consumer advocates interpret the requirement of attaching

the contract giving rise to the suit to extend to a requirement that the assignment contracts be attached. See

Lyngklip, Tr. I at 131.

84. Ray, Tr. IV at 194. See also Berman Comment at 15-16.

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Repairing A Broken System

plead or otherwise defend” and the failure to plead or defend has been “shown by affidavit or

otherwise.”85 Second, unless the claim is for a sum certain or a sum that can be made certain

by computation, the plaintiff must apply to the court for a default judgment after the clerk has

entered a default. In considering a motion for a default judgment, the court may: (1) conduct

an accounting; (2) determine the amount of damages; (3) establish the truth of any allegation by

evidence; or (4) investigate any other matter.86 After considering the available information, the

court has discretion in deciding whether to grant a default judgment.87

As discussed above, the Commission recommends steps to increase consumer participation

in debt collection litigation to help decrease the prevalence of default judgments. In an effort to

address this problem in another way, some court systems have adopted measures to encourage

judges to apply appropriate and consistent standards – including legal standards and court

rules – in deciding whether to grant such judgments.88 Massachusetts developed a checklist

for magistrates setting out the elements that must be shown to grant a default judgment in a

debt collection case.89 The Commission recommends that other state court systems consider

85. Fed. R. Civ. P. 55(a).

86. Fed. R. Civ. P. 55(b)(2).

87. “In determining whether to enter a default judgment, the court is free to consider a number of factors that

may appear from the record before it. Among these are the amount of money potentially involved; whether

material issues of fact or issues of substantial public importance are at issue; whether the default is largely

technical; whether plaintiff has been substantially prejudiced by the delay involved; and whether the grounds

for default are clearly established or are in doubt. Furthermore, the court may consider how harsh an effect

a default judgment might have; or whether the default was caused by a good-faith mistake or by excusable

or inexcusable neglect on the part of the defendant. Plaintiff’s actions also may be relevant; if plaintiff has

engaged in a course of delay or has sought numerous continuances, the court may determine that a default

judgment would not be appropriate. Finally, the court may consider whether it later would be obliged to set

aside the default on defendant’s motion, since it would be meaningless to enter the judgment as a matter of

course if that decision meant that the court immediately would be required to take up the question of whether it

should be set aside.” Charles Alan Wright & Arthur R. Miller, 10A Fed. Prac. & Proc. Civ. § 2685 (3d ed.

2010). See, e.g., Wright v. Liguori, 2009 U.S. Dist. LEXIS 93840, *6-*7 (D. Del. 2009); Fanning v. Permanent

Solution Indus., Inc., 257 F.R.D. 4, 7 (D.D.C. 2009).

88. See, e.g., Mass. Ann. Laws Unif. Small Claims Rules 7(d) (see also Small Claims Default Judgment Checklist

provided in Trial Court of the Commonwealth of Massachusetts District Court Department Memorandum

from Hon. Lynda M. Connolly, Chief Justice (Sept. 11, 2009)); Fairfax County, Virginia General District Court

Purchased Debt-Default Judgment Checklist (2009); State of Connecticut Judicial Branch, Report of the

Bench/Bar Small Claims Committee at 10-11 (2009) (see also proposed Connecticut Small Claims Judgment

Checklist for Magistrates at Appendix E, Judicial Branch, Report of the Bench/Bar Small Claims Committee

(2009)); see generally also N.C. Gen. Stat. §§ 58-70-145, 58-70-150, 58-70-155 (2009). See Appendix E for

examples of such checklists.

89. Mass. Ann. Laws Unif. Small Claims Rules 7(d); Small Claims Default Judgment Checklist provided in Trial

Court of the Commonwealth of Massachusetts District Court Department Memorandum from Hon. Lynda M.

Connolly, Chief Justice (Sept. 11, 2009).

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Protecting Consumers in Debt Collection Litigation and Arbitration

adopting similar checklists, to promote the application of proper and uniform requirements for

determining whether to grant a default judgment.90

Some jurisdictions also have adopted specific checklists for granting judgments in actions

brought by debt buyers. North Carolina recently enacted a statute requiring courts to use a

special checklist of elements a debt buyer must meet to be awarded default or summary judgment

in a debt collection action.91 Fairfax County, Virginia, also provides a checklist for judges to use

in determining whether to grant a default judgment to a debt buyer.92 New York City requires

debt buyers to present special affidavits showing the chain of title to obtain a judgment.93 The

rationale for mandating that courts follow a checklist or review special affidavits is that, if debt

buyers sue to collect, the debts at issue have changed hands more often and are older than other

debts. The FTC has not reached any conclusions as to whether different standards should apply

to debt buyers than to other owners of debts,94 but jurisdictions concerned about the validity of

the debts on which debt buyers are suing may want to adopt one of these models.95

C. Unnecessary Litigation Costs

A number of roundtable participants stated that the litigation practices of collectors have

imposed unnecessary costs on consumers. At times, according to these participants, collectors,

particularly debt buyers, are not ready to proceed to trial when consumers appear to defend.96

Given how infrequently consumers appear and defend, some collectors may decide not to

expend the costs necessary to be ready to proceed to trial on the off chance that the consumer

might appear. Because they are not prepared to go to trial, such collectors reportedly often seek

continuances or dismissals without prejudice so that the cases can be pursued or re-filed at a later

90. See Appendix E for examples.

91. N.C. Gen. Stat. § 58-70-155 (2009).

92. Fairfax County, Virginia General District Court Purchased Debt-Default Judgment Checklist (2009).

93. N.Y. City Civ. Ct. Directives and Procedures DRP-182 (May 13, 2009).

94. In December 2009, the Commission commenced a comprehensive study of the debt buying industry by

ordering the production of information from nine of the largest debt buyers in the United States. Once the FTC

has reviewed and analyzed this information, the agency will be able to offer better-informed views as to the

conduct of debt buyers and the standards that should apply to them.

95. Legislation aimed at scrutinizing debt buyer evidence was recently introduced in the Minnesota legislature. It

would require such plaintiffs to provide contract copies, affidavits of last consumer payment date and amount,

and written proof of ownership, among other features. See Minnesota S.F. No. 2689.

96. See, e.g., Barry, Tr. I at 105, 112; Donnelly, Tr. I at 108; Flory, Tr. IV at 170; Lipman, Tr. I at 107, 149; Nepveu,

Tr. I at 106; Pittman, Tr. V at 187; but see also Donnelly, Tr. I at 112 (collectors may decide “it’s not worth it”

to fight the consumer); Sinsley, Tr. I at 112 (same).

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Repairing A Broken System

date.97 In addition to the burdens this practice imposes on the court system, it is inconvenient

and costly to consumers who have appeared in court, and then must re-appear in court when the

case is rescheduled.98 Some courts have acted to deter this practice. For example, according to

a judge of the Blair County, Pennsylvania “Credit Card Court,” if the plaintiff does not appear at

an initial mandatory conciliation conference, the case is dismissed with prejudice.99 Courts also

may impose sanctions on parties or their counsel to deter this practice, or order that they pay the

costs of the consumers who have appeared for trial. To the extent that judges conclude that a

collector has engaged in this practice, they may want to consider taking similar measures.

IV. Statutes of Limitations

States usually establish a particular period of time, known as the statute of limitations, to

set the duration during which an action to compel payment of a debt may be brought. Statutes

of limitations help ensure that consumers can defend themselves in collection actions and that

courts will have the evidence they need to resolve these disputes.100 Statutes of limitations also

provide a bright line for collectors and consumers as to the date after which the collector should

no longer file an action to collect on a debt.

In most states, the running of the statute of limitations does not extinguish the consumer’s

underlying debt.101 But if the collector files a legal action to recover on the debt, the consumer

can raise the running of the statute of limitations as an affirmative defense.102 The running of the

97. See sources in supra note 96; Appleseed Report, supra note 23, at 27, 30; Pittman, Tr. V at 187 (describing his

experience with a debt buyer with no access to documentary media: “If [any consumer] comes to court, [the

debt buyer is] going to dismiss, because they can’t get the proof.”).

98. See Donnelly, Tr. I at 146; Weinberg, Tr. I at 158.

99. Carpenter, Tr. V at 183. See also Mass. Ann. Laws Unif. Small Claims Rules 7(c) (requiring that a judgment

for the defendant, rather than a dismissal, must be entered if the defendant is present for the scheduled trial, the

plaintiff does not appear or is not prepared to proceed to trial, and there is no good cause for a continuance).

100. See United States v. Kubrick, 444 U.S. 111, 117 (1979) (statutes of limitations “protect defendants and the

courts from having to deal with cases in which the search for truth may be seriously impaired by the loss of

evidence, whether by death or disappearance of witnesses, fading memories, disappearance of documents, or

otherwise”).

101. In Mississippi and Wisconsin the expiration of the statute of limitations legally extinguishes the debt. Miss.

Code Ann. § 15-1-3 (2009); Wis. Stat. Ann. § 893.05 (2009).

102. See, e.g., Evans, Tr. V at 89 (Florida); Gargano, Tr. IV at 119 (California); Lipman, Tr. I at 90 (Iowa); Surh,

Tr. IV at 113 (California). In Mississippi and Wisconsin, however, the expiration of the statute of limitations

legally extinguishes the debt, thus making a suit on a time-barred debt subject to dismissal for failure to state

a cause of action. Miss. Code Ann. § 15-1-3 (2009) (see, e.g., Lowery v. Statewide Healthcare Serv., Inc., 585

So. 2d 778, 780 (Miss. 1991)); Wis. Stat. Ann. § 893.05 (2009) (see, e.g., Klewer v. Cavalry Invs., LLC, 2002

U.S. Dist. LEXIS 1778, *6, *8 (W.D. Wis. 2002)).

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Protecting Consumers in Debt Collection Litigation and Arbitration

statute of limitations, however, does not prohibit the collector from using non-litigation means

(such as collection telephone calls) to try to collect on the debt.103

Nearly all courts that have examined the propriety of suing or threatening to sue to collect

on a debt that is older than the applicable statute of limitations (also known as “time-barred

debt”) have concluded that such practices violate the FDCPA. In Kimber v. Federal Financial

Corp., the court held it was unfair and unconscionable in violation of Section 808 to sue on timebarred debt in light of the strong public policy favoring statutes of limitations and the likelihood

that the “least sophisticated consumer” would “unwittingly acquiesce” to suit due to lack of

awareness that the passage of time could be raised as a defense.104 It further held that to threaten

suit on a time-barred debt was deceptive in violation of Section 807 because it “implicitly

represented that [the collector] could recover in a lawsuit, when it [could] not properly do

so.”105 Most other courts addressing this issue have reached the same result.106 Industry groups

have also adopted policies requiring members to refrain from suing or threatening suit on timebarred debts.107 The Commission agrees with the interpretation that the FDCPA bars actual or

threatened suit to collect on time-barred debts.108

103. Even in the absence of a legal obligation to repay a debt, people may choose to pay for moral or other reasons.

See, e.g., John H. Langbein, The Nonprobate Revolution and the Future of the Law of Succession, 97 Harv.

L. Rev. 1108, 1121 (1983-1984) (“I found the belief widespread among credit industry professionals that

voluntary payment is motivated largely by moral as opposed to legal considerations”).

104. Kimber v. Fed. Fin. Corp., 668 F. Supp. 1480, 1487 (M.D. Ala. 1987).

105. Kimber, 668 F. Supp. at 1489.

106. Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767 (8th Cir. 2001); McCullough v. Johnson, Rodenberg

& Lauinger, 2009 U.S. Dist. LEXIS 69881 (D. Mont. 2009); Ramirez v. Palisades Collection, L.L.C., 2008

U.S. Dist. LEXIS 48722 (N.D. Ill. 2008); Larsen v. JBC Legal Group, P.C., 553 F. Supp. 2d 290 (E.D.N.Y.

2008); Martsolf v. JBC Legal Group, P.C., 2008 U.S. Dist. LEXIS 6876 (M.D. Pa. 2008); Rawson v. Credigy

Receivables, Inc., 2006 U.S. Dist. LEXIS 6450 (N.D. Ill. 2006); Thinesen v. JBC Legal Group, P.C., 2005

U.S. Dist. LEXIS 21637 (D. Minn. 2005); Dunaway v. JBC & Assocs., Inc., 2005 U.S. Dist. LEXIS 37885

(E.D. Mich. 2005); Spencer v. Hendersen-Webb, 81 F. Supp. 2d 582 (D. Md. 1999); Stepney v. Outsourcing

Solutions, Inc., 1997 U.S. Dist. LEXIS 18264 (N.D. Ill. 1997); Martinez v. Albuquerque Collection Servs.,

867 F. Supp. 1495 (D. N.M. 1994); Beattie v. D.M. Collections, Inc., 754 F. Supp. 383 (D. Del. 1991); but see

Simmons v. Miller, 970 F. Supp. 661 (S.D. Ind. 1997) (no FDCPA violation where suit had not been knowingly

filed beyond statute of limitations); Lindbergh v. Transworld Sys., Inc., 846 F. Supp. 175 (D. Conn. 1994) (no

FDCPA violation where suit was not knowingly filed beyond statute of limitations).

107. See, e.g., ACA Comment at 12 (collectors that “threaten or pursue litigation of an out of statute account do so

in violation of the law and ACA’s Code of Ethics”).

108. Likewise, the Commission believes that threatening or commencement of arbitration proceedings to collect on

time-barred debts may violate Sections 807 and 808 of the FDCPA, 15 U.S.C. §§ 1692e, 1692f. See Kimber,

668 F. Supp. at 1489.

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Repairing A Broken System

A. Statute of Limitations Period

Most statutes of limitations on consumer debt begin to run from the date that the

consumer defaulted on the debt.109 The period of time for the statute of limitations varies by

state. In addition, for each state, the period of time may vary with the particular kind of debt

and circumstances under which it arose (e.g., whether the debt arose under a written or oral

contract).110

Roundtable participants said that it is sometimes difficult to determine which among several

potential statutes of limitations is applicable to a particular debt.111 In Illinois, for example,

recent case law clarified that the appropriate statute of limitations for an action to collect on

credit card debt depends on whether the suit is based on a written contract.112 If the collector

produces a written contract, a ten-year statute of limitations applies. If the collector cannot do

so, a five-year statute of limitations applies.

Uncertainty as to the applicable statute of limitations could harm both consumers and

collectors. For instance, if consumers are not certain as to how long collectors have to sue them,

they may make partial payments on time-barred debt, thereby unintentionally reviving the statute

of limitations. In addition, if collectors are uncertain as to the applicable statute of limitations,

they may inadvertently file actions to recover on time-barred debt.113

109. See, e.g., Nat’l Consumer Law Ctr., Collection Actions §§ 3.7.6, 3.7.7 (1st ed. 2008) (hereinafter NCLC

Collection Actions).

110. See, e.g., Portfolio Acquisitions, LLC v. Feltman, 391 Ill. App. 3d 642, 652 (Ill. App. Ct. 1st Dist. 2009)

(holding that, under Illinois law, a credit card contract was oral rather than written and subject to the 5-year

statute of limitations for oral contracts rather than the 10-year statute of limitations for written contracts

where parol evidence would be required to show all essential terms and conditions of the contract). See also

Donnelly, Tr. I at 125 (ambiguity of complaint as to whether it refers to an account-stated or an oral contract,

which have different applicable statutes of limitations); Markoff, Tr. I at 98; Lipman, Tr. I at 106-107, 123.

111. See, e.g., NARCA Comment at 7 (“several different statute of limitations may apply to a debt claim”)

(emphasis added); Coleman, Tr. IV at 95; Debski, Tr. V at 121; Donnelly, Tr. I at 125; Edelman, Tr. I at 82;

Evans, Tr. V at 101, 121; Flitter, Tr. V at 98; Kinkley, Tr. IV at 85; Lipman, Tr. I at 106; Naves, Tr. IV at

127, 145-46; Newburger, Tr. IV at 92; Sinsley, Tr. I at 84. See also Florida Consumer Turns Tables on Debt

Collector – Sued for $800.00 Dollars, Consumer Collects $120,000.00 Dollars From Debt Collector, Yahoo!

News, Mar. 1, 2010, available at http://www.prweb.com/releases/2010/03/prweb3657014.htm (describing

consumer’s defense of state collection action and subsequent pursuit of federal FDCPA action against collector

for suit on time-barred debt, where collector filed based on the wrong state’s statute of limitations and where

contract was held to be oral rather than written).

112. See Portfolio Acquisitions, 391 Ill. App. 3d at 652.

113. See, e.g., Asset Comment at 3 (some cases involving allegations of suit on time-barred debt involve “intricate

legal issues” such as choice of law provisions and distinguishing between written and oral contracts); NARCA

Comment at 6-7 (actions should be governed by the statute of limitations of the forum state, not the state where

the credit agreement originated).

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Protecting Consumers in Debt Collection Litigation and Arbitration

Roundtable participants discussed whether a single, uniform statute of limitations for

consumer debt cases would reduce such uncertainty where it exists. Many participants favored

this concept in theory, although consumer advocates and collector representatives recognized

that they likely would differ widely as to how long such a statutory period should be,114 and

they expressed serious reservations about Congress establishing a national standard.115 Most

participants preferred that states continue to perform their traditional role in setting statutes of

limitations for debt collection actions,116 though many expressed that making state statutes more

uniform would be beneficial for both collectors and consumers.117

To the extent that states conclude there is uncertainty as to the applicable statute of

limitations for a debt or how to apply it, the Commission recommends that they consider

modifying their laws to reduce the uncertainty. If state statutes of limitations for consumer debts

are clear, simple, and uniform, consumers and collectors stand to benefit.

B. Collecting on Time-Barred Debt

Roundtable participants discussed the collection of time-barred debt. As noted above, state

law generally does not prohibit collectors from using methods other than threatening to file or

filing an action in court118 to collect on time-barred debt. The two major issues participants

discussed were whether the FDCPA should be amended to prohibit the collection of such debt

and whether the law should permit payments on such debt to “revive” the unpaid amount of the

debt.

114. See, e.g., Kinkley, Tr. IV at 141-42; Moore, Tr. IV at 146-47; Naves, Tr. IV at 127, 145-46; Newburger, Tr.

IV at 148. See also ACA Comment at 15 (promoting a uniform statute of limitations of 10 years across all

jurisdictions); Cada Comment at 1 (11/22/09) (suggesting all states should adopt a statute of limitations of 4

years); Staulcup Comment at 1 (favoring a uniform statute of limitations of 7 years).

115. Proposed Levin Amendment SA 1097 to the Credit Card Act of 2009 would have amended the Truth in

Lending Act to provide for rulemaking to establish a uniform statute of limitations for collecting debt on credit

card accounts after the accounts had been closed by the creditor or the cardholder, but this amendment was not

included in the Credit CARD Act of 2009. CQ Congressional Record Service, Congressional Record, Senate,

Page S5445, May 13, 2009.

116. See Abrams, Tr. V at 121; Coffey, Tr. V at 121; Debski, Tr. V at 121; Faulkner, Tr. V at 121-22; Flitter, Tr. V at

122; Gagnon, Tr. V at 122; Groves, Tr. V at 122; McNulty, Tr. V at 123; Needleman, Tr. V at 123; Redmond,

Tr. V at 123; Rosmarin, Tr. V at 123. See also Evans, Tr. V at 121; Lebedeff, Tr. V at 123; Zezulinski, Tr. V at

123.

117. See, e.g., Kinkley, Tr. IV at 141-43; Naves, Tr. IV at 127, 145-46; Newburger, Tr. IV at 148.

118. Recent statutory reform in North Carolina provides that it is an unfair practice for a debt buyer collector to

“[bring] suit or [initiate] an arbitration proceeding against the debtor or otherwise [attempt] to collect on a debt

when the [collector] knows, or reasonably should know, that such collection is barred by the applicable statute

of limitations.” N.C. Gen. Stat. § 58-70-115(4) (emphasis added).

25

Repairing A Broken System

Participants differed in their views about whether the FDCPA should be amended to bar

the collection of time-barred debt. Most collector participants favored continuing to allow

the collection of time-barred debt, provided that collectors neither sue nor threaten to sue

the consumers from whom they are trying to collect.119 Many consumer advocates asserted

that the FDCPA should prohibit such collection attempts, or, in the alternative, that collectors

should explicitly be required to disclose to consumers that they cannot be sued to collect on the

debt.120 Collector representatives countered that making such a disclosure would require that the

collector interpret state law as to the applicable statute of limitations, which state officials could

construe as the unauthorized practice of law.121

The Commission takes no position on whether the FDCPA should be amended to preclude

collectors from collecting debt that they know or should know is time-barred. Nevertheless,

because most consumers do not know or understand their legal rights with respect to the

collection of time-barred debt, the Commission believes that in many circumstances such a

collection attempt may create a misleading impression that the collector can sue the consumer

in court to collect the debt, in violation of Section 5 of the FTC Act and Section 807 of the

FDCPA.122 To avoid creating this misleading impression, collectors would need to disclose

clearly and prominently to consumers before seeking payment on such time-barred debt that,

119. See, e.g., Debski, Tr. V at 88; Sinsley, Tr. I at 86; but see also Groves, Tr. V at 85 (“it’s clear that collecting on

out-of-stat[ute] consumer debt is a bad idea”).

120. See, e.g., AARP Comment at 2 (favors requiring an affirmative disclosure about the statute of limitations when

collecting time-barred debts); Barry, Tr. I at 120 (FDCPA should be amended to require disclosure to consumer

that the statute has expired); Edelman, Tr. I at 83 (stated he has seen debt buyers “badger somebody into

making a small payment” the only purpose of which is to re-trigger the statute of limitations), 94 (stated debt

buyers frequently send collection letters on time-barred debts implying that there is still “a binding, legally

enforceable obligation”); Edelman Comment at 20 (collecting time-barred debts should be declared an unfair

or deceptive practice unless there is a reasonable basis to believe the debts are not time-barred); Flory, Tr. IV

at 139 (consumers are told to send a little bit of money to “show good faith” even where they do not owe the

medical bill or their insurance company should be paying it); Kinkley, Tr. IV at 138-39 (“And there are a lot

of debt collectors who sort of trick somebody and say: Just send me five bucks” without disclosing that such

payment would make “a debt that’s uncollectible judicially now collectable”); NCLC Comment at 5 (collectors

should be required to clarify that consumers cannot be sued for non-payment of a time-barred debt); NEDAP

comment at 5 (FDCPA language should be amended to explicitly prohibit debt collectors from filing suits

on time-barred debts); Nepveu, Tr. I at 91 (consumers do not know that it matters how long ago something

happened); Weinberg, Tr. I at 96 (has seen debt buyers scare senior citizens into authorizing small payments

on aged debts that they really don’t recognize in order to re-trigger the statute of limitations); but see also

Donnelly, Tr. I at 121 (consumers wouldn’t understand such disclosures).

121. See, e.g., Andersen, Tr. I at 116; Sargis, Tr. IV at 135; Sinsley, Tr. I at 117-18. See also ACA Comment at 14

(consumer disclosure might lead consumers mistakenly to believe that the debt is no longer valid).

122. FTC Act § 5(a), 15 U.S.C. § 45(a); FDCPA § 807, 15 U.S.C. § 1692e. In addition, the failure to disclose this

information may violate state laws prohibiting unfair and deceptive acts and practices.

26

Protecting Consumers in Debt Collection Litigation and Arbitration

because of the passage of time, they can no longer sue in court to collect the debt or otherwise

compel payment.123

The second issue related to collecting on time-barred debt roundtable participants addressed

was the “reviving” of such debt. In many states, making a payment on a debt after it has gone

into default triggers the start of a new statute of limitations period for the entire debt, even if the

original statute of limitations period has already expired.124 For example, if such a state has a

three-year statute of limitations for credit card debt and it has been five years since a consumer

paid on his $3,000 credit card debt, the collector could not lawfully sue him to collect on the

debt. But if he decides to pay the collector $10, the payment would start a three-year period

during which the collector could sue for the remaining $2,990.125 Debt collectors generally do

not disclose to consumers that making any payment on a time-barred debt revives the collector’s

ability to sue to collect on the entire debt.126

Roundtable participants differed in their views about whether a payment should revive

the statute of limitations on a time-barred debt. Some opined that state law should continue to

allow the revival upon payment of time-barred debts.127 Other participants contended that state

law should be amended so that a payment on a time-barred debt does not revive the statute of

limitations.128 Still others asserted that state law should be changed to require that the collectors

123. In some circumstances, collecting on time-barred debt could be an unfair act or practice under Section 5 of

the FTC Act or state laws prohibiting unfair acts or practices. For collecting on time-barred debt to be unfair

under Section 5 of the FTC Act, the Commission would have to demonstrate that “the act or practice causes or

is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves

and not outweighed by countervailing benefits to consumers or to competition.” FTC Act § 5(n); 15 U.S.C. §

45(n). Determining whether an act or practice is unfair is a fact-specific inquiry.

124. See, e.g., NCLC Collection Actions, supra note 109, at § 3.7.7.3.1.

125. For sake of simplicity, we have not included in this amount additional interest or fees that the credit contract

may impose.

126. Most consumers do not understand that a payment will revive the statute of limitations. Some roundtable

participants suggested that many consumers do not even understand the basic concept that a statute of

limitations prevents collectors from suing to collect on debts after the passage of a period of time. See,

e.g., Nepveu, Tr. I at 91; but see also Lerch, Tr. I at 100 (consumers do know about the concept that when

something happened too long ago, suit is barred).

127. See, e.g., Debski, Tr. V at 118-19 (no need for disclosure or affirmation when consumer continues to pay on an

out-of-statute debt).

128. See, e.g., Rosmarin, Tr. V at 96.

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Repairing A Broken System

disclose to consumers the effect of paying on a time-barred debt, or to require consumers to

make a knowing affirmation that they waive their rights to be immune from suit.129

The Commission recommends that states in which a partial payment revives the statute of

limitations consider modifying their laws so that a payment on a time-barred debt does not revive

the debt unless the consumer is aware of and acknowledges its revival. Otherwise, consumers

do not expect that a partial payment toward a time-barred debt will have the serious, adverse

consequence of starting a new statute of limitations during which the collector can sue to collect

the entire debt. Limiting consumers’ responsibility to the amount of the partial payment on a

time-barred debt would conform the law to reasonable consumer expectations.

In states where laws continue to provide that a partial payment on a time-barred debt

revives it, the Commission believes that in many circumstances a collector’s attempt to collect

a debt that it knows or should know is time-barred may create a misleading impression as to the

consequences of making such a payment, in violation of Section 5 of the FTC Act and Section

807 of the FDCPA.130 To avoid creating a misleading impression, collectors would need to

disclose clearly and prominently to consumers prior to requesting or accepting such payments

that (1) the collector cannot sue to collect the debt and (2) providing a partial payment would

revive the collector’s ability to sue to collect the balance.

129. See, e.g., AARP Comment at 2 (creditors should be required to disclose affirmatively that debt is time-barred

and that making partial payment will revive the obligation); Evans, Tr. V at 119-20 (favors a disclosure

requirement for consumers paying on time-barred debts because “we have to make sure [consumers]

understand what they’re doing and they’re doing it with knowledge”); Faulkner, Tr. V at 81-82 (“it should

be an unfair practice to buy or sell out-of-statute debts” and, without a disclosure, consumers are misled to

believe they are under threat of suit on time-barred debts); Lebedeff, Tr. V at 84-85 (familiar with collection

practice of asking for a token payment to prolong statute or revive an out-of-statute debt obligation); Rosmarin,

Tr. V at 118 (disfavors reviving a time-barred debt through subsequent payment except when consumers

write affirmative statements evincing understanding of their lack of legal obligation to pay and affirming

that they still want to pay); but see also ACA Comment at 14 (notification that a debt is time-barred might

confuse consumers); Midland Credit Management (Midland) Comment at 3 (providing consumers with more

information regarding an account’s legal status would only confuse consumers and should not be attempted).

130. FTC Act § 5(a), 15 U.S.C. § 45(a); FDCPA § 807, 15 U.S.C. § 1692e.

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Protecting Consumers in Debt Collection Litigation and Arbitration

C. Suits on Time-Barred Debts

Many consumer advocates and some judges expressed the view that some collectors

regularly sue consumers on time-barred debts.131 Some consumer advocates suggested that debt

buyers are more likely than original creditors to threaten or bring suits on time-barred debts.132

One New York legal services provider analyzed a sample of all the debt collection cases in its

office over an eighteen-month period and found that over fifty percent of the cases for which

sufficient information was available were filed after the statute of limitations period had expired.

In addition, in thirteen percent of all cases, the debt’s time-barred status was apparent from the

face of the complaint.133 On the other hand, many collector representatives maintained that it

would be against a collector’s interest to sue on a time-barred debt, and that such suits are rarely

if ever filed.134

A significant consumer protection problem related to suits on time-barred debt appears to

arise from the combination of collectors filing them and consumers not defending them. Because

an expired statute of limitations is an affirmative defense in most states, collectors have no

obligation to allege in the complaint that the debt is not time-barred, and many collectors do not

131. See, e.g., Abrams, Tr. V at 96-97; Coffey, Tr. V at 95; DC 37 Comment at 4; Edelman, Tr. I at 82-84; Edelman

Comment at 18; Evans, Tr. V at 89; Faulkner, Tr. V at 108; Lipman, Tr. I at 89; McNulty, Tr. V at 95; NEDAP

Comment at 4; Rosmarin, Tr. V at 83; but see also Phillips, Tr. I at 86-87 (“we don’t know what the instance

is of filing suits beyond the statute of limitations because we don’t have the data” and the majority of debt

collection complaints are silent as to the relevant information); Weinberg, Tr. I at 100 (“so many of the debt

buyers have no . . . reliable information as to the date of last payment or date of default . . . . I think a lot

of lawsuits are filed where the lawyer has made no effort to determine whether it’s beyond the statute of

limitations because [the lawyer has] no information.”). Note that case law has established that it is generally

a violation of the FDCPA for a collector to sue or threaten to sue on a time-barred debt. See, e.g., Kimber v.

Fed. Fin. Corp., 668 F. Supp. 1480, 1487 (M.D. Ala. 1987); Ramirez v. Palisades Collection LLC, 2008 U.S.

Dist. LEXIS 48722, *13 (N.D. Ill. June 23, 2008); McCorriston v. L.W.T., Inc., 536 F. Supp. 2d 1268, 1271 n.2

(M.D. Fla. 2008).

132. See, e.g., Edelman, Tr. I at 82 (“I think it’s very common among the debt buyers”); Faulkner, Tr. V at 81-82

(“There are people in the debt-buying industry [who] make it a practice to buy primarily . . . out-of-statute

debt.”); Kinkley, Tr. IV at 84 (speaking about collection rather than litigation).

133. Letter to FTC from Robert A. Martin of DC 37 Municipal Employees Legal Services, Feb. 11, 2010 (on file

with FTC), at 1-2, supplementing the information described in DC 37 Comment.

134. See, e.g., ACA Comment at 12; Andersen, Tr. I at 115; Asset Comment at 3-4; Coleman, Tr. IV at 96; Debski,

Tr. V at 88-89; Midland Comment at 2; Gagnon, Tr. V at 94; Lerch, Tr. I at 100; Markoff, Tr. I at 98-9; NARCA

Comment at 7; Needleman, Tr. V at 82-83; Newburger, Tr. IV at 111; Redmond, Tr. V at 124-25; Sinsley, Tr. I

at 84; see also Groves, Tr. V at 85-87 (collecting as well as filing suit on time-barred debt is a “bad idea”).

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Repairing A Broken System

include this information.135 If consumers do not defend, there is no one to raise the defense that

the debt is time-barred. Indeed, some judges who participated in the roundtables stated that,

even if a debt collection action appears to be time-barred, it would be improper for courts to

consider affirmative defenses that no party had raised.136 As a result, some courts appear to be

granting default judgments on time-barred debt.

The Commission recommends that states change their laws to require collectors to prove

that the debts they are collecting are not time-barred, rather than imposing on consumers the

burden of raising the running of the statute of limitations as an affirmative defense. As discussed

above, states also should revise their laws to require that collectors set forth in their complaints

the date of default and the applicable statute of limitations.137 These changes would highlight the

statute of limitations issue in debt collection litigation for consumers and make it appropriate for

courts to consider the issue before granting default judgments to collectors.

Federal action also could assist in decreasing the extent to which default judgments are

entered in actions based on time-barred debts. The Commission recommends that Congress

amend Section 809(a) of the FDCPA to require that collectors include the date of default in

the validation notices they provide to consumers at the outset of the collection process.138 If

collectors are required to have this information when collection begins, then it should be readily

available at the time an action is filed. Further, because increased enforcement actions against

135. Few complaints currently state the date of default or the length of the applicable statute of limitations. See,

e.g., Abrams, Tr. V at 97; Donnelly, Tr. I at 89, 107; Evans, Tr. V at 90-91; Hillebrand, Tr. IV at 112-13;

Kinkley, Tr. IV at 85; Lipman, Tr. I at 89-90; Moiseev, Tr. I at 113-14; Phillips, Tr. I at 87; Rosmarin, Tr. V at

96; Surh, Tr. IV at 113-14. In some states, however, collectors are required to include this information in their

complaints. See, e.g., N.Y. City Civ. Ct. Chief Clerk’s Memorandum 186 (May 13, 2009); Fisher, Tr. V at

195; Lebedeff, Tr. V at 93. In addition, some creditor attorneys have adopted as a best practice the inclusion of

such information in their complaints. See, e.g., Buckles, Tr. I at 133 (routinely provides date of last payment in

complaint); but see Debski, Tr. V at 115.

136. See, e.g., Abrams, Tr. V at 97 (often saw cases suing on out-of-statute debt but “I felt my hands were tied”);

Evans, Tr. V at 90; Lipman, Tr. I at 90.

137. Similarly, the Commission believes that arbitration forums should require that collectors initiating arbitration

proceedings state the date of default and applicable statute of limitations, and that arbitrators should determine

whether the claim is time-barred.

138. Pursuant to Section 809(a) of the FDCPA, 15 U.S.C. § 1692g(a), a collector must send, within five days after

the initial communication with the consumer in connection with the collection of a debt, a written “validation

notice” containing: (1) the amount of the debt; (2) the name of the creditor to whom the debt is owed; (3) a

statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the

debt, or any portion thereof, the debt will be assumed to be valid by the debt collector; (4) a statement that if

the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion

thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the

consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and

(5) a statement that, upon the consumer’s written request within the thirty-day period, the debt collector will

provide the consumer with the name and address of the original creditor, if different from the current creditor.

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Protecting Consumers in Debt Collection Litigation and Arbitration

collectors who violate the FDCPA by threatening to file or filing time-barred lawsuits would

deter such practices, the Commission intends to focus more of its enforcement efforts on those

who engage in such conduct.139

V. Garnishment of Exempt Funds in Bank Accounts

Many roundtable participants identified the freezing and garnishment of exempt funds

in bank accounts as a critical issue for consumers. If a collector obtains a judgment against a

consumer, then the collector may seek to recover on that judgment by attempting to garnish the

consumer’s bank account. Although each state has its own garnishment rules, a collector usually

must apply to a state court for a garnishment order. A collector typically must give notice of its

application to the consumer,140 and the collector generally provides a copy of the application to

the bank. Upon receiving this notice, the bank typically “freezes” the funds in the consumer’s

account pending resolution of the application. If the state court issues a garnishment order, then

the collector serves a copy of the order on the bank and the bank pays the collector from the

funds in the account.

Federal and state law declare that certain funds in the bank accounts of consumers are

exempt from garnishment.141 Federal law generally exempts Social Security, Supplemental

Security Income (SSI), veterans’ benefits, and numerous other federal benefits from

garnishment.142 Many state laws exempt similar state benefits from garnishment. The

fundamental objective of these laws is to ensure that the garnishment of these funds by judgment

creditors does not create undue hardship for benefit recipients, many of whom are indigent.143

Notwithstanding such laws, banks frequently freeze accounts that contain exempt funds

pending resolution of the collector’s application for a garnishment order.144 Such freezes create

139. For threatening to file time-barred suits, see United States v. Whitewing Fin. Group, No. H-06-2102 (S.D. Tex.

June 22, 2006); FTC v. Capital Acquisitions & Mgmt. Corp., No. 04C7781 (N.D. Ill. Dec. 2, 2004).

140. Consumers typically do not receive such notices until after their accounts have been frozen by the bank.

This ensures that consumers do not withdraw all funds from their accounts in anticipation of a freeze or

garnishment.

141. There are limited exceptions pursuant to which exempt funds may be garnished. For example, exempt

funds are sometimes reachable to pay federal income taxes, child support or alimony. See generally NCLC

Collection Actions, supra note 109, at § 12.5.10.

142. See, e.g., 42 U.S.C. §§ 407, 1383 (Social Security and SSI benefits); 38 U.S.C. § 5301 (veterans’ benefits). See

generally NCLC Collection Actions, supra note 109, at Appendix C.

143. Hillebrand, Tr. IV at 238 (“you know, you don’t want to leave a person penniless when there’s food to be

bought and kids to be sent to school and rent to be paid”); Kinkley, Tr. IV at 226 (exempt funds are intended to

be spent on rent, food, and subsistence).

144. See, e.g., Hillebrand, Tr. IV at 210-11; Markoff, Tr. I at 175; Moore, Tr. IV at 217-18; Nepveu, Tr. I at 176-77;

Newburger, Tr. IV at 227; Tyler, Tr. V at 213-14; Weinberg, Tr. I at 178-79; Wilner, Tr. V at 213.

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Repairing A Broken System

considerable hardship for consumers.145 Once the consumer’s bank account is frozen, he or she

cannot get access to the funds in the account, often causing rent checks to bounce, debit card

withdrawal requests to be rejected, and so forth. Further, banks typically charge consumers fees

for freezing the account and for checks that bounce because of the freeze, charges which many

indigent consumers find difficult to pay. The duration of freezes on bank accounts varies, but

roundtable participants estimated that consumers often are without access to funds for about a

month.146

There was a consensus among roundtable participants that banks should not freeze funds

that are exempt from garnishment under federal or state law. There was significant disagreement,

however, as to who is responsible when these funds are frozen. Most debt collectors expressed

a desire to comply with the law and avoid garnishing exempt funds.147 Collectors explained

that they usually do not have information from the consumer or the bank identifying the exempt

benefits consumers receive, which accounts contain exempt funds, and whether such funds have

been commingled with other funds.148 Without such information, collectors contend that as a

practical matter they cannot avoid asking that exempt funds be frozen when they seek to garnish

bank accounts. Collector participants and others suggested that, because banks have more

145. See, e.g., Brown, Tr. I at 180 (“by the time we get into court [objecting to the garnishment of exempt funds,]

the client is facing tons of other financial problems, as well as the bank fees that have accumulated, because

their money has actually been frozen); Maurer, Tr. IV at 215 (a freeze can “result in all kinds of bank charges”

and consumers might “[miss] their rent payment, and so it’s a real hardship”); Moiseev, Tr. I at 200 (consumers

are “finding out about [the garnishment] when their checks are bouncing”); Nepveu, Tr. I at 176 (freezing the

account causes consumers to face freeze fees and multiple insufficient funds fees for checks that bounce),

202-03 (“When those accounts are frozen, [consumers] don’t have money for food; they don’t have rent; they

don’t have medicine”); Newburger, Tr. IV at 227; Tenhundfeld, Tr. V at 221; Weinberg, Tr. I at 179 (by the

time the bank account is unfrozen, “so much damage [has been] done” such as the rent check having bounced

and forcing the family into eviction proceedings); Wilner, Tr. V at 218 (“[m]aybe [consumers whose bank

accounts have been garnished are] trying to buy groceries at the store because they have no food, and now their

card doesn’t work, they have no access to money. So, we have people who need to go to food pantries, who

need to borrow money from relatives to survive, but maybe they don’t have any relatives or friends. . . . We

have had clients getting eviction notices because they weren’t able to pay their rent because of the frozen bank

accounts.”).

146. See, e.g., Nepveu, Tr. I at 202-03 (“When those accounts are frozen, [consumers] . . . usually don’t have [access

to the account] for [approximately] a month.”); Maurer, Tr. IV at 215 (consumers may be without their funds

for approximately a month).

147. See, e.g., Andersen, Tr. I at 210; Asset Comment at 6; Buckles, Tr. I at 183; Midland Comment at 4; Leibsker,

Tr. I at 186-7; Markoff, Tr. I at 175-6; Moore, Tr. IV at 217-18; NARCA Comment at 8; Olshan, Tr. V at 215;

PRA Comment at 3; Ray, Tr. IV at 215-16.

148. See, e.g., Asset Comment at 6 (creditors almost never know the source of funds in an account); NARCA

Comment at 8 (banks should be required to notify collectors that an account contains exempt funds before the

collector freezes or garnishes the account); PRA Comment at 3 (consumers must communicate with collectors

to let them know about exempt funds in accounts).

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information than collectors about the origin of deposited funds, banks should bear the primary

responsibility for not freezing exempt funds.149

Bank representatives maintain that they are “between a rock and a hard place.”150 They

acknowledged that at times they freeze exempt funds in bank accounts, explaining that it can

be difficult to determine which funds are exempt, and especially difficult if consumers have

commingled exempt and non-exempt funds. Banks contend that they “call a time out” and freeze

all of the funds in accounts pending a court resolution because they fear being held liable to

judgment creditors if they make a mistake and fail to freeze non-exempt funds.151

Several states have attempted to reduce or eliminate problems associated with freezing

exempt funds by setting a pre-determined amount that banks may not freeze in an account with

any exempt funds.152 Under this “pre-determined amount” approach, Connecticut provides that,

for bank accounts that have received funds from certain exempt sources within the previous

thirty days, $1,000 in the account is preserved for the consumer, and banks may freeze any

excess amount.153 California follows a similar approach, permitting consumers continued access

to a pre-determined amount of money in accounts with exempt funds.154 New York also has

enacted such a statute, preserving $2,500 in bank accounts into which exempt funds have been

deposited in the previous forty-five days.155

The federal government has also been considering how to protect against banks freezing

federally exempt funds. At the FTC’s roundtable in December, a U.S. Treasury official described

149. See, e.g., Andersen, Tr. I at 189; Hillebrand, Tr. IV at 218, 230; Leibsker, Tr. I at 186; Markoff, Tr. I at 175;

Moore, Tr. IV at 218; NARCA Comment at 8; Newburger, Tr. IV at 201; Ray, Tr. IV at 230.

150. See Tenhundfeld, Tr. V at 221-22.

151. Tenhundfeld, Tr. V at 222.

152. See, e.g., Cal. Civ. Proc. Code § 704.080 (2009); Conn. Gen. Stat. Ann. § 52-367b (2009); N.Y. C.P.L.R.

5222 (2009). See also Wash. Rev. Code § 6.27.060 (2009) (requiring plaintiff seeking a writ of garnishment to

submit an affidavit affirming that plaintiff has reason to believe and does believe that the garnishee has funds or

property of the defendant’s which are not exempted from garnishment by state or federal law).

153. Conn. Gen. Stat. Ann. § 52-367b(c) (2009).

154. Cal. Civ. Proc. Code § 704.080(b) (2009). For a single account holder, the automatic exemption from freeze

is $1,225 for a public benefits recipient and $2,425 for a social security recipient. For joint account holders,

the automatic exemption from freeze is $1,825 for public benefits recipients and $3,650 for social security

recipients.

155. N.Y. C.P.L.R. 5222(h) (2009). Some workshop participants stated that there have been problems in the

implementation of this statute because it requires a continuing freeze on future funds that come into the

account, rather than merely looking at the account at the time the bank receives notice that a collector is

seeking a garnishment order. See, e.g., Kerrigan, Tr. V at 229-30; Tyler, Tr. V at 232-33; see also Grippo, Tr.

V at 233-34. Note also that the New York statute provides that a fixed amount ($1,740) in a bank account is

protected from freeze even if the funds in the account are not derived from exempt sources. N.Y. C.P.L.R.

5222(i) (2009).

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a pre-determined amount proposal under discussion by his agency and numerous federal

agencies that distribute funds exempt from garnishment under federal law (e.g., the Social

Security Administration).156 On April 19, 2010, the Department of the Treasury, the Office of

Personnel Management, the Railroad Retirement Board, the Social Security Administration, and

the Department of Veterans Affairs (“Agencies”) issued a joint notice of proposed rulemaking

(“JNPR”) on the garnishment of accounts containing federal benefit payments.157 Instead of a

pre-determined amount approach, the JNPR adopted a “lookback” approach preventing banks

from freezing exempt funds. The amount banks would not be permitted to freeze is “the lesser of

the sum of all [federally exempt] benefit payments deposited to an account during the lookback

period or the balance in an account on the date of account review.”158 The proposed rule defines

the “lookback period” as “the 60-calendar-day period preceding the date on which a financial

institution is served a garnishment order.”159

The Agencies proposed a lookback approach rather than a pre-determined amount approach

because of their concern that a pre-determined amount might “go beyond the underlying

statutory authorities to protect ‘moneys paid’ and . . . result in the unauthorized over-protection

of funds when benefit payments were less than the flat amount . . . .”160 For example, assume

a consumer’s bank account contains $2,500, of which $1,500 was deposited by the Social

Security Administration during the past sixty days and $1,000 came from non-exempt sources.

If a pre-determined $2,000 freeze amount is applied, $500 in the account that comes from

non-exempt sources would be protected from the freeze even though it was not exempt from

garnishment. Under the lookback approach, by contrast, the amount protected from a freeze can

never exceed the amount of exempt funds deposited, so the amount protected would be $1,500.

The Agencies sought public comment through June 18, 2010 on their proposed rule incorporating

the lookback approach. No final rule has been issued.

Both the lookback approach and the pre-determined amount approach appear to benefit

consumers through protecting the indigent from undue hardship. The Commission generally

supports the rulemaking efforts the Agencies proposed in the JNPR and encourages them,

after considering the scope of their legal authority and the costs and benefits of alternative

156. See Grippo, Tr. V at 225-26.

157. Garnishment of Accounts Containing Federal Benefit Payments, joint notice of proposed rulemaking (proposed

Apr. 19, 2010), 75 Fed. Reg. 20299 (hereinafter Garnishment JNPR).

158. Garnishment JNPR, supra note 157, at proposed § 212.3.

159. Garnishment JNPR, supra note 157, at proposed § 212.3.

160. Garnishment JNPR, supra note 157, at 20301.

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approaches,161 to issue a final rule limiting the freezing of exempt funds as expeditiously as

possible. The FTC also continues to encourage states to prevent banks from freezing amounts

in bank accounts containing exempt funds.162 The Commission recommends that states which

have not limited the amounts in accounts subject to a freeze consider adopting either the predetermined amount approach or the lookback approach.163

Another suggestion made during the roundtables was to educate consumers as to their

rights with regard to exempt funds in bank accounts and encourage them to take steps to exercise

those rights. Consumers often do not know whether the funds they receive are exempt from

garnishment. The Commission has engaged in efforts to educate consumers about their right

not to have exempt funds garnished.164 In addition, through their JNPR, the Agencies propose to

require that financial institutions provide consumers more information about their garnishment

rights.165 The FTC believes it would be worthwhile for others to consider providing this sort of

information to consumers.

Several roundtable participants also suggested that consumers would benefit from a

plain language explanation identifying the funds in their accounts which may be exempt from

garnishment.166 In particular, panelists suggested that the notice consumers receive from the state

court informing them that a collector is seeking to garnish their bank accounts should come with

a form with boxes consumers can check to indicate sources of exempt funds.167 The Commission

recommends that state courts consider using such forms, which could help educate consumers

about their rights and enable unrepresented consumers to exercise those rights more easily.

161. Financial institutions may incur different costs under these approaches because a lookback approach requires a

more extensive account review and calculation than a pre-determined amount approach.

162. The proposed federal rule does not preempt state law unless federal and state law are inconsistent.

Garnishment JNPR, supra note 157, at proposed § 212.9.

163. In considering which approach to employ, the Commission recommends that states evaluate the likely costs

and benefits of each approach, especially as a lookback requirement may involve extensive transaction-level

account review.

164. The Commission issued a consumer education piece on this topic in May 2009. It is available at

http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt135.shtm.

165. Section 212.7 of the JNPR, supra note 157, would require that financial institutions provide consumers with

notices about receipt of a garnishment order, eligibility for continued access to a protected amount, freezing of

any other amounts, an exemplary list of federal, state, and other benefits generally exempt from garnishment,

and their right and procedures to assert a further garnishment exemption for amounts above the protected

amount. A sample notice is provided at proposed Appendix A to Part 212.

166. See, e.g., Grippo, Tr. V at 257-58; Kerrigan, Tr. V at 260; Lerch, Tr. I at 202; Markoff, Tr. I at 200; but see

also Tyler, Tr. V at 258-59 (rather than consumer education, he would prefer making honoring of exemptions

automatic, “so people actually don’t need to know this right, and their account[s] [remain] safe”).

167. See, e.g., Lerch, Tr. I at 202 (Indiana form); Moiseev, Tr. I at 200 (Michigan form).

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36

Protecting Consumers in Debt Collection Litigation and Arbitration

Chapter 3

Arbitration Proceedings

I. The Arbitration Framework

Debt collection disputes may be resolved in private arbitration as well as in the public

court system. Arbitration is a form of alternative dispute resolution in which the parties submit

their disputes to an arbitrator, a private third party, rather than a judge.168 The arbitrator is often

affiliated with an arbitration company, known as an “arbitration forum,” and is tasked, like a

judge, with considering the parties’ evidence and submissions, and then rendering a decision.

Arbitration generally is less formal and has simpler rules than court litigation.169 The arbitrator’s

decision is final170 and is enforceable in court, subject to limited grounds for appeal.171

To use arbitration, the parties must agree to resolve their dispute by this process, rather than

by the court system. The parties can agree to arbitration after a dispute has arisen. They can

also agree beforehand, typically through the use of an arbitration clause in the parties’ contract

stating that, should a dispute arise, they will arbitrate to resolve that dispute. Such “mandatory

pre-dispute arbitration” clauses have become increasingly common in consumer contracts for

goods and services,172 such as credit cards, cellular phones, and medical services. If a consumer

168. Drahozal, Tr. II at 18 (“The basic idea of arbitration is private judging.”).

169. American Arbitration Association, Alternative Dispute Resolution Basics FAQ, available at

http://www.aaauonline.org/upload/439166290_adr_basics_faqs.pdf (“Arbitration is less formal than litigation

and the evidentiary process is limited.”).

170. Drahozal, Tr. II at 18 (stating that “an arbitrator is someone who decides the issue, and it’s a binding decision

on the parties”). Although decisions issued in debt collection arbitration are binding on the parties, note that

arbitration in connection with other consumer transactions may be non-binding.

171. Federal Arbitration Act (FAA), 9 U.S.C. §§ 10-11 (2006).

172. Majority Staff of H. Subcomm. on Domestic Policy, Comm. on Oversight and Gov’t Reform, 111th

Cong., Arbitration Abuse: an Examination of Claims Files of the National Arbitration Forum (July

21, 2009), at 3 (“Virtually all consumer transactions with large businesses are now subject to pre-dispute,

mandatory arbitration clauses.”); Theodore Eisenberg, Geoffrey P. Miller & Emily Sherwin, Arbitration’s

Summer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts,

41 U. Mich. J.L. Reform 871, 871 (2007-2008) (“Arbitration clauses are common features of American

consumer agreements.”); Mandatory Binding Arbitration – Is It Fair and Voluntary?, Before the Subcomm.

on Commercial and Administrative Law of the H. Comm. on the Judiciary, 111th Congress 1st Sess. (2009)

(statement of Stuart T. Rossman, Director of Litigation, National Consumer Law Center, Recent Developments

in the Forced Arbitration Market and the Continued Need for Protective Legislation, at 1, available at

http://judiciary.house.gov/hearings/pdf/Rossman090915.pdf (“Practically every credit card agreement,

cell phone contract . . . now contains a pre-dispute mandatory arbitration clause.”)) (hereinafter Rossman

Testimony); Public Citizen, Forced Arbitration: Unfair and Everywhere 1 (Sept. 14, 2009), available at

http://www.citizen.org/documents/UnfairAndEverywhere.pdf (stating that, “forced arbitration remains almost

ubiquitous in many industries”).

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does not pay on these contracts, the creditor or other collector of the debt may use arbitration to

collect the amount owed.

Arbitration proceedings and decisions are governed by federal and state law. The primary

law governing arbitration is the Federal Arbitration Act (“FAA”),173 which was enacted to

overcome court reluctance to enforce arbitration agreements between corporations.174 The FAA

makes arbitration clauses (including mandatory pre-dispute arbitration clauses in consumer

contracts) enforceable,175 and it generally overrides any state laws to the extent they are contrary

to the FAA.176 Disputes within the scope of the arbitration agreement can be arbitrated. A party

wishing to challenge the enforceability of an arbitration agreement can do so in court using

state law defenses applicable to contracts generally,177 so long as such defenses apply to contract

provisions in general and do not single out arbitration clauses. Courts have limited power and

opportunity to review awards and decisions resulting from arbitration.178

As collectors increasingly have turned to arbitration to collect on consumer debt, a debate

has arisen about the advantages and disadvantages of using arbitration forums to resolve such

disputes. Some contend that debt collection arbitration has significant benefits, such as more

expeditious and less expensive proceedings, as well as diverting a large number of cases that

would otherwise clog the court system.179 Others, however, have expressed reservations about

173. 9 U.S.C. §§ 1, et seq. (2006).

174. S. Rep. No. 536, 68th Cong., 1st Sess., at 2 (1924) (stating that the federal courts “have denied relief to the

parties seeking to compel the performance of executory agreements to settle and determine disputes by

arbitration”); Southland Corp. v. Keating, 465 U.S. 1, 10 (1984) (stating that in enacting the FAA, “Congress

declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum

for the resolution of claims which the contracting parties agreed to resolve by arbitration.”).

175. FAA, 9 U.S.C. § 2 (2006) (making written arbitration agreements “valid, irrevocable, and enforceable, save

upon such grounds as exist at law or in equity for the revocation of any contract”).

176. Drahozal, Tr. II at 22.

177. FAA, 9 U.S.C. § 2 (2006).

178. Id. at §§ 9-13 (2006); Drahozal, Tr. II at 29 (stating that the FAA sets out standards relating to the enforcement

of arbitration awards, but noting that it is “less clear” whether the FAA governs or whether state standards may

be used to some degree).

179. ACA Comment at 4 (noting arbitration’s “important role in reducing already overcrowded court dockets”);

AAA Comment, testimony of Richard Naimark to House Oversight and Government Reform Committee,

Domestic Policy Subcommittee (July 22, 2009) at 5 (noting that if arbitration is no longer available for

consumer debt claims, “a very large number of small dollar claims will be filed in our already overburdened

courts”) (public comment # 542930-00016, hereinafter AAA Comment); U.S. Chamber of Commerce

Comment at 3 (citing benefits of arbitration such as the consumer usually having “the choice to conduct his or

her arbitration over the phone or ‘on the papers,’ which saves the consumer from having to take any days off

work to resolve the dispute.”).

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Protecting Consumers in Debt Collection Litigation and Arbitration

the impact of debt collection arbitration on consumers.180 Some arbitration critics contend that

consumers do not have a real choice as to whether they will be subject to an arbitration clause.181

Other critics assert that the debt collection arbitration system does not have adequate procedures

to ensure fairness towards consumers182 and is biased in favor of creditors and collectors.183

To evaluate the impact of arbitration on the debt collection system, the Commission

considered the topic during its 2007 Debt Collection Workshop. In its 2009 workshop report, the

FTC reported that it had heard varying opinions and concerns regarding consumer debt collection

arbitration.184 The information presented and submitted in connection with the Workshop,

however, was not sufficient for the Commission to make extensive findings, conclusions, and

recommendations related to this topic.185 To gather more data and views, in 2009 the FTC held

roundtable discussions in Chicago and San Francisco on this topic.

During the summer and fall of 2009, while the Commission was conducting its roundtables,

there were major developments in the use of arbitration to resolve debt collection disputes. In

July 2009, the Minnesota Attorney General’s Office (“Minnesota AG”) filed suit against the

National Arbitration Forum (“NAF”), then the leading debt collection arbitration forum. The

Minnesota AG alleged that NAF had engaged in consumer fraud, deceptive trade practices, and

false advertising. NAF purportedly held itself out as an impartial provider of dispute resolution

while actually having financial ties to key members of the debt collection industry through

a series of complex and purposefully hidden affiliations. Days after the suit was filed, NAF

entered into a settlement with the Minnesota AG which required it to cease providing arbitration

180. Alderman Comment, attaching Richard M. Alderman, Why We Really Need the Arbitration Fairness Act – It’s

All About Separation of Powers, 12 J. Consumer & Com. L., 151, 154 (Summer 2009) (“Consumer arbitration

is often simply a way for a business to reduce the number of disputes, avoid the courts and juries, and achieve

more favorable results.”) (hereinafter Alderman Comment).

181. Jackson, Tr. II at 91 (“Right now they [consumers] have no choice.”); Johnson Tr. II at 95 (“Pre-dispute

consumer arbitration simply doesn’t work.”).

182. See Bland Comment, Testimony to House Subcommittee on Domestic Policy, “Arbitration or ‘Arbitrary’: The

Misuse of Arbitration to Collect Consumer Debts,” at 11 (referring to NAF, expressing doubts about “the

ability of consumers to get a fair hearing in arbitration, as compared to the experiences they would have in

court.”)

183. See, e.g., Sturdevant, Tr. III at 93 (“I think there is substantial bias in the process”); Public Citizen,

The Arbitration Trap – How Credit Card Companies Ensnare Consumers 1 (Sept. 2007), available at

http://www.citizen.org/documents/ArbitrationTrap.pdf (stating that, “binding mandatory arbitration is a rigged

game in which justice is dealt from a deck stacked against consumers.”) (hereinafter Arbitration Trap).

184. Challenges of Change, supra note 1, at 55.

185. Id.

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services for consumer debt collection claims.186 A number of private class actions suits against

NAF have been filed.187

In the wake of this settlement with NAF, the American Arbitration Association (“AAA”),

an arbitration forum which had handled some debt collection arbitrations, decided to impose

a moratorium on providing such services until concerns regarding the system are addressed.188

Subsequently, a number of large banks announced that they would discontinue their use of

binding mandatory arbitration clauses in credit card agreements.189 In light of these events, it is

an opportune time to assess the validity and viability of arbitration as an alternative to the court

system as a method of resolving debt collection disputes. Indeed, many commentators have

expressed the belief that some entity will eventually emerge to fill the void left by NAF.190

The Commission believes that, to ensure that consumers are adequately protected if

arbitration once again becomes a common method of resolving debt collection disputes,

mandatory pre-dispute arbitration should be permitted only if: (a) creditors provide consumers

with meaningful choice as to whether their debt collection disputes will be arbitrated; and (b)

186. See Consent J., State of Minn. v. Nat’l Arbitration Forum, Inc., State of Minn., Hennepin County

Dist. Ct., 27-CV-09-18550 (signed by parties July 17, 2009; entered Aug. 7, 2009), available at

http://www.publicjustice.net/Repository/Files/NAFMinn_Letter_071909.pdf.

187. See In re Nat’l Arbitration Forum Trade Practices Litigation, Docket No. 10-md-02122 (D. Minn., Transfer

Order creating multidistrict litigation filed Feb. 3, 2010).

188. See Letter from William K. Slate II, American Arbitration Association, to Lori Swanson, Attorney General,

State of Minnesota (July 20, 2009), available at http://www.nclc.org/images/pdf/arbitration/testimonysept09exhibit4.pdf, at 2 (implementing moratorium until “there is some consensus on how concerns about the

administration of debt collection arbitrations might be successfully addressed”).

189. See Dow Jones Newswires, Banks Agree to Settle Suit Over Arbitration Clause – Lawyers, (Apr. 6, 2010),

available at http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201004061448dowjonesdjonl

ine000297&title=banks-agree-to-settle-suit-over-arbitration-clause-lawyers (according to lawyers representing

class action plaintiffs in a suit over credit card arbitration clauses, Bank of America, Capital One Financial,

J.P. Morgan Chase, and HSBC Holdings agree to a settlement, pending court approval, that would, inter alia,

“require the companies to stop enforcing arbitration clauses . . . and to remove those items from their terms

for 3 ½ years”); see also National Consumer Law Center, Forced Arbitration – Consumers need Permanent

relief, 13 (Apr. 2010), available at http://www.nclc.org/images/pdf/arbitration/report-forced-arbitration.pdf

(hereinafter NCLC Arbitration Report) (stating that JPMorgan Chase, Bank of America, Capital One and

HSBC reached tentative settlements to stop enforcing existing mandatory arbitration clauses and to refrain

from including such clauses in their contracts until at least 2013); CardRatings.com, HSBC Drops Mandatory

Credit Card Arbitration, (Jan. 5, 2010), available at http://www.cardratings.com/hsbc-mandatory-credit-cardarbitration.html (indicating that Regions Bank, TD Bank, and PNC Bank had represented that they would leave

mandatory arbitration clauses out of new agreements).

190. Johnson, Tr. II at 97 (“[A]nother NAF is going to emerge.”); Bland, Tr. II at 106 (speaking against the position

that, “no one else is going to show up with a wink and a nod and some pretty protocols and so forth to devise

a system which again delivers the goods of basically a set system . . . .”), 209 (discussing the possibility that a

successor of NAF, “appears down the road”); Barron, Tr. III at 107 (“It would be a terrible mistake to think that

because NAF isn’t here now, there’s no opportunity for a similar provider to arise . . . .”); Sternlight, Tr. III at

169.

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Protecting Consumers in Debt Collection Litigation and Arbitration

the arbitration process is fair to creditors, collectors, and consumers. For the reasons discussed

below, the Commission is not confident that debt collection arbitration currently satisfies either of

these two conditions. The Commission therefore will continue to closely monitor, evaluate and

report, as appropriate, on whether debt collection arbitration models are providing consumers

with meaningful choice and a fair process.191

II. Meaningful Consumer Choice

The decision to submit disputes to arbitration rather than the public court system must be

based on an agreement between the creditor and the consumer. This agreement usually takes the

form of a mandatory pre-dispute arbitration provision in the contract between the creditor and the

consumer, a provision that creditors draft. To give consumers a meaningful choice192 to submit

their disputes to arbitration, they must have: (1) a basic understanding of arbitration and its

consequences; (2) the option whether to agree to arbitration, and under what conditions; and (3) a

reasonable method of exercising that option.

A. Consumer Understanding of Arbitration

Many roundtable participants suggested that consumers do not understand arbitration or

its consequences.193 Without such an understanding, consumers may not be aware of the choice

related to arbitration they are being asked to make. Public and private sector efforts would be

useful in conveying information about arbitration to consumers and would help them make

better-informed decisions.

191. In late 2009, AAA convened a task force of arbitration and debt collection experts to evaluate whether the

organization should recommence debt collection arbitration, and, if so, how such arbitration should be

reformed. FTC staff has been a member of the task force, and has participated in its meetings and discussions.

The AAA task force’s work is ongoing.

192. The ‘meaningful choice’ whether to arbitrate does not necessitate that creditors in their consumer contracts

offer an alternative to arbitration, such as litigation. Consumers may exercise meaningful choice to arbitrate

by refraining from contracting with a creditor, so long as all other conditions for meaningful choice and fair

process discussed in this report are met.

193. See, e.g., Johnson, Tr. II, at 43 (“Consumers are not familiar with arbitration.”); Sturdevant, Tr. III at 18 (“So I

don’t think that there is any general level of awareness by consumers about arbitration.”); Sternlight, Tr. III at

23 (“Even if people get served with a document that says arbitration, they have no concept; even law students,

even law professors have no concept of what arbitration is.”).

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B. Consumer Arbitration Choices194

Assuming that consumers have a basic understanding of arbitration, they can make

meaningful choices only if they are aware of the arbitration provisions in contracts and have

the ability to make choices regarding those provisions. Many consumer advocates at the

roundtables stated that consumers generally do not know that their contracts contain arbitration

provisions.195 Indeed, one consumer advocate opined that the credit card companies purposefully

draft contracts in a manner such that consumers do not notice these clauses.196 Other roundtable

participants questioned whether consumers who are aware of the arbitration provisions in

their contracts actually understand them,197 explaining that it may be challenging to disclose

information about arbitration in a contract in a clear and prominent manner.198 One consumer

advocate indicated that consumers may have particular difficulty understanding provisions that

are contingent on a future event, such as the possibility that consumers will not be able to make

their payments under the contract.199

Some roundtable participants expressed concern that consumers currently have no

meaningful ability or opportunity to make choices or weigh their options at the point of

194. Some debate has arisen in the academic literature and elsewhere over arbitration clauses that prohibit class

actions and whether such bans should be permitted. Some roundtable participants expressed opposition to

class action bans, including one consumer advocate who opined that one of the main reasons that companies

prefer arbitration is to avoid class actions. (See Sternlight, Tr. III at 88). The roundtables focused on the

issue of debt collection arbitrations against individual consumers – which comprise the vast majority of such

arbitrations – and thus the FTC takes no position regarding clauses that bar or restrict class actions in debt

collection proceedings.

195. See, e.g., Frank, Tr. II at 86 (“[D]o people who get consumer loans know they have an arbitration clause, and

the evidence is that the vast majority of them do not.”).

196. Frank, Tr. II at 86-87 (“[T]here’s [sic] things they [credit card companies] don’t want you to notice necessarily;

and clearly the way the arbitration is disclosed, it’s disclosed in a manner that definitely the case is it’s not

something that the company wishes you to be focused on.”).

197. See, e.g., Jackson, Tr. II at 91 (“Credit card contracts are extremely difficult to understand. I have difficulty

reading them, and I’ve been trained as a lawyer.”).

198. See Sorkin, Tr. II at 106-07 (“I don’t think it’s easy to provide meaningful disclosure and meaningful choice. I

think there’s a real contest to it . . . . It’s very hard to disclose even a limited amount of information in a way

that’s meaningful . . .”).

199. Frank, Tr. II at 89 (Consumers may underestimate the likelihood of an event, especially one which is

contingent on another future event.); see also Sorkin, Tr. II at 107 (noting that, “when some of the information

is contingent on an unlikely future event, it’s even harder to disclose it in a way that enables a meaningful

choice”).

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Protecting Consumers in Debt Collection Litigation and Arbitration

contract.200 Consumers generally do not negotiate or try to negotiate the arbitration provisions

in their credit card contracts. A number of participants stated that consumers may not attempt to

negotiate because they may not believe they have any alternative given that all of the companies

in the relevant industry (e.g., banks that issue credit cards) have arbitration provisions in their

contracts.201 Another participant noted that some consumers may not negotiate concerning

arbitration provisions because they are purchasing goods or services (e.g., urgent medical care)

in circumstances in which time is of the essence.202 Some consumer advocates have suggested

that consumers want the opportunity to negotiate about arbitration provisions in their contracts.203

Representatives of collectors,204 on the other hand, expressed doubt about whether consumers,

assuming they had the ability and opportunity to do so, would even want to try to negotiate such

contractual provisions.205

Roundtable participants also discussed allowing consumers to “opt out” of mandatory

arbitration even after having entered into a contract with an arbitration provision. Some

consumer credit contracts do contain provisions allowing consumers a certain period of time

from the date of the contract to opt out of mandatory arbitration. One attorney who represents

creditors reported that an increasing number of credit card issuers are providing consumers

with such an option, with the time period to opt out ranging from fifteen days to sixty days.206

However, some roundtable participants stated that, for a variety of reasons, consumers rarely

exercise such opt-out rights.207 Many consumer advocates asserted that, if consumers were aware

200. See Joshua M. Frank, Center for Responsible Lending, Stacked Deck: A Statistical Analysis of Forced

Arbitration, 6 (May 2009), available at http://www.responsiblelending.org/credit-cards/research-analysis/

stacked_deck.pdf (stating that “[e]ven when a consumer can shop for loans, they typically cannot renegotiate

the key terms of the standard contract. They have no choice or control over which arbitration forums can be

used in a forced arbitration clause.”) (hereinafter Stacked Deck).

201. Frank, Tr. II at 88-89; Jackson, Tr. II at 90 (“You want a phone, you’re going to get arbitration. You want a

credit card, you’re going to get an arbitration clause.”); see Sternlight, Tr. III at 56-57 (stating that, “if you

define the word choice in any kind of remotely meaningful way, consumers do not have a choice because all or

certainly virtually all credit card companies currently require consumers’ debt to be sent to arbitration.”).

202. Hillebrand, Tr. III at 66.

203. See Jackson, Tr. II at 91.

204. The use of the term “collector(s)” includes original creditors and subsequent debt collectors.

205. See Kaplinsky, Tr. II at 85.

206. Kaplinsky, Tr. II at 85 (stating that, “a lot of them have been doing that for years, I have been counseling them

to do that . . . .”).

207. See, e.g., Bland, Tr. II at 101 (“only a very, very tiny percentage of people opted out”).

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Repairing A Broken System

of that option, they would choose to do so.208 In contrast, an attorney for creditors opined that

few consumers would choose to opt out of arbitration because they prefer it to court litigation.209

Some roundtable participants suggested that arbitration provisions state that, at the time the

dispute with the creditor arises, the consumer has the right to demand that the matter be moved

from arbitration to a small claims court if the court would have jurisdiction over the claims.210

AAA mandates in its consumer dispute process protocol that companies include such a “small

claims carve-out” in their arbitration agreements. AAA acknowledged, however, that few

consumers exercise their right to have their matters heard in small claims court rather than in

AAA consumer arbitration.211

Beyond the initial choice whether to arbitrate and any subsequent opt-out options, some

roundtable participants suggested additional arbitration options consumers could select. One

collector attorney suggested that creditors could give consumers the ability to choose or reject

arbitration terms in exchange for receiving more or less favorable interest rates.212 For example,

a consumer might be offered a ten percent interest rate without a mandatory pre-dispute

arbitration clause, or a nine and three-quarters percent rate with such a clause. Roundtable

participants also suggested giving consumers choices as to the arbitration forum that would

resolve their disputes. Some consumer advocates suggested that, if the creditor drafts the

208. See Lake Research Partners, “National Study of Public Attitudes on Forced Arbitration,” Apr. 2009, available

at http://www.fairarbitrationnow.org/uploads/Forced%20Arbitration%20Study%20Slides%200409.pdf at 3, 4

(in a study commissioned by the Employee Rights Advocacy Institute for Law and Policy and Public Citizen,

and funded by the Public Welfare Foundation, researchers polling 800 adults found that 59% oppose fine print

forced arbitration clauses in employment and consumer contracts); see also Arbitration Trap, supra note 183,

at 56 (advising consumers obtaining a credit card with a mandatory pre-dispute arbitration clause to “sign an

arbitration opt-out if one is available or strike the clause from the contract and initial the change”).

209. Kaplinsky, Tr. II at 110.

210. Kaplinsky Comment, attaching “The Use of Pre-Dispute Arbitration Agreements by Consumer Financial

Services Providers,” at 13 (stating the attorney’s message to his clients to draft a fair arbitration clause,

including a small claims court carve-out).

211. Naimark, Tr. III at 54 (noting that in the consumer debt collection cases AAA previously administered,

although the initial letter to consumers informed them of the option to go to small claims court, “very, very few

took that option”). One suggestion offered was that, if such a small claims court option is permitted (as with

AAA’s protocol), then consumers should be informed of this right in the notices provided to them about the

initiation of arbitration proceedings. Kaplinsky, Tr. II at 84 (stating of the demand for arbitration, “[t]hat notice

probably ought to contain a clear disclosure that if you don’t want to arbitrate this debt, you’ve got the right to

have it heard in small claims court, and you’ve got to do the following in order to take advantage of that”).

212. Kaplinsky Comment, “The Use of Pre-Dispute Arbitration Agreements by Consumer Financial Services

Providers,” at 16 (stating, “[c]onsider bifurcated pricing under which the consumer will pay a lower interest

rate or lower fee is he or she does not opt out of the arbitration provision”).

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arbitration provision in the contract, the consumer should be allowed to choose213 the arbitration

forum214 from among a number of alternatives.215 An academic offered the caveat, however, that

even with this approach consumers might not have an acceptable number or quality of arbitration

forums from which to choose,216 perhaps because there may be a limited number of arbitration

providers.217

C. Reasonable Methods of Exercising Choice

Consumers must have a reasonable method, at a reasonable cost, of exercising their choice

whether to arbitrate, as well as their choice regarding any other arbitration options or terms.

Where a contract offers only one arbitration option, consumer assent to the contract may suffice.

However, where selection from among a range of choices is required, how such choices should

be made available to consumers depends on the context in which they are offered. For example,

if consumers have the option in credit contracts to select the arbitration forum, at a minimum

the names of the potential arbitration forums should be disclosed clearly and prominently in the

contracts. If consumers have the option to select between litigation and arbitration, allowing

them a selection method such as checking a box on the contract generally could be a relatively

low-cost means of exercising their option.

D. FTC Views on Consumer Choice in Arbitration

The Commission concludes that consumers should, but generally do not, have a meaningful

choice regarding mandatory pre-dispute arbitration provisions in consumer credit contracts. To

give consumers such choice, they must have: (1) a basic understanding of arbitration and its

consequences; (2) the option whether to agree to arbitration, and under what conditions; and

(3) a reasonable method of exercising that option. The FTC thinks that substantial changes in

mandatory pre-dispute arbitration provisions are needed to meet these criteria. Creditors should

draft their consumer credit contracts in a way that ensures consumers are aware of their choice

213. One panelist aptly described this method as “one cuts, one chooses,” Drahozal, Tr. II at 122-23, explaining

that such a decision rule gives the one making the cut (i.e., drafting the contract) an incentive to make the

arbitration provision fair.

214. The reporting and transparency requirements discussed below to make the arbitration process more fair would

also provide critical information in helping consumers make better-informed choices among arbitration forum

options.

215. See Bland, Tr. II at 102; see also Edelman Comment at 22 (“Consumer should be given choice of 3 or more

forums.”).

216. See Sternlight, Tr. III at 81-82.

217. Consumer ability to choose from among any alternative providers or processes would be enhanced by, inter

alia, consumer education efforts and transparent reporting of arbitration results. (See Sections II.A, “Consumer

Understanding of Arbitration,” and III.D, “Transparency of Arbitration Results.”)

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whether to arbitrate, and provides consumers with a reasonable method of exercising that choice.

The FTC recommends that the public and private sector study the efficacy of alternatives to give

consumers meaningful choice, including evalua

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