Consumer Law

Default Judgments Can Allow Creditors to Collect Debt That Was Never Owed

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When a deluge of phone calls and letters began insisting that Nancy Taylor owed nearly $2,000 on a Sears account, the San Jose, Calif., resident fought to protect her excellent credit rating, responding to each letter explaining that she had had no such account.

But even though Sears confirmed that Taylor was correct, she was named as a defendant in a 2008 debt collection action by a Southern California lawyer. Eventually, a judge dismissed the case in 2009 and Taylor won a Fair Debt Collection Practices Act counterclaim against the company that had purchased a bundle of claimed unpaid debt from Sears, including the incorrect Taylor account, in the hopes of collecting some of it, reports the New York Times.

Many individuals simply ignore collection efforts, however, and this has offered a lucrative collection opportunity for some such debt purchasers:

“We found that these law firms count on a huge percentage of the people that they sue defaulting,” attorney Osha Neumann of the East Bay Community Law Center tells the newspaper. “The debtors don’t respond because they don’t know how, and that’s how the debt buyers make their money.”

Once collection costs are added, the amount owed can dwarf the original debt.

Sidney Jones, a 45-year-old Virginia maintenance worker who never graduated from high school, had more than $10,000 deducted from his bank account since 2003 to repay a $4,097 personal loan that he took out from from Beneficial Virginia in 2001. The company won a default judgment of $4,750, plus $900 in attorney fees, with interest continuing to accrue at 27.55 percent on the debt, reports the New York Times in an earlier article.

To date, only about $134 of his $10,000 total has gone toward the principal; the rest has been paid toward interest, fees and court costs. As of last year, he still owed the company $3,965, according to a court order.

“I just thought they were going to take what I owed,” says Jones, explaining why he didn’t try to defend the collection lawsuit that led to this result.

Related earlier coverage: “Supreme Court Tells Debt-Collection Law Firm that Ignorance of Law Is No Excuse” “Lawyer Sues Sallie Mae Over ‘Unrelenting’ Student Loan Robocalls”

New York Times: “You’re Dead? That Won’t Stop the Debt Collector”

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