Charles Phelan

Debt collection attorneys who file affidavits in state courts in order to obtain wage garnishments can be sued by consumers under the Fair Debt Collection Practices Act. This key decision, unheld on appeal to the 6th Circuit Court of Appeals, is an important victory for consumer advocates and other critics of the collection industry. For decades, collection attorneys have been filing bogus documents with the courts, and getting away with it because of supposed “immunity” as a “witness” in the case. The real-world result of this loophole has been extensive abuse of the rules. Basically, in practical terms, a collection attorney has been able to file a false affidavit about their knowledge regarding a debtor’s ability to pay a debt. Even in cases of obviously false or bogus statements or documents, consumer victims have been blocked from suing the collection attorneys because of this immunity exemption. In ruling that this exemption does not apply to collection attorneys, the 6th Circuit Court of Appeals got it exactly right.

What’s the practical effect? Well, for starters, collection liars (sorry, lawyers) will have to pay a little more attention when they sign their name to the claims documentation. What’s important to understand here is that most collection attorney firms are little more than collection agencies headed by an attorney. Since they deal on a volume basis, thousands of files run through their office on a monthly basis. Because of the immunity factor, collection attorneys in the past have thought nothing of rubber-stamping huge volumes of documents for submission to the courts, with little or no concern for factual truth. A good example is the case that led to this decision. A collection attorney obtained a default judgment against a debtor, and then filed an affidavit with the court when seeking to collect via wage garnishment. The affidavit stated that the collection attorney had a reasonable basis to believe that the property to be garnished (i.e., income), was not exempt from garnishment. Problem: The income in question was from Social Security benefits, which are exempt from garnishment. So the collection attorney filed a false affidavit, got sued for it, lost, appealed, and lost again. Naturally, consumer attorneys love this decision, while those in the collection industry hate it. Of course, the losing party is attempting additional manuevers, but the 6th Circuit Court wrote that “the purpose of immunity is to preserve the integrity of our judicial system, not to assist a self-interested party who allegedly lies in an affidavit to initiate garnishment proceedings.”

Now at least collection attorney paper-mills will have to exercise a little caution before filing undocumented declarations about debtors’ assets, or risk getting counter-sued for violating Federal law. It’s about time!

A big “thank you” to the National Association of Consumer Bankruptcy Attorneys. In a recent press release, they reported on the results of a survey of more than 60,000 consumers who were filing for bankruptcy under the ridiculous new law that went into effect last October. One of the silliest aspects of the new law is that it requires a credit counseling session within 180 days prior to filing. Leaving aside that this is a total joke (more later), the study found that 97% (basically, everbody) that went through the counseling session did in fact qualify for bankruptcy, and did not qualify for a “debt management plan” through a counseling agency.

In other words, of 61,335 consumers surveyed, more than 59,000 of them were flat broke. A great big raspberry and “I told you so” to the the prized collection of idiots who crammed this stupid law down the throats of the American public. It’s a bad law, badly written, badly enacted, and passed for all the wrong reasons. Supposedly, you see, there were all these “deadbeats” out there gaming the system, racking up huge debts, and then walking away without consequence in bankruptcy. Yeah, right. If you’ve worked in the consumer debt field at all, as I have since 1997, you already knew better. Sure, there are probably a few instances of abuse by consumers. But the vast majority of people seeking bankruptcy are doing so because they have been pushed to the wall through job loss, medical problems, or other legitimate financial hardship, and not because they want all their stuff for free.

All the new law has done is to make it harder for people who most need relief to obtain it. Thank you, Congress. It was the illustrious House Judiciary Chairman, F. James Sensenbrenner, Jr. (R-Wisconsin), who said the bill would stop “billions of dollars in losses associated with profligate and abusive bankruptcy filings.” And Senator Charles Grassley (R-Iowa) said the new law would clean up “a convenient financial planning tool where deadbeats can get out of paying their debt scott-free …” Well, Mssrs. Sensenbrenner and Grassley, you were wrong, period. But I suppose you don’t want to be bothered with the facts. Besides, those campaign contributions are already a done deal, so no worries.

What really happened here is that there never was any pattern of abuse to begin with. That was a smoke-screen of creative fiction devised by the lobbyists working for the credit card industry. No, what really happened is that the banks have hooked the American public on the plastic addiction, jacked up interest rates so high that struggling consumers are forced into default, and then applied for some corporate welfare from Congress to ensure a few more dollars back to the bottom line. I have nothing against banks, mind you, and I’m all for profit-making. But this law merely rubbed salt into the wounds of already exhausted consumers who needed the protection of our legal system. Instead, they have been thrown to the wolves courtesy of Congress and the banking lobby.

By the way, I mentioned above that the whole credit counseling requirement under the new law is a joke. First, credit counseling doesn’t work very well. According to the Consumer Federation of America, the industry has a 76% failure rate, so that means 3 out of 4 people aren’t able to complete such a debt management program. But that’s not the reason it’s a joke. The law doesn’t require people to actually go through a counseling program, only to have a 90-minute session where someone tells them they should pay their bills. Think traffic school. Think online traffic school. Read a few boring lessons. Take a quiz. Get a certificate. Voila. No more traffic violation. Same thing with the credit counseling requirement. How is this helping people? But as I say, credit counseling really doesn’t work anyway. Oh, and right now the IRS is attacking non-profit credit counseling agencies left and right. So far about 30 major agencies have had their non-profit status revoked. It just keeps getting better and better …

My one beef with the report by the NACBA is that they did not mention the alternative of debt settlement. No surprise there. Bankruptcy lawyers have a vested interest in avoiding that subject. Consumers can settle their own debts out of court without paying thousands in fees to attorneys or settlement companies. But you won’t hear that from the BK attorneys, the banks, or the credit counselors. Hey, at least you heard it from me. Check out my DIY seminar if you want to learn more, or download the free 32-page report. Get educated. You have options the media isn’t telling you about. Cheers.