Junk Debt Lawsuits Are Clogging up Courts

The economic downturn has forced millions of people to rely on credit cards to sustain them through times of unemployment or underemployment. Unfortunately, those credit card borrowers are having a hard time paying back what they've borrowed. According to Equifax and Moody's Analytics, credit card borrowers are behind on repaying $18.7 billion in credit card debt. Credit card companies and others are increasingly filing lawsuits against creditors to get their money.

Courts are seeing a slew of credit card lawsuits come through the system, but many have expressed grave concerns over the validity of the credit card companies' and others' claims and have dismissed some for a lack of convincing evidence. For example, borrower American Express sued customer Felicia Tancreto, claiming she quit making payments on her $16,000 in credit card debt. Ms. Tancreto admitted to being behind on payments, but claimed her American Express bill was not that high.

Brooklyn, New York Judge Noach Dear dismissed the case against Ms. Tancreto, calling American Express' evidence generic "robo-testimony" and not specific enough about her account. Judge Dear would know; he has presided over as many as 100 similar credit card lawsuits in a day. He says, "[r]oughly 90 percent of the credit card lawsuits are flawed and can't prove the person owes the debt." Some are calling this the new form of "robo-signing" that plagued the home foreclosure process.

These "junk debt" lawsuits are becoming more common as private companies buy bad debt from the credit card companies for pennies on the dollar and then seek to collect the debt in court.

With the onslaught of junk debt lawsuits, credit card borrowers need to be educated about how to deal with companies that file lawsuits and try to inappropriately collect real or bogus debts. University of Maryland Law Professor Peter Holland provides the following five tips for those served with a junk debt lawsuit:

1. Don't ignore a lawsuit

The vast majority (as high as 90 percent) of junk debt judgments are won by default because the borrower being sued never showed up in court to contest the creditor's claims. Holland says, "Rule No. 1: Show up in court and make them prove their case. File an answer. Don't ignore it."

2. Contact the state attorney general and state bar association

Most of the people being sued cannot afford to hire a lawyer, but there are resources available to help fight a junk debt suit. The consumer protection division of a state attorney general's office or a state bar association may have a list of attorneys willing to represent debtors pro bono. Junk debt suits are becoming so common that the government and consumer protection groups are beginning to recognize the risk of fraud and want to help.

3. Check for robo-signing

Holland says "forgery and robo-signing are rampant" in these cases. Combing through the documentation being used as evidence may reveal falsified documents and documents that were never really reviewed, but simply signed.

4. Read the creditor's documentation

As debts are purchased and resold time and time again, documentation is sometimes lost along the way. The creditor must prove that the borrower owes the claimed amount and that the creditor suing actually owns that debt. As in the case of Felicia Tancreto, amounts owed can be inflated either fraudulently or because of added bank fees the borrower never agreed to.

5. Avoid settlements negotiated in the hallway

Often times, the lawsuit is used as a scare tactic to get something out of the borrower even if there is insufficient documentation. Attorneys filing these junk debt suits are known to capitalize on people's fears and inexperience by trying to work out unrealistic deals with them outside the courtroom. Holland says these deals are often "set up to make you fail" as they involve impractical repayment plans that could make the borrower agree to pay the full amount if they miss a payment.

Junk debt lawsuits are clogging up small claims courts across the country and are in large part fraudulent attempts by creditors to recoup some amount of money from those struggling to pay back what they owe. Having the help of a skilled and experienced attorney can be crucial in dealing with aggressive opposing counsel and in spotting fraudulent claims. The representation of an attorney could end up saving you thousands of dollars in the long run.