Legislation Can Modernize How State Civil Courts Handle Debt Collection Lawsuits

Editor’s note: This piece was updated on May 25, 2022, to clarify National Conference of State Legislators; a previous version stated National Council of State Legislators. It was also updated on May 18, 2022 to clarify an explanation of judgment interest rates.

The COVID-19 pandemic has piqued policymaker interest in eviction lawsuits, but debt collection cases have received far less attention, even though they are overwhelming civil dockets across the country. Despite a documented need to both modernize how courts handle these suits and address the barriers they place on financial security particularly for communities of color, the necessary reforms are sparsely included in state legislative action.

As with evictions, pandemic-related financial strain and growing amounts of household debt are already engendering more lawsuits that courts are struggling to manage. But debt litigation is governed by a patchwork of federal regulations, state statutes, court rules, and industry standards, which experts have termed a “whack-a-mole” approach to handling these challenges.

To raise awareness of these issues among state legislators, the National Conference of State Legislators (NCSL) recently hosted a webinar to provide guidance on what has been and can be done to boost court efficiency and ensure equitable outcomes for all parties. Featured speakers included Delegate Al Carr (D), a Maryland state legislator working to address medical debt collection in the courts, and David Reid, general counsel of the debt-buyer trade association Receivables Management Association International and a frequent contributor to legislative efforts in this space.

The panelists discussed the role state legislators play in both clarifying and updating laws to better meet the needs of parties involved in consumer debt claims. In many states, debt collection lawsuits continue to be governed by general codes of civil procedure, which are inadequate to address the increasing number of suits brought by a handful of represented debt buyer and financial services companies against consumers that lack attorneys. Policies should reflect these transformations in who is using the courts, and state judiciaries should play an active role in managing cases in a way that equitably and efficiently serves the needs of their contemporary users. To accomplish this, legislators could clarify the specific documentation and proof of claim requirements for each particular type of debt (e.g., credit card, medical, payday loan), rather than maintain general rules that apply to all general civil or contract claims. They could also expand lawsuit notification requirements to ensure that the majority of consumers in these cases who don’t have attorneys still both receive and understand notice of the lawsuit against them. While much of this can be accomplished at the judiciary level by updating court rules, Carr noted that state lawmakers can use their oversight role over the judiciary to “force a conversation by introducing legislation” in order to “ask these questions of the courts” and move reforms forward.

To that end, the webinar also highlighted recent legislative efforts that have been successful in improving court processes at various stages of debt collection lawsuits. For example, Maryland’s Medical Debt Protection Act, passed in May 2021, seeks to manage the number of lawsuits filed by requiring hospitals to check the financial assistance eligibility of patients before taking a debt to court. The legislation also limits a hospital’s ability to use a court order to seize a patient’s wages, assets, and even home to satisfy a debt claim.

Also last year, New York’s legislature passed the Consumer Credit Fairness Act to refine court rules about debt collection lawsuits. Civil courts are now required to send additional notice to consumers at two key points in a case: after they are first notified of a lawsuit, and if a default judgment, or automatic ruling in favor of the plaintiff, is requested. These communications also inform consumers of the implications of a court case, outline next steps, and direct consumers to legal resources that are written in plain language and available in both English and Spanish. The new law also mandates the court maintain a website with resources for consumers without attorneys.

Similarly, the Texas legislature recently directed the state Supreme Court to “establish a simple and expedited procedure” for defendants to claim exemption from bank account and property seizures after a judgment has been issued against them. Like New York, the new law specified that notices must contain instructions, be written in plain language, and integrate Spanish translations.

In addition to these examples, state legislators across the country are also updating laws to lower the statute of limitations for consumer debt suits, reduce post-judgment interest rates, and determine criteria for exemptions from wage garnishment and asset seizure. Ohio recently reduced its statute of limitations for debt cases, from eight years to six, to align with national averages. Nevada adjusted the interest rates on judgments to more closely reflect contemporary market rates. And Colorado’s recent move to raise how much value of a family’s home is protected from seizure is an important step toward updating garnishment and asset seizure exemptions so they more accurately reflect modern costs of living and home values. Changing these outdated laws helps ensure that consumers don’t fall deeper into debt after court involvement and are still able to make ends meet as they pay back debts they owe.

Guided by these promising practices, there is much that state legislators can do to continue to manage the prevalence of debt collection litigation and better align the civil legal system with the characteristics of modern court users and their legal needs. Critical to these efforts is understanding and examining current gaps in policies and court record data to better identify additional pain points and monitor the impact of any reforms. Legislators would also benefit from working together with various stakeholders, including the courts, consumers and their advocates, and industry actors. To close NCSL’s webinar, David Reid noted that he has “much more readily come to common ground” when he has “open lines of communication” with consumer and court advocates, an outlook that is being embraced by states such as Michigan and Utah, which are contemplating holistic reforms in this space.

State legislators interested in watching a recording of the webinar can visit NCSL’s website, which also offers policy resources on debt collection lawsuits and other information on key challenges facing civil courts.

Natasha Khwaja works on The Pew Charitable Trusts’ civil legal system modernization project.