Debt Lawsuits Loom Amid Economic Slowdown

Courts act to prevent consumer harm as pandemic-induced financial pressures mount

Debt Lawsuits Loom Amid Economic Slowdown

As the coronavirus pandemic placed increasing pressure on the U.S. economy, unemployment skyrocketed from 3.5% in February to 14.7% in April, exceeding Depression-era levels and leaving millions of Americans struggling to pay their bills. The resulting growth in unpaid obligations could lead debt collectors and third-party firms known as “debt buyers”—which purchase defaulted debt from collection agencies—to sue already stressed consumers to recover the money owed.

A recent Pew report found that even before the pandemic, such debt collection lawsuits had come to dominate state courts, accounting for the majority of civil cases in some states. Dealing with shuttered courthouses and state budget shortfalls, courts have had to act quickly to prepare for a probable surge in debt suits by addressing a range of challenges associated with these cases, many of which they were already contending with before COVID-19.

Courts across the country have issued emergency orders to manage their operations and provide guidance on ongoing and forthcoming cases. For debt cases, courts had to determine whether, during the pandemic, they would permit collectors to file suits or hold hearings on those already filed. For hearings scheduled before the pandemic, courts had to determine whether, if the defendant failed to appear, they would issue a default judgment—an automatic ruling in favor of the plaintiff that occurs when the consumer does not participate in the case. Pew’s report notes that, in the states for which data was available, more than 70% of debt lawsuits resulted in default judgments as of 2018, a figure that would be likely to rise in light of the barriers to litigant participation posed by the coronavirus.

Additionally, courts have had to determine whether to allow enforcement of judgments and orders issued before the pandemic. Doing so would result in the garnishment of wages and bank accounts at a time of severe economic uncertainty.

The Indiana, Minnesota, and Virginia courts’ responses to the twin challenges of debt lawsuits and the pandemic illustrate state judiciaries’ diverse approaches. The Indiana Supreme Court declared that, starting April 3, unless the local court determined there was an emergency, no orders would be issued in debt collection cases, and existing orders would not be enforced. This includes those issued after a judgment indicating that a debt is owed, which often authorize the garnishment of wages or freezing of bank accounts. In Minnesota, the Supreme Court took a different tack. Rather than temporarily prohibiting new enforcement orders in debt lawsuits, the court categorized garnishment exemption requests as urgent and ordered relevant hearings to proceed during the state of emergency so that consumers can petition to delay or prevent the seizure of funds.

Virginia employed yet another strategy. Beginning March 16, the Virginia Supreme Court suspended all nonemergency civil cases, and 11 days later, the court clarified that the nonemergency category includes debt lawsuits. Upon learning that some trial courts were ignoring these directives, Chief Justice Donald Lemons issued a memorandum reminding the general district courts that no garnishments were to be ordered and that “for garnishments issued before or after March 16, 2020, where a garnishment exemption is requested, that hearing should be considered an emergency hearing and should be heard either by electronic audio-visual or telephonic communication or by telephone.” In other words, the Virginia Supreme Court not only halted debt lawsuits but, like Minnesota, also prioritized as urgent the ability of consumers to seek exemptions from garnishments that would sap their wages and bank accounts in the face of unemployment and other economic hardship stemming from the coronavirus.

As the pandemic wears on, and the Centers for Disease Control and Prevention updates its guidance on the resumption of life activities, courts’ approaches to debt lawsuits will continue to evolve. For example, on May 18, the Texas Supreme Court ordered the resumption of debt lawsuits and the enforcement of garnishment orders. And according to a recent ProPublica investigation, “While new collection activity has dropped off, some major debt collectors have been laying the groundwork for a return to normal by filing suits by the thousands, according to a ProPublica review of online court records from county and state court websites.”

ProPublica further notes: “Even more worrying to consumer advocates is what lies ahead. Households often rely on credit cards during moments of financial stress. In recent months, more have been paying rent with their cards. Eventually the bill will come due, which could lead to a wave of collection suits as the nation attempts to recover.”

As courts resume normal operations and begin to tackle what this and other analyses suggest will be a wave of debt cases in the wake of COVID-19, policymakers and advocates will need to study the impact of various emergency orders to identify the most effective strategies for protecting economically at-risk consumers in uncertain economic times.

Erika Rickard is a director and Qudsiya Naqui is an officer with The Pew Charitable Trusts’ civil legal system modernization initiative.

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Effects of Debt Lawsuits on Civil Courts Obscured by Lack of Data

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Over the two decades from 1993 to 2013, debt lawsuits came to dominate civil court dockets in a significant number of states. And as of 2018, they were still the most prevalent type of civil case in nine of 12 states for which some data is available.