Credit cards file flawed lawsuits to collect bad debt

Hand holding credit cards

It appears that lenders are just as inept at suing to collect bad credit card debt as they are at processing foreclosures, the New York Times reports, in the biggest consumer news of the day.

“I would say that roughly 90 percent of the credit card lawsuits are flawed and can’t prove the person owes the debt,” Noach Dear, a Brooklyn civil court judge, tells the Times.

According to Dear, other judges and lawyers interviewed for the report, major credit card issuers are relying on incomplete records, falsified documents and generic testimony to pursue delinquent customers.

The situation appears to be very similar to the "robo-signing" controversy, in which mortgage lenders used inaccurate, mass-produced documents to foreclose on homes.

“This is robo-signing redux,” Peter Holland, a lawyer who runs the Consumer Protection Clinic at the University of Maryland Francis King Carey School of Law, tells the Times.

Borrowers are delinquent on something like $18.7 billion, or about 3% of all outstanding credit card debt.

Lenders are trying to recoup those bad loans and clean up their books, which judges say is flooding the courts with lawsuits.

However, even when they have the right to collect, credit card companies are not providing the original contract or payment history as proof in certain cases.

That's leading to a lot of lawsuits where card companies claim their customers owe more debt than they've actually accumulated.

Some cases even involve falsified credit card statements produced years after borrowers fell behind on their bills.

Unfortunately, judges say it's all too common that errors in these kinds of suits go undetected, especially since borrowers rarely show up to defend themselves.

That results in an estimated 95% of those lawsuits ending in default judgments favoring lenders, notes the Times. And lenders can garnish wages or freeze bank accounts to recoup the loan.

Judges can't question banks or card companies unless consumers show up to contest the lawsuit. If they don't show, it's an automatic win for the bank.

To learn more, read the New York Times story here: http://dealbook.nytimes.com/2012/08/12/problems-riddle-moves-to-collect-credit-card-debt/?ref=business.

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