The Cost of Debt – Don’t Forget the Legal Fees

Lawsuits and court ordered wage garnishment are becoming an increasingly common phenomenon for those in the United States who are unable to pay back their debts on time. With little regulation and consumer protection in the legal realm of debt collection, consumers are often left with few resources to fight in court and consequentially little control over the repayment of their debts.

Wage garnishment is the direct seizure of wages to repay a debt, as permitted by a court order. For years in the United States, the practice of wage garnishment was reserved for collecting child support, student loans, and back taxes. During the recession that began in 2008, debt collectors increasingly turned to the courts as a channel to collect, and the practice of wage garnishment expanded rapidly, including to consumer debts. Rates of wage garnishment have sky-rocketed, more intensely in some regions and cities than others. In Phoenix wage garnishment rates increased 121 percent from 2005 to 2013, Atlanta saw a 55 percent hike between 2004 and 2013, and Cleveland saw a 30 percent jump between 2008 and 2009 alone.

The new family of plaintiffs, which includes debt collectors, payday lenders, credit card companies, and medical companies, is entering civil courts at an alarming rate. These entities sue debtors to recover the debt and upon victory in the court (which is overwhelmingly granted) tack on extra fees for the suit and legal proceedings, in addition to receiving permission to garnish wages. Debt buyers are among the heaviest users of civil courts in the United States, and in certain cities they are the most common plaintiffs.

So, why are collectors opting to go through the court system to collect debts? It works.

With relatively low costs to sue and odds of victory tipped heavily in their favor, entering the court system is reaping big payoffs for collectors. After opening a case, collectors are required to provide debtors with an official summons, which advises on the case’s court date, and a complaint, which explains why the debtor is being summoned. From the very onset of this process, the plaintiff and defendant are not on an equal playing field. A large majority of those being sued make less than $40,000 a year and lack knowledge of the legal system. In many cases, the defendants may not even be aware that they are in a suit until after the court case has been decided. Ninety to ninety-five percent of the issued summons go unanswered, meaning that the defendants do not show up for their court date. When this happens, the plaintiff collectors win the case by default and, in most states, gain permission to collect debts and any additional costs acquired during the legal proceedings directly from wages.

In the cases where consumers do show up for their case in court, they are often unrepresented and are left facing experienced corporate lawyers on their own. It is important to note that as different from criminal cases in the U.S., the government is not required to provide legal representation to defendants in the civil court system. Therefore, defendants must seek and pay for legal assistance on their own.

Once a court order is established, it is very difficult for debtors to reverse the order or protect their wages. While federal regulation prohibits garnishment of more than 25 percent of an employee’s take-home pay in a month, beyond this, the regulatory environment differs greatly at the state level. Some states, including Texas, North Carolina, South Carolina, and Pennsylvania, have banned the practice of wage garnishment for consumer debt altogether. Other states allow collectors to continue charging high interest rates following a court order and the resulting wage garnishment. Additionally, as previously mentioned, many states allow collectors to add their own legal fees to the outstanding debts, with few regulatory guidelines. For example, in a case filed by a debt collector in Louisiana in 2012, $1,782 in attorney fees and $1,509 in court costs were added to an original debt of $2,993.

While the court system should be a resource available to corporations to collect money they are owed, the current regulatory environment fails to protect consumers and disproportionately places the costs of the system on their shoulders. Given the gaps in current federal legislation, states should pursue greater protections for their citizens, including limiting the additional interest charges if a court suit is settled, prohibiting the addition of exorbitant legal fees to outstanding debts, and potentially prohibiting wage garnishment on consumer loans all together. In a financial system where consumers are often in the dark, it is important that the legal system does not perpetuate existing inequalities between large corporate lenders and individual borrowers.

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