I recently came across an interesting article challenging the conventional wisdom about why people file for bankruptcy. Most people, myself included, have long concluded that the amount of debt a person has, combined with unfortunate personal circumstances (divorce, job loss, accident, illness, etc.), are the primary factors leading the person to consider a bankruptcy filing. For example, a 2013 study by Nerd Wallet concluded that almost 60% of consumer bankruptcy filings are due to medical debts. I see quite a number of clients who indeed have medical bills which they have no realistic hope of paying.
This article, however, takes a different spin on the motivation behind filing for bankruptcy. It cited a study from the Center for Consumer Recovery showing that approximately 75% of those filing for bankruptcy did so because they were being sued by a debt buyer. Debt buyers, as opposed to collection agencies, are companies which buy delinquent or charged-off debts from creditors for pennies on the dollar. The debt buyer then attempts to pursue the debtor for collection of the entire debt.
Major debt buyers include companies such as Midland Funding, LVNV Funding, and Portfolio Recovery Associates. These companies are very aggressive in filing lawsuits against the debtor. According to one writer, Midland Funding “has a reputation of buying soured credit card debt and heading straight to court to collect.” In light of the massive number of cases being filed nationwide by these companies, judges in some states are now giving these suits more scrutiny and are demanding more documentation to support the debts allegedly owed.
The practical reality, however, is that most people being sued do not have the financial wherewithal to defend themselves, and the debt buyers end up winning the overwhelming percentage of their cases by default. Once a judgment is entered, the debt buyer can garnish the debtor’s wages and bank accounts, and in some states, place a lien against the debtor’s home. Most people simply cannot afford to keep up with their basic household needs if they are garnished. As the debt buyers are unwilling to negotiate reasonable payment options, many people in this situation feel forced into filing for bankruptcy to stop the lawsuits and prevent garnishments.
Not surprisingly, debt buyers justify their actions in rather lofty terms. The article quotes a spokesman for the Association of Credit and Collection Professionals as saying “Debt buyers play an important role in the economy in that they recover rightfully owed consumer debt. Companies and government rely on the repayment of credit, fees, services to keep their business functioning.”
While no one will argue with the fact that people should be paying their debts if they are able, the debt buying industry itself in no uncertain way is responsible for a large percentage of bankruptcy filings. Their overly aggressive litigation tactics leave most consumers with no practical choice but to file for bankruptcy.
This post is intended to be purely informational in nature, and cannot be considered legal advice. If you have questions related to bankruptcy, please call our office at (503) 545-1061 (Oregon cases) or (360) 836-4238 (Washington cases) to schedule a free initial consultation.