While some debt collectors have resorted to questionable and sometimes illegal practices, there are also legal routes to debt collection — like lawsuits and wage garnishment — that can nonetheless have a destructive effect, particularly in low-income, minority neighborhoods.
Back in 2013, wage garnishments hit more than 1-in-10 employees between the ages of 35 and 44, nearly 35.4% of those debts were a result of student loans and other court-ordered consumer debt repayments for things like credit cards and medical bills.
While those figures may be startling, a new year-long investigation and analysis from ProPublica focuses on companies’ pursuit to use the court system to pursue million of dollars in small consumer debts – like utility bills – from some of the country’s most vulnerable consumers in St. Louis, Newark, NJ, and Chicago.
We really recommend that you head over and read the entire report from ProPublica, but here are the 8 things we learned from the exposé:
1. Through court judgments, collectors are able to seize a chunk of a debtor’s salary via garnishments. ProPublica found that the highest rates of garnishment are among consumers who earn between $25,000 and $40,000 a year.
Between 2008 and 2012, debt buyers, banks, hospitals and other entities that sued consumers for overdue debts have seized about $34 million from residents of St. Louis’ mostly black neighborhoods. In Jennings, a suburb of St. Louis, ProPublica found that during that same time frame, there has been more than one debt collection lawsuit for every four residents.
2. As Consumerist has highlighted before, many of these suits are won by the debt buyer, originator or other plaintiff because consumers don’t show up to defend themselves in court. But even when a defendant does show up, ProPublica found the cases generally end the same: the plaintiff attempting to garnish the consumers’ paycheck.
Communities like Jennings, which has an average income level of about $28,000/year, are hit especially hard by these garnishments. Except in some cases, plaintiffs are allowed to seize up to a quarter of a worker’s after-tax pay. And when their wages are deposited into a bank, the plaintiff can take other money already in the account to pay down owed debts.
3. Most of these collection lawsuits viewed for the report are for smaller debts. In one case profiled by ProPublica, the mayor of Jennings was sued over a $352 utility bill. These small-dollar collection lawsuits cross local judges’ desks at a rate that sometimes surpasses 100 complaints per day.
Like in St. Louis area, the typical debt tied to a collection lawsuit in mostly black neighborhoods of the Newark and Chicago areas was about 20% to 25% smaller than the debts of residents of mostly white neighborhoods. For instance, in Newark, when a company filed a suit against a resident of a middle-income white neighborhood, the average balance was $3,446, while the suit in a black area has an average debt of $2,629.
4. Metropolitan St. Louis Sewer District – the company that sued the mayor of Jennings – was found to have dramatically increased its collection efforts about five years ago, going from filing about 3,000 lawsuits against consumers in 2010 to 11,000 in 2012. A majority of these suits were filed against residents of predominantly black communities like Jennings. In all, ProPublica’s analysis of the suits found MSD obtained judgments in these neighborhoods at a rate four times higher than in mostly white neighborhoods it provides utility to.
5. Debt buyers — as opposed to lenders — are responsible for most collections lawsuits in the three cities studied by ProPublica.
These companies purchase debts for pennies on the dollar and try to recover what they can from debtors – and recently these companies have turned to the courts.
ProPublica found that in Chicago and Newark, the lawsuits filed by debt buyers were about 30% smaller in value than the average suit by a major bank.
In Newark, the rate for judgments against these small suits in mostly middle-income black neighborhoods is twice as high as those in middle-income white neighborhoods.
6. Experts say the reason minority communities are see more debt collection lawsuits and garnishments likely stems from a long-running wage gap and lack of resources in those communities. The typical black household has a net worth of $11,000, while that of a typical white household is $141,900, according to the Pew Research Center. This leaves black households with fewer resources to draw on when they need to pay an unexpected debt like a medical bill or unusually high utility bill.
Michael Collins, faculty director of the Center for Financial Security at the University of Wisconsin-Madison, tells ProPublica, that while low-income families generally do “very, very well given the very meager resources and high expenses they have,” eventually they run out of options. “You don’t have the social network, you don’t have the legal and other resources available to you to find a solution.”
7. In some states, consumers facing steep garnishments can receive some help. For instance, a Missouri law allows for a “head of family” exemption that reduces the maximum garnishment to just 10% of a consumers paycheck. However, this assistance is something people have to find themselves, ProPublica points out that the law doesn’t require anyone to inform debtors of the exemption.
The Color of Debt: How Collection Suits Squeeze Black Neighborhoods [ProPublica]
