Consumer Debt Collection In State Courts

Lawsuits collecting small debts from consumer debtors, evicting residential tenants who fail to pay rent, establishing tax liens for individual taxpayers who don't pay what they owe, and foreclosing upon unpaid residential mortgage debts are the predominant share of the court docket on the civil side of every state court system. But, despite this fact, surprisingly little is known about how these cases are handled in the courts. We do know, however, that few of these cases are litigated on the merits and that when defendants do appear in court, they often do so without counsel.  

Virginia, with a population of about seven million, has averaged more than a million civil filings a year since the late 1980s. The overwhelming majority of these filings seek to collect debts from consumers, and most judgments go unpaid. 

Despite this apparent insolvency, civil litigation appears to be only tenuously related to consumer bankruptcy whether one looks at Virginia or at the nation as a whole. Nationally, the non-business bankruptcy filing rate rose by more than 350% between 1980 and 2002, while the civil filing rate rose by about 12%. Prior research suggests that relatively few bankrupt debtors have been sued by their creditors in state court, that most bankrupt debtors are drawn from the middle class, and that bankrupt debtors own homes at nearly the same rate as the general population. 

This Article finds that few civil defendants file for bankruptcy, that civil litigation is concentrated in cities and counties with lower socioeconomic characteristics, and that civil defendants in Virginia have a significantly lower rate of homeownership than the general population. In other words, the bankruptcy statistics exclude many defaulting and insolvent consumers, and these consumers may be disproportionately drawn from the more disadvantaged segments of society.

Richard M. Hynes, "Broke But Not Bankrupt: Consumer Debt Collection In State Courts" 60 Florida L. Review 1 (2008) (emphasis added).

It is commonly assumed that the typical person who files for bankruptcy does so because they are overwhelmed with state court judgments that they can't pay.  But, by and large, this is not the case. Bankruptcy is largely the province of the insolvent middle class. State court judgments are largely the province of the uncollectible poor and the solvent middle class.  The two worlds barely intersect.

There is not an empirical consensus on how these cases are processed, although it is clear  that few are ever tried on the merits, let alone before a jury as many state court rules allow. One low end estimate is that just 40% of limited jurisdiction court debt collection cases default, although many are dismissed voluntarily or involuntarily without prejudice, sometimes for lack of service of process, and sometimes due to a deal with the debtor to make payments which are often reached after a debtor appears in court with or without filing a responsive pleading.  An industry source estimates that 80% of such cases default and a Federal Trade Commission estimate that 90% of such cases default which would be closer to my estimation.

Institutional creditors such as credit card companies and payday lenders file collections lawsuits in a surprisingly low percentage of their bad debt cases, and it is surprisingly rare for multiple suits to be filed against the same debtor by different creditors in state courts.  But, the fact that such a large share of judgments go unsatisfied helps explain this reluctance.

Also about 80% of post-judgment litigation involves the filing of garnishments. Interrogatories addressed to debtors, enforcement of judgment liens in real property, and seizures of tangible personal property from debtors are far less common.

In the case of judgment liens in real property, many debtors sued in state court don't have any real property that is not fully protected by a homestead exemption, and even when they do, there is usually a first mortgage that must be assumed if the judgment lien is enforced, so it is easier to simply wait until the home is sold voluntarily to collect the debt.