JP Morgan Chase’s decision to abandon more than a thousand collection lawsuits in five states, as reported in The Wall Street Journal, signals complications with the legal collection process that could lead to more creditors employing resolution strategies outside the court system.
You can always trust your creditors to do whatever they believe is best for their bottom line. Through litigation a creditor can use the court system to compel you to repay your debts in full. At first glance that may seem best for a creditor’s bottom line, but the legal collection model has very real deficiencies:
Anyone unfortunate enough to have been sucked into the American legal system knows it’s far from cheap. Lawyers cost money – a lot of it. Filing paperwork with the court is costly as well. Creditors also know they aren’t always able to fully shift those costs to the debtor.
Debtors can delay the judgment process for months simply by filing the proper response paperwork and showing up to the hearing. Creditors sue in the hope that the debtor will ignore the summons, resulting in a default judgment. But even in the event of a default judgment, it can take months to execute and begin a garnishment or secure a lien.
The legal process is complicated, labor-intensive and rife with state-specific regulations. Nowhere is this more apparent than with the Chase story thread. No allegations were proven, and Chase has admitted to no wrongdoing, but a fair reading of what’s known suggests Chase simply got lost in the sadly comical complexity of the state bureaucracy. Too much paperwork; too many hoops. Someone fell on their face. Bad for the bottom line.
Creditors can view debt resolution as a simple, cheap, reliable alternative to litigation. A good debt resolution model should have a legal collection rate of no more than 3 to 6 percent of the accounts they enroll, meaning roughly 95 out of every 100 enrolled debts should sail through the program.
It’s cheap for the creditor: When they choose to settle, creditors don’t have to involve their expensive legal department or the court system. In fact they don’t have to spend any money at all in pursuit of the debt.
Resolutions are also faster when you don’t involve the courts. And with the advance-fee ban imposed on the debt resolution industry by the Federal Trade Commission in October 2010, companies can no longer collect fees prior to settlement.
Before the advance fee ban, creditors bristled at debt resolution companies collecting fees while the delinquent debts enrolled in the program sat idle. No more – creditors get paid sooner because fees are paid to the resolution company only after a debt is resolved.
Creditors can settle the debt for less than you owe and still make money off you:
- They’ll collect a portion of the principle.
- They’ll receive a tax break on the debt that they forgive.
- In many cases, the cards have been open for years and the consumer has paid thousands of dollars in interest and fees prior to settlement.
The knock against debt resolution programs has always been litigation – credit card companies retain the right to sue, even if the debtor is enrolled in and making monthly payments into a debt resolution program.
But just because a creditor can sue, it doesn’t mean they will. Look at Chase. It all boils down to the bottom line.
The American Fair Credit Council (AFCC) is in the process of certifying Consumer Credit Advocates for accredited debt resolution companies. It’s a good place to start if you’re buried in credit card debt and looking for answers.