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Woman Sues Debt Collector, Wins $8.1 Million
At courthouses across the United States, it has become increasingly common during the economic downturn for lawsuits to be filed against consumers to collect old debts. Lawyers who specialize in the practice are filing thousands of suits on behalf of large firms that have acquired debts from other companies. Although most people don't fight the suits and lose them by default, a Dallas woman bucked the trend last October.

Chrystal A. Snow challenged the validity of a $9,000 debt in a Dallas County Court-at-Law and countersued the debt collector for making improper phone calls, her attorney Ross Teter said. In a case that has received no media attention, Snow won her suit against Midland Funding LLC and the jury hearing the case awarded her $8.1 million -- $250 for actual damages, $100,000 for mental anguish and $8 million in punitive damages, he said.

"The jury made a finding she did not owe the debt," Teter said in a phone interview. "We argued that they violated the Texas Fair Debt Collection Act by making harassing phone calls and the jury agreed."

Midland Funding is a subsidiary of Encore Capital Group, a company whose primary business is the acquisition and collection of "charged-off consumer receivable portfolios," according to its 2009 annual report filed with the Securites and Exchange Commission.

"We acquire receivable portfolios at deep discounts from their face values," the annual report states. "[W]e have invested approximately $1.4 billion to acquire 28.8 million consumer accounts with a face value of approximately $43.8 billion."

As the owner of millions of long-overdue accounts from credit card, auto, health care and phone companies, Encore has three call centers in the U.S. and one in India to make collection calls. When these efforts are unsuccessful, Encore has a nationwide network of attorneys to pursue legal action for the full amount of the debt. If a creditor wins a lawsuit, it can get a court order to seize bank accounts, garnish paychecks and claim other assets. Consumers can find themselves on the hook for the debt plus interest, penalties and legal fees.

"We generally refer accounts for legal action where it appears the debtor is able, but unwilling, to pay their obligations," the annual report states. "We pay the law firms a contingency fee based on amounts they collect on our behalf."

An April 1 New York Times story on the rising number of court-ordered garnishments told the story of Sidney Jones, a maintenance worker who took out a $4,097 personal loan in 2001 from the subprime lender Beneficial Virginia:

He fell behind, and Beneficial sued. Mr. Jones did not appear in court. "I just thought they were going to take what I owed," he said.

By default, Beneficial won a judgment of $4,750, plus $900 in lawyers' fees, with the debt accruing interest at 27.55 percent until paid in full. The bank started garnishing his wages in March 2003.

Over the next six years, the bank deducted more than $10,000 from Mr. Jones's paychecks, but he made little headway on his debt. According to a court order secured by Beneficial's lawyers last spring, he still owed the company $3,965, a sum nearly equal to the original loan amount.

Allen West, a Republican candidate running for Congress in Florida to unseat Rep. Ron Klein (D-Boca Raton), lost a $2,832 judgment to Midland in 2009 for credit card debt, the Palm Beach Post reported in March. He's "more than half way" to paying it off, he told the paper.

Kristy Welsh, the editor of the do-it-yourself credit repair site Credit Info Center, said the worst thing a person can do is ignore a lawsuit filed to collect one of these "zombie" debts. File a answer to the original suit, Welsh advised in a phone interview. "If you don't answer you lose automatically. You don't want a judgment against you. You have zero to lose [by fighting]."

She wrote a blog post Friday on the six steps to take if you've been sued to collect a debt, even if you can't afford an attorney and must defend yourself:

... by filing an answer, you greatly increase the chance the creditor will dismiss the lawsuit. In other cases the collection agency rent-a-lawyer won't bother to show up themselves -- giving you the automatic win. Some lawyers who work for big collection agencies file as many as 50 lawsuits a day. Why spend time on a consumer who fights back when there are plenty who won't resist?

In Snow's case, the attorney representing Midland Funding did not appear and the one-day trial was conducted without him, Teter said.

Welsh said that a creditor is required to prove in court that a debt is valid, a difficult task for debt-acquisition firms like Midland because they receive a limited amount of information on the debts they acquire -- sometimes as little as the debtor's name, Social Security Number, amount owed and original creditor. "They weren't around watching the original creditor. They weren't around to witness the processing of payment," she said. "The older a debt is, the less chance it has of having any kind of paperwork."

The debts pursued by these firms often are inaccurate or have passed the statute of limitations in a consumer's state and are no longer legally required to be paid, she said.

Welsh runs an online forum where members share information with each other about their legal battles with debt collectors they call JDBs -- "junk debt buyers."

In the section of the annual report where Encore discloses the risks of running its business, the fact that consumers are banding together on the web is cited as a problem:

Consumers are exposed to information from a number of sources that may cause them to be more reluctant to pay their debts or to pursue legal actions against us. ... Various Internet sites are maintained where consumers can list their concerns about the activities of debt collectors and seek guidance from other website posters on how to handle the situation. And advertisements by debt relief attorneys and credit counseling centers are becoming more common, adding to the negative attention given to our industry. As a result of this negative publicity, debtors may be more reluctant to pay their debts or could pursue legal action against us regardless of whether those actions are warranted.

Snow, who did not return requests for comment, has reached a confidential settlement with Midland, her attorney Teter said.

Teter said that it's rare to achieve a result like hers in a debt collection lawsuit, but "I think it's not going to be so rare in the future. A lot of these debt collectors are making lots and lots of phone calls for no reason. The jurors are beginning to understand."