Default surge: Misery by numbers

A deteriorating job market is blamed for a record amount of judgments in Minnesota in 2008, and 2009 might be worse.

As the economy spirals down, the number of Minnesotans unable to pay their debts continues to shoot skyward, with a record number of default judgments filed in state courts in 2008.

Default judgments soared to 51,287 across the state last year, 39 percent more than in 2007, another record year, and 133 percent higher than 2006.

The default judgments largely involve unpaid credit card debt, but include other unpaid loans. They do not include foreclosures.

As a result of the default surge, the dollar amount of debt being demanded by creditors rose to $461.97 million in Minnesota 2008, a 58 percent increase over the year before.

No county handled more default files than Hennepin. Its district court processed 12,879 defaults in 2008.

"These files evidence the financial failure of people's lives," said Mark Thompson, Hennepin County court administrator.

Tom Stinson, Minnesota's state economist, said the central factor behind the default surge is the deteriorating job market. After the state added 9,000 jobs from December 2006 to December 2007, it lost 50,000 jobs from December 2007 to December 2008.

"When people lose jobs, they are more apt to default on their credit card debt," said Stinson. "And if they have large credit card debt, it is simply impossible for them to keep up if they lose employment. This is not likely to get better in the short term. We would expect to see even more defaults in 2009, because cumulatively we expect to lose 120,000 jobs in the state before the recession is over."

Heavy cost of default

When business dropped off for her husband's pest control firm, Adriana Klug of Waverly, Minn., said she was unable to make the last five monthly payments of $509 each on the two-year lease for her 2006 Ford F-150 pickup truck.

The truck was repossessed and in October the Wright County District Court entered a $15,965.61 default judgment against her. Klug, 33, manages a convenience store, and on March 1, her wages began to be garnished at the rate of $532 a month -- one-fourth of her pay.

"It's going to hurt," she says. "We were barely making ends meet."

Pete Barry, an attorney who sues debt collectors, reviewed Klug's court file and said the judgment seemed "grotesquely excessive, given the relatively small amount originally owed. This is illustrative of the problem of default judgments in Minnesota and overreaching collection law firms and greedy creditors." He said he "seriously doubts" a jury would award $16,000 on a $2,500 debt."

But Bill Hicks, a shareholder of Messerli & Kramer, the law firm which obtained the judgment against Klug on behalf of the Ford Motor Credit Co., said Klug had a standard lease and it was legal. Had she finished making the payments on the truck lease, Ford would have assumed the risk of loss of market value on the truck. But once she stopped paying, the risk fell on her shoulders, he said.

The used-car market has declined steeply, he said, and Ford resold the truck for a price in the $15,000 range, making her liable for $13,454 in lost value. The judgment also includes repossession costs and the expense of refurbishing the truck for sale. Klug is also responsible for $2,018 in legal fees and about $500 in other expenses including court costs.

"More frequently" it is the car companies suffering, Hicks said.

Easy credit fueled defaults

Toby Madden, a regional economist with the Federal Reserve Bank in Minneapolis, said the seeds of the rising default rate were sown earlier in the decade when credit eased so people could borrow more.

Omar Sadiq, 33, of Hopkins, was one of those who got overextended. Sadiq, who is married with four children, said he lost a truck-driving job, and in February, a suit seeking a default judgment was filed against him for $15,289 in credit card bills, including $6,751 in interest. "I used to make small payments, but everything I paid was not reducing the amounts," he said. "I was paying basically for interest."

Bankruptcy law changes also play a role. In 2005, Congress made it much more complicated and expensive for people to file for bankruptcy, although most people can still qualify, said Tim Theisen, a bankruptcy attorney in Anoka. So instead of filing for bankruptcy, more people have simply stopped paying their debts, leading to an increase in default judgments, he said.

"These are not chronic debtors," said Heidi Staloch, an attorney and one of the owners of Gurstel, Staloch & Chargo, a law firm that represents creditors. "These are people who know how to be financially responsible and simply cannot pay their obligations due to economic times, due to job loss or reduction in income."

Staff handles judgments

Virtually none of the 12,879 default judgments in Hennepin District Court last year was seen by a judge. They were handled by court clerical staff.

Robert Blaeser, chief judge of the Hennepin civil division, said that the $252 filing fee attorneys pay the court for each default suit goes into the state general fund, and the $3.2 million raised each year for defaults makes such judgments, ironically, a real "moneymaker for the state."

"The impression for many of our counselors is that collectors are moving more quickly to legal action on both credit card debt and medical debt," said Darryl Dahlheimer, program director for financial counseling at Lutheran Social Service, a nonprofit agency that counsels 12,000 people annually. "The debt collection industry is a very lucrative business, so with Minnesota's unique law of judgment by mail, there is not much downside for collectors" to filing default suits.

Staloch said that the credit industry has gotten more sophisticated, using technology to determine case-by-case whether it is worthwhile to sue for past debts or simply use a collection agency. For example, if a person is not behind on the mortgage and has a job, it increases the possibility there is money to garnish in the debtor's account, she said.

While total debt in default cases has increased in Minnesota, the median amount of debt per individual case dropped from $4,081 in 2006 to $3,656 in 2007 and remained virtually unchanged at $3,670 in 2008.

"Maybe there is movement afoot to move on small accounts, because the small accounts get paid off first," said Hicks of Messerli and Kramer.

Still, he added, "It is a more difficult climate to get money off the pre-legal piece, which are calls and letters. People don't have the money, and the people who have it are less willing to part with it because of the economic uncertainty."

Staff librarian John Wareham did research for this article; Randy Furst • rfurst @ startribune .com 612-673-7382; Glen Howatt • ghowatt@star tribune.com 612-673-7192

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