A day after a federal agency declared America's debt collection system "broken," two Minnesota lawmakers pledged to write legislation to better protect consumers who are sued or jailed over their debts.

Sen. Ron Latz, DFL-St. Louis Park, and Rep. Joe Mullery, DFL-Minneapolis, said Tuesday that they intend to address a growing public concern -- highlighted in a continuing Star Tribune series, "Hounded" -- that debtors are being sued for money they don't owe and, increasingly, jailed when they fail to appear in court. Latz and Mullery plan to introduce a package of debt-collection reforms when the Legislature reconvenes in January.

The Star Tribune investigation found that the use of arrest warrants against debtors jumped 60 percent in the past four years, with 845 cases in 2009. Some debtors who were arrested said they were unaware they had been sued for their debts and were required to appear in court.

"There is something broken in this state if someone winds up in the clink over a debt," said Ron Elwood, staff attorney with the Legal Services Advocacy Project in St. Paul, which is helping to write the legislation. "There has to be a better way."

A Federal Trade Commission (FTC) report issued Monday described problems in the debt collection business and called on states to fix many of them. The two Minnesota legislators, who saw their earlier debt collection bill die in the last session for lack of support, said the FTC has strengthened the case for changing the law.

"This should help galvanize public support for passing legislation," Latz said. "Anyone in Minnesota might have to deal with this, and they might be surprised there is an arrest warrant for something they didn't realize existed."

The report recommended that state governments toughen laws to reduce the number of unsubstantiated lawsuits against debtors. It called on states to require collectors to offer more proof of debts in their lawsuits, and to curb suits over debts for which the statute of limitations has expired.

"The system for resolving disputes about consumer debts is broken," the report said.

Mark Schiffman, a spokesman for ACA International, an association based in Edina that represents the debt collection industry, said it agrees with many of the FTC's proposals. But he said the report doesn't address a key problem -- that much of the information about consumer debt is incorrect.

"It's not that debt collectors are withholding that information," he said. "It's that it doesn't exist."

Many of the FTC's recommendations are similar to those included in Latz and Mullery's previous proposal. That legislation would have required firms that buy and collect debts to identify the original creditor and supply consumers with an itemized accounting of amounts owed and explain how they were computed. The bill would have imposed fines of as much as $2,500 per violation against the firms.

Expanding legislation

Now, the two legislators want to expand the bill to address the practice of issuing warrants against debtors. They haven't settled on the details, but want the state to set stricter criteria for arresting people in civil cases involving debts.

"I'm not saying that we would ban arrests under all circumstances," Latz said. "But there has to be a threshold. It can't just be because you owe money and miss a court appearance."

Mullery said he was particularly concerned that some Minnesota judges set bail at the amount someone owed, often at the request of creditors. This practice was described in a June 9 Star Tribune report, "In jail for being in debt." Mullery considers this practice a violation of Minnesota's constitution, which prohibits people from being imprisoned for their debts, except in cases of fraud.

"It's blatantly unconstitutional," he said. "Your ability to get out of jail should not in any way be related to the amount of money you owe."

The federal report also said state and federal laws should be changed to prevent debt collectors from seizing money that is exempt from garnishment. Federal law bars creditors from taking Social Security income to recover a debt, but many banks still seize the money from bank accounts when they receive a garnishment order.

FTC officials called for tighter rules on consumer arbitration to prevent bias, citing Minnesota Attorney General Lori Swanson's 2009 lawsuit accusing the St. Louis Park-based National Arbitration Forum of deceiving consumers into thinking it was a neutral arbitrator in debt collection when it had ties to the industry.

As a result of Swanson's suit, the forum agreed to cease credit card arbitrations, as did another large nonprofit arbitration firm. FTC Commissioner Julie Brill said in a statement that Congress should impose a moratorium on all debt collection arbitration until the process is shown to be fair.

Chris Serres • 612-673-4308