State laws give edge to debt collectors

For people in debt, Minnesota can be a tough place to live.

Missi McLaren of Champlin found that out when her bank account was frozen because of a debt for $180 in textbooks that she thought was covered by financial aid from St. Cloud State University. It wasn't, and late fees pushed what she owed to more than $4,800 over a couple of years. The bookstore sent a collections agency after her.

After $200 was taken from her bank account, McLaren got a lawyer to help her negotiate a $300 settlement with the bookstore. Her experience, though, provides a window into laws that state Attorney General Lori Swanson says, "stack the deck against consumers."

Minnesota is one of few states where a bill collector can both file a lawsuit and garnish a debtor's bank account without appearing in court.

"I think it's an appalling abuse of process," said Pete Barry, a Minneapolis attorney who represents clients in suits against collection agencies.

Collections attorneys say this system saves consumers the time of going to court, the cost of a court filing fee and keeps cases off a bulging court docket.

"[Collections attorneys] are an amazing group of professionals who take their job seriously," said Wendy Badger, who runs the collections practice at Morrison, Fenske & Sund in Minnetonka. "It's not a matter of who can harass the consumer most, it's a matter of, 'You owe money to our client that you should pay back.'"

Debt collection practices are becoming more of an issue as the economy falters and more Minnesotans fall behind on credit card, auto, mortgage and medical bills. Default judgments, which are imposed when people fail to pay bills and don't respond to lawsuits seeking payment, surged 73 percent through the first six months of 2008. That follows a 67 percent jump in 2007, to more than 36,000 cases.

Lawsuits start without filing

But the default judgment is only the midpoint of a process that can begin with a "pocket filing," a state rule that allows a lawsuit to begin when a person is served with a complaint, not when it's filed in court.

If Minnesotans don't receive notice of the suit, or fail to understand the documents they do receive, they probably won't respond and they'll lose their case -- whether the money is actually owed or not. Once a default judgment is entered, a creditor can garnish -- have a bank freeze a person's account and get a court order to seize the funds.

Marisa Williams, a state corrections officer, learned about pocket filing when she got a summons last year for $13,700 in old credit debt that she has insisted for years was not hers.

But instead of a notice of a court date, the 31-year-old from St. Paul got notice in February that she had lost her case via default judgment and that her bank account was garnished.

Attorney Paul Weig said Williams never answered the complaint.

"Many people tell us they didn't understand when they received the summons and complaint, they didn't realize they were being sued," said Debra Swaden, the supervising staff attorney for the Self Help Center at the Hennepin County Government Center.

Consumer advocates say the lack of court oversight allows creditors to go after debtors' money with little attention to due process. They say some defendants never even see the original documents announcing they've been sued.

"Debt collectors have an uncanny ability to come up with the right address once it comes time to get the money. But they have a hard time coming up with the right address when it comes time to serve the summons and complaint," said Minneapolis consumer attorney Sam Glover.

"It's not as if all of a sudden out of the blue, [collectors] say, 'Hey, Mr. Consumer, you have a default judgment against you,'" said Badger.

"I don't know what else we can do, other than to make [the default judgment papers] pink," said Rozanne Andersen, general counsel for the Edina-based Association of Credit and Collection Professionals (ACA), a national trade group for the collection industry. "It is their responsibility to read the mail."

Freezing protected money

Garnishing a person's funds without a day in court is first among the debt collection reforms that Attorney General Swanson would like to see.

Once creditors get banks to garnish consumers' accounts, all the money can be tied up -- even income that is legally exempt such as Social Security, workers compensation and veterans benefits.

The Legal Aid Society's attorney Carvel got the collection agency to order the bank to return the money because Plath could show it was Social Security income.

"That back-end piece where the burden is shifting back to the consumer to prove the money is exempt is unfair to the consumer," Swanson said.

Nationwide, $171.4 million in exempt federal benefits were garnished by U.S. banks in a 12-month period, a recent report from the Social Security Administration estimated.

Andersen of the ACA proposes a simple fix: Exempt funds could be separated from other funds in low-cost accounts modeled after bank accounts for minors.

Swanson said there's no need to do that. "Collectors need to adhere to the consumer protection laws that are already on the books in Minnesota to ensure that they do not freeze or garnish exempt funds," she said.

What can courts do?

Hennepin County District Judge Gary Larson, who headed the civil courts division from 2000 to 2004, said he has never understood Minnesota's system.

"It makes no sense to me that you can use the power of the state of Minnesota to sue somebody ... without paying a fee to us and bringing it into court," he said.

But with thousands of default cases filed annually, he's not sure what other system would work.

"What judge is going to hear these cases?" Larson asked. "Our civil judges in Hennepin County carry way over the national caseload."