States are seeing an increase in debt collection lawsuits, which can lead to drastic financial consequences for consumers.
Collection lawsuits — filed by businesses or debt collectors when borrowers fail to pay a debt, like a credit-card bill or a medical bill — declined during the pandemic years of 2020 through 2022. But they rose sharply in 2023 and 2024, according to a recent analysis of seven states and several large metropolitan areas.
In four of those states — Connecticut, Minnesota, North Dakota and Texas — filings are back at prepandemic levels, and all seven are above 2020 levels, the report, which was conducted by the data consulting firm January Advisors, found.
While the report didn’t include all states and cities, it found the pattern broadly in both urban and rural areas, indicating the trend is probably happening nationwide.
“There is a postpandemic rebound that’s happening,” said Lester Bird, a senior manager for the courts and communities project at the Pew Charitable Trusts, which has developed recommendations on making state debt lawsuit systems more fair.
About a quarter of American adults have debt in collection, and an estimated 4.7 million debt collection lawsuits were filed in courts in 2022, according to Pew.
Why are debt lawsuits increasing?
The likely reasons for the recent upswing are varied, researchers say. During the pandemic, collection suits fell partly because government stimulus checks and enhanced unemployment benefits helped people pay their bills. It was also hard for companies to file suits for a time because courts were often closed, Mr. Bird said. Now, people no longer have that extra cushion to cover expenses, and prices have risen. More people are relying on credit cards, increasing their balances and missing more payments.
A recent report from the National Center for State Courts also suggests that an increase in debt claims may be partly the result of automated filing systems using artificial intelligence.
A.I. “makes it incredibly easy” for debt collection companies to file large numbers of suits, said Diane Robinson, principal court research associate at the center. She cautioned that it was not yet clear whether A.I. was behind the increase in collection suits, only that there was a correlation with the availability of generative A.I. Still, the center’s report said, “we have reason to believe that the same filers responsible for the greatest volume in court filings are, or will shortly be, adopting A.I. tools.”
In many of the states that January Advisors studied, large debt buyers file a majority of debt cases, and all have increased their filings. One large buyer, LVNV Funding, more than tripled its filings from 2019 to 2024, the report said. The increase “far outpaces any other debt collector in our data set,” January Advisors reported.
Debt buyers purchase overdue debts for pennies on the dollar, then try to collect the full amount by suing the borrower. By the time someone receives notice of a suit, however, the debt may have changed hands multiple times, Mr. Bird said. Consumers may not recognize the name of the company suing them, making it difficult for them to know if they actually owe the debt.
“There’s a lot of confusion about these lawsuits,” said Frederick Wherry, a professor of sociology at Princeton University and the director of the Debt Collection Lab, a research group.
Borrowers may not be able to find or afford a lawyer. So they often fail to file the necessary paperwork or show up in court, causing them to lose the case by default, without a close examination of the facts. In some states, a fee is required to file a response. A vast majority of defendants in debt lawsuits do not have lawyers, and some 70 percent of debt cases end in default judgments, according to the Pew research.
What happens if a default judgment is issued?
A court judgment can set off draconian steps. “When you don’t engage is when consequences get severe,” Mr. Bird said.
Collectors can then seize the borrower’s wages and put liens on the borrower’s property in an attempt to collect the debt. Sometimes, people aren’t aware of a judgment until money is taken out of their bank accounts.
In some states, including Virginia, once a judgment is entered, debt collectors can ask the court to summon borrowers to a hearing to discuss their assets, and to issue a “capias” warrant, which means they can be arrested if they miss the hearing.
What should I do if I’m sued by a debt collector?
Don’t ignore any legal notices you receive. They will contain information like the deadline for filing a response in writing, if required, or the date, time and location of hearings.
“It’s really important to open those notices,” said April Kuehnhoff, a senior attorney at the National Consumer Law Center. “If you don’t understand what it says, ask for help.”
Details depend on the specific court, she said, but the court clerk’s office may provide basic response forms or offer “self-help” guides.
Legal aid programs may offer low- or no-cost help to clients with low incomes. Or local bar associations may refer you to lawyers who can help at no charge. The National Association of Consumer Advocates can help you find a lawyer to handle debt matters; you can check on the group’s website for members by state and specialty.
Often, the January Advisors report said, large debt collectors buy debts by the thousands and count on the failure of consumers to appear in court so they can win the case by default.
Carlos Banuls, 52, a civil engineer in Richmond, Va., said he ran into financial trouble during the pandemic, when he was between jobs and his father became ill. “I was the only one who could help,” he said in a phone interview. “I did what I could to pay hospital bills.”
He used credit cards and took out personal loans, amassing about $16,000 in debt. He said he worked as a ride-share driver and delivered packages until he eventually found a full-time job, but he struggled to make payments on his debt. “I was able to try and pay a couple, but then another came in, and another.”
In August 2024, he was sued in a Virginia district court by LVNV Funding, which sought to collect $2,824, as well as interest and costs, on a defaulted credit-card account. “It triggers anxiety and stress,” Mr. Banuls said.
Still, he decided to represent himself. “I figured, ‘Well, give it a try,’” he recalled. “I put my speech together.” He sat in court, he said, listening as case after case was found in favor of collectors because the debtor hadn’t appeared.
When it was his turn, he said, he told the judge that he owed money on a credit card but that he didn’t recognize the name of the company suing him. LVNV didn’t have documents to prove it owned the debt, he said, so the judge postponed the matter.
Mr. Banuls said he was stunned: “I didn’t know what to do next.” A lawyer who happened to be in court referred him to a law firm that works on such cases. The debt company still didn’t supply necessary documentation and eventually dropped the case, said his lawyer, Drew Sarrett.
In August, Mr. Banuls sued LVNV and a collections affiliate, Resurgent Capital Services, in Richmond Circuit Court, claiming violations of fair debt collections law, and seeking damages and attorneys’ fees. The case is pending.
Neither LVNV nor Resurgent could be reached for comment.
What steps can be taken to improve the debt lawsuit system?
Pew recommends that states adopt policies to make sure people know they are being sued by requiring process servers to use the same technology that delivery drivers use to show that legal notifications have been delivered.
Pew also recommends having policymakers work with courts to make sure debts included in lawsuits are valid, such as by requiring the name of the original lender to be included with lawsuit notifications.
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