07/13/2010 01:05 am ET | Updated May 25, 2011

FTC Urges States To Rein In Frivolous Debt-Collection Lawsuits Overwhelming Courts

Throughout the financial crisis and deepening recession, debt collectors have been harassing Americans, often under false pretenses, in order to scare up a quick buck. Frivolous debt-collection lawsuits have now become so pernicious and prevalent that they're drowning the court system, leading the Federal Trade Commission to call Monday for new state legislation that would staunch the rising tide of baseless debt claims.

Given the current balance of power in debt-collection cases, it's easy to scare people. As The New York Times outlines, some firms with a skeleton crew of lawyers now routinely file tens of thousands of debt-collection lawsuits a year via a largely automated process.

These suits are generally filed merely on the basis of Social Security number, address and date of birth, but this can be enough to freeze the defendants' bank accounts -- default judgment are common given that defendants' address information is often outdated or erroneous, and so the complaint doesn't reach them until after their court date -- and they can then be more easily pressured into paying something, anything, to make the problem go away.

Lawsuits are sometimes filed against the wrong people, critics say. Other times, they say, the amount owed is incorrect or includes questionable fees and interest that has been added to the balance.

In addition, it is not always clear if the debt buyer filing suit legally owns the debt, since debt portfolios are often sold several times.

Often, they don't own the debt -- they or someone along the line has just made it up, as McClatchy outlined in a report last week. This is to some extent a consequence of the outsourcing of credit card debt, now routinely sold for pennies on the dollar to third-party debt-collection companies who specialize in hounding people, rightly or not, for whatever they can pay.

More and more often, they seem to resort to forms of bullying that prompt their targets to speak out, and the FTC took notice. The FTC recorded 67,550 complaints of harassment by debt collectors in 2009, a whopping 50-percent spike over the prior year, and they're on track to jump another 13 percent in 2010, according to CNN Money.

In its report Monday, the FTC deems the current system of debt-collection litigation and arbitration "broken." In fact, the commissioners named the report itself "Repairing A Broken System." Based on nationwide "discussions" resembling town hall meetings and the Commission's own experience, the FTC report calls on states to require more detailed claims from debt collectors, limit the freezing of alleged debtors' bank accounts, and encourage more defendants to show up and defend themselves, among other reforms largely focused on procedural transparency.

The FTC has said previously that complaints regarding "third-party and creditor debt collection" ranked second only to identity theft last year.