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How to Turn Delinquent Credit Card Debt Into Debt-Collector Gold

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We tend to be blown away these days by the latest smartphones, GPS driving aids, and free satellite imagery that can show the doghouse in our backyard. But it's a mistake to think that astonishing advances are confined to the realm of high-tech; other extremely creative people are doing remarkable things with systems that are decades old. For example, some pioneers have achieved a court-system breakthrough that has made the lives of countless citizens a living hell.

I speak of the debt-collector alchemists who can turn seemingly worthless defaulted credit card debt into pure gold. In the movie The Graduate, a young Dustin Hoffman was pulled aside by a successful older man and given the secret to making a fortune in business: "Plastics." If that dialogue occurred today and Dustin Hoffman were talking to a debt-collector, it would be a two-word secret: "Default judgments."

It's an absolutely brilliant contortion of our justice system, if you care more about profits than justice. Here's how the professionals do it:

Step 1: They press a button and file a suit, making sure it's in small-claims court. It costs as
little as 40 bucks to file a suit electronically. Better yet, filing in small-claims court means that the formal courtroom rules of evidence are out the window.

Step 2: They don't sweat the "notification" part about telling people that they're being sued. The whole idea is to have the consumers be no-shows, as you'll see in a minute. So they hire a process server who claims to deliver notice of the suit, but may or may not actually do it. And just in case the documents do get delivered, they write them in a confusing fashion. That way, consumers might throw out the documents, thinking they don't apply to them or that it's some scam.

Step 3: If consumers do happen to show up in court, only about 1 percent of them will bring an attorney, because they'd have to pay for one, and that's highly unlikely. So the match will be between wide-eyed consumers who've never been sued, going up against stone-cold seasoned attorneys who sue for a living.

Step 4: You can usually forget that last step, because consumers most likely won't appear in court. The fact is they can't take the time off work, or they didn't realize they were required to show up.

Step 5: Their no-show status means a quick bang of the gavel, and the court issues a default judgment. Now the court becomes the debt collector and demands that the debt be paid, with all the powers courts have to extract compliance, like arrest warrants, garnishment, and even jail.

If that's all there were to default judgments, it would be enough to make them a favorite tool to extract money from consumers, but they're oh-so-much more. Here's where the real genius happens, and it's the lead-into-gold part: The default judgment washes away the sins of the debt collector and gives that collection effort a new lease on life by reframing the issue:

  • Did the consumer declare bankruptcy and get a full discharge of credit-card debt, but the debt collector went ahead and sued anyway, winning a default judgment? Pay up.
  • Was the affidavit that showed "proof of indebtedness" signed by a dead person but the lawsuit happened anyway and they won a default judgment? No matter -- pay the court NOW, or else.

Simply brilliant. Evil, but brilliant. Like some pathogen that finds a particularly potent nutrient and spreads like the plague, the debt-collection industry has taken notice, because 85 percent of all small-claims-court cases in some areas are now debt-related.

There's a place for a court system in the debt-collection business, assuming that it has not been hijacked to enhance the profit margins of collectors who can't be bothered with silly little details like whether the consumer actually owes the debt. In order to reclaim control from the hijackers, our elected officials must insist on crystal-clear documentation before ever allowing a lawsuit to move forward, much less a default judgment to happen. The courts should be where the playing field is leveled for the little guy -- not where debt collectors make profits they don't deserve, from people who shouldn't have been sued in the first place.