Alert July 13, 2010

FTC Issues Report on Debt Collection Litigation and Arbitration

The FTC issued a report concluding that litigation and arbitration do not provide enough protection for consumers in debt collection actions. The report identifies a number of concerns that the FTC believes contribute to this issue. According to the report, the litigation concerns include:

  • filing suits based on insufficient evidence;
  • failing to properly notify consumers of suits;
  • high prevalence of default judgments;
  • improperly garnishing exempt funds from bank accounts; and
  • suing or threatening to sue on time-barred debts.

The arbitration concerns include:

  • binding consumers to resolve disputes through arbitration without meaningful choice or awareness;
  • bias or the appearance of bias in arbitration proceedings;
  • procedural unfairness in arbitration proceedings; and
  • requiring consumers to pay substantially more to participate in arbitration proceedings than in comparable court proceedings.

The report offers a number of findings and recommendations with respect to debt collection litigation and arbitration. Regarding litigation:

  • states should consider adopting measures to make it more likely that consumers will defend themselves in litigation;
  • states should require debt collectors to include more information about the debt in their complaints;
  • states should take steps to make it less likely that debt collectors will sue on time-barred debt and that consumers will unknowingly waive statute of limitations defenses available to them; and
  • federal and state laws should be changed to prevent the freezing of a specified amount in a bank account into which a consumer has deposited funds that are exempt from garnishment.

And, regarding arbitration:

  • consumers should have a meaningful choice about arbitration;
  • arbitration forums and arbitrators should eliminate bias and the appearance of bias;
  • arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated; and
  • arbitration forums should make their process and results more transparent.

Click here for the report.