Owing money isn’t supposed to be a crime.
So why are people being arrested over delinquent student loans and other debts?
The official line for why U.S. Marshals confronted Houston resident Paul Aker earlier this month is that he failed to appear in court over a $1,500 student loan taken out three decades earlier — not that he owed the money. But that’s a distinction without a difference for many Americans who get caught in the gears of the highly profitable debt-collection industry.
Private law firms have figured out how to get the courts in many states to turn what should be civil cases into criminal ones. In recent years, collectors have transformed unpaid credit card debt and medical bills into arrest warrants for people who sometimes weren’t even aware they were being sued.
The Texas case may not be the first time such tactics were used with an unpaid student loan, consumer advocates say. But the heavy-handed response to such a relatively small debt certainly captured the attention of many of the 40 million Americans with outstanding education loans.
“It was massive overkill,” says Ira Rheingold, executive director and general counsel of the National Association of Consumer Advocates.
How debt mills beat the system
The U.S. outlawed debtors’ prisons nearly two centuries ago. And the Fair Debt Collection Practice Act of 1977 prohibits bill collectors from even threatening you with criminal prosecution.
Instead, bill collectors can file a civil lawsuit — and lately, a whole industry of well-financed law firms has sprung up to do just that. They file hundreds of thousands of lawsuits against debtors every year, sometimes with little proof that they’re suing the right people for the right amounts.
When people don’t show up in court as ordered — and they don’t “about 90% of the time,” Rheingold says — the collectors get default judgments. Those judgments can then be used to get wage garnishments and bank liens. In about one-third of U.S. states, creditors can use the judgments to get arrest warrants for failing to comply with a court order.
No one tracks how many arrest warrants are issued nationwide, but “it’s fair to say it’s in the thousands,” Rheingold said.
Once the warrants are issued, creditors can use public resources — in the form of sheriff’s deputies and other law enforcement — to pursue the debt.
Why don’t people show up to defend themselves? Some areas are notorious for “sewer service,” which is when debt collectors don’t even bother to notify debtors of complaints against them, figuratively or literally throwing the notices into the sewer.
Even when people get the notices, they often feel helpless to respond.
“They think, ‘I don’t have the money to hire a lawyer. I don’t have the money to pay this debt,'” says Persis Yu, a staff attorney at the National Consumer Law Center and director of the NCLC’s Student Loan Borrower Assistance project. “So they don’t do anything.”
Borrowers shouldn’t — and don’t — get off scot-free
Failing to pay your debts, whether because you can’t or you choose not to, has consequences.
The lender can take back your house through foreclosure or your car though repossession and ruin your credit in the process.
With personal loans and credit cards, where interest rates are higher because there is no asset to seize if you don’t pay, your credit still gets trashed, making future loans more expensive and difficult to get. Your car insurance rates can go up. You can find it harder to get a job. Renting an apartment becomes an ordeal.
All of this is unpleasant and potentially expensive, but we’re still talking about a business transaction: A lender thought it could make money by extending you credit and picked an interest rate to reflect the risk that you wouldn’t repay. Sometimes lenders misprice this risk, but overall they make a lot of money in the process.
Allowing debt collectors to turn these unpaid private debts into a criminal matter is outrageous. You certainly shouldn’t expect a business transaction gone sour to land you in jail.
This does not happen to Donald Trump. It doesn’t happen to people with enough money to hire lawyers.
It happens to poor people.
Putting the muscle on student loan borrowers
Aker’s case was a little different: He owed money to the federal government for a student loan he received in 1987. That’s taxpayer money, not a private debt. But the company that stands to profit from his arrest is a private law firm, one of several hired by the U.S. Department of Education to pursue old debts.
In 2014, the Education Department paid private debt collectors over $1 billion in commissions.
Consumer advocates have long complained about the questionable tactics used by such firms.
“U.S. Department of Education heavily favors high pressure student loan collection and debt collector profits to the detriment of millions of financially distressed borrowers seeking help,” the National Consumer Law Center reported in 2014.
The Consumer Financial Protection Bureau found last year that some government-hired collectors had misled borrowers, and the Department of Education promised to “wind down” contracts with five of its 22 collection contractors after finding “high incidences of materially inaccurate representations.”
And yet the criminal action against Aker was allowed to proceed. The law firm didn’t even have to pay for the marshals — Akers was ordered to reimburse the U.S. Marshals Service more than $1,200 for the cost of his arrest.
Debtors have other options
The saddest thing about all of this is how unnecessary many of these lawsuits and arrests are.
For student loan borrowers, income-driven repayment plans can help federal borrowers avoid default. The newest one, REPAYE, is available to anyone with federal direct loans, no matter when they first borrowed or how much they earn. Those who have defaulted can also rehabilitate their loans to qualify for an income-driven plan.
“REPAYE has opened up income-driven repayment to millions more borrowers,” says Brianna McGurran, NerdWallet’s student loans expert. “And since it forgives your loans after 20 or 25 years, borrowers don’t have to feel burdened by their loans forever.”
The problem is that too many people don’t realize they have these options.
“The government is notoriously bad about giving out information in a way that people understand,” says Jay Fleischman, a student loan lawyer with offices in Los Angeles and New York.
Bankruptcy isn’t a realistic option for most student loan borrowers, since it’s extremely difficult to erase education debt. Bankruptcy is, however, an option for many of the people being sued for other types of debt. People with below-average incomes and few assets can legally erase those obligations in a Chapter 7 liquidation.
Whatever kind of debts you owe, though, you shouldn’t pretend they’ll go away on their own. Read up on your debt-collection rights. And no matter what, if you receive a notice that you’ve been sued, you should show up in court.
Your local legal services may be able to provide a free lawyer. Such programs are expanding because of the growing volume of debt mill lawsuits, Rheingold says. But even going without a lawyer and representing yourself is better than not appearing at all.
“No one else is looking out for your interests, including the courts,” Rheingold says.
Image via iStock.