Report: Debt collection hits state’s low-income, Black communities hardest

Debt collection cases are flooding Michigan’s district courts, and residents living in majority Black communities are more than twice as likely to have debt in collections compared with those living in predominantly white neighborhoods.

Nearly two million debt collection cases were filed in district courts between January 2010 and September 2021 and those lawsuits have financial consequences for consumers, particularly those in low-income and Black communities. The Justice for All Commission — created by the Michigan Supreme Court to boost access to the civil legal system — released a detailed report Wednesday outlining the state’s debt collection litigation practices and ways to make the process more accessible for people.

“What the research in Michigan shows us is consistent with what we’ve seen in our research around the country, which is that debt collection lawsuits have been overwhelming state court dockets,” said Erika Rickard, project director at The Pew Charitable Trusts, which worked with the commission on the report. “This is a big shift that has largely gone unnoticed by state leaders, and yet, has profound, lasting implications for states, for taxpayers and for consumers.” 

Creditors and debt collectors turn to the courts when they can’t recoup what they are owed through informal means. The cases are often a loss for courts, creditors and customers, the report said. The cases overwhelm district courts, second only to the volume of traffic cases in 2019. Creditors rack up attorney and court fees. For consumers, the cases are a financial blow leading to garnishment of wages, state tax returns and money in bank accounts when they also need to keep a roof over their heads and food on the table.

“The result of garnishment can be devastating for a consumer,” said Kathryn Hennessey, senior court management consultant for the National Center for State Courts and co-chair of the commission’s debt collection work group. 

Here are a few of the key findings from the report:

• Half of all debt collection cases are filed against people living in areas with a median income of $50,000.
• Black communities experience a higher number of filings than white communities. But in Black communities, as incomes rise, debt collection lawsuits remain the same. While in white communities debt collections decrease as incomes increase. Across all neighborhood income levels, majority Black communities see about two to three times as many debt collection filings compared to predominantly non-Hispanic white areas.
  The report said more information is needed to understand these disparities, but pointed to lower credit scores in communities of color. People with lower credit scores may have fewer credit options. Black consumers, the report said, may face barriers to paying debt such as higher interest rates and predatory lending terms, due in part to practices like redlining, or denying loans because an applicant lives in a certain area.
• Sixty-percent of cases filed in Michigan were debt buyers in 2019, a huge uptick from 40% in 2010. This is a particularly unique challenge since consumers may not recognize the debt buyer and they might think it’s a scam and ignore collection efforts.
• Debt collection suits filed by 10 plaintiffs account for 71% of the cases filed from 2020 to 2021.
• Seventy-eight percent of debt collection judgments result in garnishments — a way for creditors to collect money through the defendant’s funds. The most common garnishment in Michigan is state income tax returns.
• Default judgments are entered in nearly 70% of cases, indicating a lack of response from defendants. This raises concerns about whether the court process is clear and understandable for consumers.

“With the high default rate, the workgroup really focused on ways to remove barriers so that more consumers will participate in the debt collection process and respond to the collection lawsuit,” said Lorray Brown, co-managing attorney at the Michigan Poverty Law Program.

Among the recommendations from the report:

• Modernizing the way customers are notified of a lawsuit against them. That could include giving plaintiffs more time to serve defendants and expanding mail services.
• Making sure plaintiffs provide enough evidence for a default judgment
• Creating court documents that are easier to understand, improving court data collection
• Studying the experiences of people dealing with debt collection
• Developing pilot projects for affordable payments plans instead of garnishments

“The proposed reforms will take Michigan one step closer to justice for all by making core processes that are more understandable and easier to navigate for consumers,” said Judge Timothy Kelly of the 74th District Court, who is also a commission member and work group co-chair.

Next steps include working with the courts and justice system partners in the next few months to understand how to incorporate the report’s recommendations into practice and policy, said Angela Tripp, director of Michigan Legal Help and the commission’s vice chair.

To view an interactive dashboard about debt collection cases in the state, go to https://bit.ly/MichiganDebtCollection.